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 2024 results call. It is a pleasure to have with us in the call the following speakers from NBK: 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 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 expectations and 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 view 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. 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. Mr. Sujit Ronghe, our Group CFO, will go through the financials in more details. Following our presentation today, 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 them 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 Al-Sager for his opening remarks.
Thank you, Amir. Good afternoon, everyone. I am pleased to join you today for our first quarter earnings call for the year 2024. Global economic prospect divert among market year-to-date and recent solid data in the U.S., weaker in the E.U., and recent decent in China. The readings show that the current interest rate level will hold for a longer period than originally anticipated, but cuts remain on the table for the remainder of the year. Nevertheless, continued geopolitical tension and raising energy prices could prevent inflation from easing, thus supporting a cautious approach to monetary easing. In the GCC region, growth for the year is forecasted to remain solid on the back of higher energy prices that will support public finances and boost domestic demand. While the execution of public economic diversification programs and strong capital flows should further support the outlook.
As for Kuwait, the economy ended the quarter on a relatively soft note. In terms of historical trends, credit growth stood low while real estate activity weakened. Inflation has eased and is trending lower on the back of cooling private demand. We expected GDP growth to witness a low single-digit construction on the back of oil production cuts at that growth rate of around 2.5% in the non-oil sector. Likewise, project activity declined significantly following an improved 2023. This could be partially explained by seasonal effect in addition to the unexpected downturn in domestic politics in the absence of the parliament. The project to award outlook for the remainder of the year should be better with a pipeline of KD 6.3 billion worth of projects to be awarded.
As for NBK, we continued recording solid performance and building on past year's momentum as we advance in executing our diverse strategy and leveraging our flexible business model throughout the challenging macroeconomic landscape. We reported net profit of KD 146.6 million in the first quarter of the year, growing by 9.2%. Driven mainly by growth in core banking income, our revenue stream stems from a diverse operational mix that proven successful in mitigating risk and optimizing performance. We achieved a growth of 11.2% year-to-year in a net operating income to reach KD 309 million. Our success is underscored by strategic investments that are aimed at achieving sustainable growth, enhancing customer experience, and creating long-term value to shareholders, which is evident of our performance measures. Our return on average assets for the reporting period reached 1.55%, whereas our return on average equity reached 15.2%.
The ongoing investment by group in innovation and technology will support our ability to meet the evolving needs and expectations for our clients. By such, we will further strengthen our leading franchise across all business sectors and continue to build on our trust-based relationship with stakeholders. Our approach in Kuwait remains centered on strengthening our market position in key segments, growing our client throughout digital products, and providing exceptional customer service. From a corporate banking standpoint, we continue to lead Kuwait's infrastructure program and are well-positioned for any revive of infrastructure spend. Furthermore, our Islamic banking arm, Boubyan, along with our international operation, both continue to expand their contribution to the group, aiming in our diversification strategy. Also, notably in wealth management, we will endeavor our position and brand presence throughout a global network of operation with the launch of NBK Wealth.
We will further solidify our value proposition in providing innovative solution and service toward a best-in-the-class wealth management experience. Similarly, as a frontrunner in ESG space, we will continue to play a role in fostering the sustainable advancement in the communities where we operate and in being a key partner in the sustainable financing endeavors of our client. With that, I will conclude my comments and leave you with my colleague, Sujit Ronghe, our Group CFO, to cover the quarterly 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 opening quarter of 2024. We have announced a net profit of KD 146.6 million for 1Q 2024, a 9.2% increase over the corresponding quarter in 2023. These results stem from a strong operating performance by the group and demonstrate the continued growth in our businesses. Before going into details of our financial results, I would first like to say a few words regarding the overall operating environment during the current quarter. The continued higher interest rate regime and an overall stable operating environment in Kuwait have benefited the bank in general. Inflationary conditions in the U.S. and some other advanced economies have gradually improved, although benchmark interest rates are generally expected to decrease only in the later quarters of the year.
At the same time, geopolitical developments in the region and beyond have affected global operating environment unfavorably. Now turning to the financial results for the first quarter 2024. As shown at the top left of this slide, net profit at KD 146.6 million reflects a year-on-year growth of KD 12.4 million, that is 9.2%. Underlying drivers for the robust bottom line performance are a combination of year-on-year growth in business volumes, higher interest rates, and a stronger operating performance. Group loans and advances grew by 5.7% year-on-year. Investment securities also contributed strongly to group assets with a growth of 15.6% vis-à-vis March 2023. The top right chart reflects operating surplus, that is profit before provisions and tax, for the current quarter at KD 197.5 million, a growth of KD 21.1 million, +12% over first quarter 2023.
Net operating income increased by KD 31.1 million, 11.2%, while operating expenses grew by KD 10 million, +9.9% over the last year. 1Q 2024 net profit at KD 146.6 million was 13.2% more than the previous quarter, benefiting from a 5.8% growth in operating surplus and lower impairment losses. The operating income mix profile at the bottom right-hand continues to show a healthy mix with 23% coming from non-interest earning sources.
I will go into the main drivers behind movements in 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 the net interest income of KD 238.1 million for 1Q 2024, a growth of 12.4% over the first quarter of 2023. Net interest income largely benefited from higher interest rates and growth in loans and investment securities across geographies and segments.
You would also note from the chart at the top right, that average earning assets grew by KD 1.6 billion, that is 4.5% from March 2023 to reach KD 36.2 billion. We see from the chart at the bottom left that the average NIM for first quarter 2024 at 2.64% reflects an improvement of 16 basis points over the first quarter 2023, driven by a higher yield despite increased funding cost. Group yield and funding cost for the current quarter was 6.25% and 4.07% respectively. The higher funding cost results from repricing of deposits at increased market rates, a limited migration of lower cost deposits to time deposits, and longer tender funding sourced by the group. At the same time, an overall sticky and stable base of retail customer deposits continues to benefit the group.
At the bottom right of this slide, we can see drivers behind the 16 basis points year-on-year increase in NIM from 2.48% in 1Q 2023 to 2.64% in 1Q 2024. Loans and other interest earning assets backed by strong year-on-year growth in volumes and interest rates, contributed a net increase of 79 basis points and 17 basis points to the NIM respectively. Higher funding costs negatively affected the NIM by 80 basis points. Moving to the next slide. As we can see on the top left of this slide, total non-interest income at KD 70.9 million for 1Q 2024 was KD 4.7 million higher than the comparable period in 2023. Fees and commissions income was strong at KD 53.2 million, reflecting robust contributions across different lines of business and geographies. FX contributed KD 10.2 million, benefiting from higher transaction volumes and favorable currency movements.
Other non-interest income sources, mainly investment income, contributed KD 7.4 million, benefiting from improved valuations. 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 to operating expenses reflected in the top right hand of this slide. Total operating expenses for 1Q 2024 at KD 111.5 million were 9.9% higher than the first quarter 2023. The cost growth reflects increased activity levels at Kuwait and across group's network, as well as investments in key businesses, initiatives, digital technologies and processes. This enables the group to offer best-in-class service to its customers and optimize resources to improve operational efficiency. NBK's digital channels and products continue to play a vital role in attracting and servicing customers with increased volume of electronic transactions.
We also continue to press ahead with selective product offerings in certain geographies, for example, through our global wealth management business, known as NBK Wealth, Islamic banking through Boubyan Bank, and by leveraging our overseas network. As a result of the marked growth in operating income and controlled cost growth, the Q1 2024 cost to income ratio was 36.1% 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 1Q 2024 amounted to KD 25.5 million, a decrease of KD 2.6 million over 1Q 2023. KD 25.3 million of the current quarter's charge was for provisions for credit losses and facilities, whereas the remainder related to other impairment losses and ECL.
Specific provision of KD 22.7 million was in course of normal business activities at Kuwait and overseas location, whereas KD 2.5 million was towards general provisions. The group remains committed to its conservative approach in managing credit exposures. The cost of risk for first quarter 2024 was 44 basis points compared to 53 basis points in 1Q 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 expand on the matter of earnings diversification of the group through different lines of business.
NBK Group continues to benefit from its unique position amongst Kuwaiti banks in terms of geographical spread through international banking and the ability to conduct business in both conventional and Islamic banking. We recently enhanced the segmental analysis information, you can see that in note nine in the first quarter financial statement, to reflect consumer banking results separately. Similarly, NBK Wealth, being an area of key focus, is disclosed as a separate business segment. NBK Wealth provides asset management, brokerage, lending, deposits, and other customized and innovative offerings to high-net-worth individuals and institutional clients, further advancing the group's diversification agenda. You would note that NBK's consumer banking contributed 20% and 17% to the group's net operating income and profit, respectively. Similarly, corporate banking contributed 13% and 21% to the group's net operating income and profit.
International banking contributed 24% to the net operating income and 21% to the group's profit, reflecting a strong operating performance. The group's Islamic banking subsidiary, Boubyan Bank, delivered a net profit of KD 25 million, up 21.2% on 1Q 2023, boosted by a strong growth of 15.2% in operating surplus and lower provisions for credit losses. NBK Wealth contributed 9% and 11% to the group operating income and profit, respectively. NBK's business segments serve as main pillars of diversification, providing a strong competitive advantage and a significant degree of resilience to group earnings. Finally, the chart at the bottom right corner, you would note that international banking and Boubyan Bank contributed 41% 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 the top left, the group total assets reached KD 38.3 billion as of March 2024, a 5.1% increase over March 2023. The recent devaluation of EGP has adversely affected the KD value of the balance sheet items and resulted in lower growth percentages, especially for the first quarter of 2024. Group loans and advances at KD 22.4 billion registered a growth of KD 1.2 billion, that is 5.7% from March 2023 and 0.5% in the current quarter. Loan growth was achieved at Kuwait in both conventional and Islamic sectors and at international operations. Similarly, investment securities reflected a growth of 15.6% to reach KD 6.9 billion. Customer deposits, that is non-bank and non-FI deposits, at KD 22.3 billion reflect a strong growth of 9% year-on-year. The group has continued to benefit from its strong base of core franchise retail deposits.
As can be expected in a rising interest rate scenario, we noted a limited migration from lower cost deposits to time deposits during the last year. NBK's stable deposit 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. Customer deposits comprise a healthy 69% of total funding mix of the group. I want to highlight that the group continues to maintain healthy liquidity levels and comfortably exceeds the minimum requirements of Basel III ratios. Moving on to the next slide. Here, we will look at the impact 1Q 2024 financial results had on certain key performance metrics. The return on average equity for the current quarter improved to 15.2%. Similarly, return on average assets now stands at 1.55% compared to 1.50% in first quarter 2023.
At 17.2%, the total capital adequacy ratio remains strong and stable, well above the regulatory minimum. CET1 and tier 1 ratios at 12.9% and 14.9% have remained stable and similar to December 2023 levels. As regard asset quality, NPA ratio stands at 1.51% compared to 1.38% as of December 2023. Loan loss coverage ratio is at 248%, reflecting conservative provisioning policy of the group. Moving to the next slide. On this slide, I would like to discuss expected credit losses, ECL, on credit facilities as per IFRS 9, calculated in accordance with CBK guidelines. As per the regime adopted by the CBK, banks calculate 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 the 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 at March 2024 was KD 597 million, slightly lower than December 2023 levels. Although IFRS 9 and CBK provisions are two different regimes and should not be compared as such, as at March 2024, the balance sheet provision as per CBK instructions exceeds the ECL by KD 315 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 1Q 2024. As mentioned earlier, a strong operating performance combined with a healthy balance sheet, comfortable liquidity levels, and a strong capital base were features of NBK's 1Q 2024 results. Looking forward, ongoing regional and international geopolitics prospects for higher for longer interest rates 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, will remain generally stable during 2024. Now, turning to the guidance for the year ahead. As regards to loan growth, given the current geopolitical and the 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.
As mentioned earlier, 1Q 2024 NIM has improved to 2.64%, benefiting from stronger volumes and higher interest rates compared to the first quarter of 2023. The general expectation is that benchmark interest rates will remain at current levels for a longer period, with rate cuts forecasted for later quarters of 2024. We should also expect increasing competition and funding costs to remain high despite the group's overall healthy funding mix. In such an environment, our guidance for the 2024 NIM is to remain stable, similar to full-year 2023, which was 2.59%. Coming to operating expenses, the 1Q 2024 year-on-year cost growth was circa 10%. This is a good indication of the expected rate of increase for the fuller 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 44 basis points during the current quarter. We are cautiously optimistic of a stable overall operating environment and as such, expect the full-year cost of risk to be circa 40- 50 basis points. 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 very much. Amir?
Thank you, Sujit. Time for the Q&A session. We will pause for 30 seconds to get all the questions. Please type your question in the Q&A platform, and once we're back, we will start taking questions in the order they are received. Okay. Hello again, everyone. Got a few questions here, a lot around NIMs and interest rate direction. We'll start with the first question. What is the guidance on NIMs? I think we covered that in the guidance page. Is the repricing effect of July 2023 hike already in Q1 2024 numbers? What is the view on policy rates in 2024, 2025? Do you expect any rate hikes going forward? Please.
Okay. As I mentioned, during my discussion earlier that our guidance of the NIM is to remain flattish when we compare to the last year. There is a great deal of uncertainty with respect to the benchmark interest rates, going forward. Not only on the global front, but also when it comes to the Central Bank of Kuwait. We don't know what exactly the Central Bank would do with respect to the pace of rate cuts. However, for our discussion behind the flattish NIMs, we have assumed a couple of rate cuts, both on the Fed and the discount rate side in the CBK, but coming in the latter part of the year.
Okay. Along the same lines, what the CASA percent in Q1 2024, do you expect further migration to interest-bearing deposits?
Yeah. The CASA levels remain to be very healthy and they are still around the mid-30s when you compare them with the total non-bank deposits. We have not seen the kind of movement, or the shift from CASA to time deposits that we saw in the last two quarters of 2023. I think the CASA deposit base has stabilized during the current quarter and can be compared with the last year-end position.
On Egypt, question has two parts. Can you generally shed some light on Egypt operations? And the second part of the question is on provisions. Start us off, Egypt.
Well, on Egypt, we witnessed recently signals of economic stability in Egypt, which is considered one of the largest economies in the region and enjoys huge potential for growth. As soon as the confidence in the Egyptian economy is regained, we believe that there are substantial growth opportunities within Egypt, and we will continue to be optimistic in this regard. Speaking on our operation in Egypt, it is a main growth market for us, and we are committed to grow our operation in the Egyptian market as it is one of our most profitable markets in domestic terms.
On-
On the provision, maybe is-
Yeah. The Egyptian book remains very healthy, and in terms of its asset quality. The cost of risk that we saw in Egypt is below 1%, actually 0.9%. And the NPL to gross loans ratio is also at 0.9%. And it has been in this region around 1% for the last year as such. So we are not, at this stage, concerned about the credit quality in the Egyptian books, given the lending that we are involved with.
Okay, moving on to capital. What is your internal target for CET1 ratio for this year? What are the key downside risks to achieving it?
Yeah. When we talk about our internal target for capital ratios, we generally keep a target of the total capital ratio to be between 1.5%- 2%, especially at the year-end. However, we also monitor the CET1 ratio closely, and our year-end target for the CET1 is also around 1.5%.
What Fed rates changes are you assuming for 2024 in your guidance? I think that was covered in the NIM discussion earlier. A question on cost to income ratio. This first quarter cost to income ratio of 36.1, high 30s, or should we assume it goes higher than this for the rest of the year?
Yeah. See, the cost income ratio is a function of both on the income side and the cost side, and also considers the declining interest rate scenario as we go ahead into the further quarters of 2024. So we do expect the cost income ratio to increase slightly, but it would be below the 40% mark that we have seen previously. It could be somewhere between where we are currently and the 40%.
Good.
Already covered.
Yeah?
Yeah, we can repeat.
Back to NIMs again, what is the current CASA figure? I think we covered that already. What is causing quarter-on-quarter compression in NIMs? Are we seeing competition in deposits locally?
As regards the quarter-on-quarter compression in NIMs, we are seeing a small drop of 4 basis points compared to the last quarter. Actually, this compression was because of higher funding costs and also because the previous quarter benefited from certain one-off interest recoveries, which have not repeated in the current quarter. At the same time, the NBK Group, because of its international network, remains well-positioned to attract deposits at competitive rates, and the local competition does not impact NBK to the extent it does to other banks.
Again, around NIM and rates, could you share your base case on CBK monetary policy? Could rate cuts be delayed relative to Fed's cuts?
If you look back during the increases in Fed rates and the CBK rates, the CBK did not match the Fed increase. In fact, in the earlier part of the increase, CBK was lagging behind to a larger extent. Given that experience, we do not expect that CBK would decrease rates matching the Fed over the next few quarters, whenever the decrease starts. However, it would be unwise to say that we have a specific outlook or some indication regarding how the CBK exactly will conduct its rate cuts, and we would need to wait to see that.
Any additional capital requirements?
Another question on loan growth and deposit growth. If we look at NBK standalone, we have seen a slight contraction in both loans and deposits. What caused this?
As I mentioned earlier, the Egyptian devaluation impacted the asset and liabilities growth in KD terms in the current year. Basically, if you see our financial statements, we can see a three months loan growth. So loan growth at the end of March compared to December last year to be 0.5%. This includes a significant amount related to the KD value of Egyptian loans, in our consolidated balance sheet. If we adjust the loan growth for the EGP devaluation, we would be somewhere close to 1.4% growth in this quarter. Similarly, with the deposits, we have seen a contraction in the deposits because of the impact of Egyptian devaluations. And we can see that similar to the asset side, we have seen a contraction in the Egyptian contribution to the group's balance sheet.
What is the outlook on corporate loan growth for 2024? If interest rates remain elevated, what is the outlook on NIM for the rest of the year?
Corporate loan growth has been very promising during the last 12 months, and we have seen a renewed appetite for corporate growth in terms of both local customer base and our international locations. We would see most of the growth coming from the corporate side for the quarters to come. As far as NIM is concerned, if there is no change to interest rates, we can expect the NIM to be increasing by a few basis points. However, the interest rate outlook remains uncertain and hence the guidance of a flattish NIM.
Do you have updated guidance from the authorities on corporate tax implementation?
There is no formal information from the Ministry of Finance in Kuwait, although we know that Kuwait had signed up for being a part of the inclusive framework in November last year itself. We heard it or we read it from the media that the government is working towards having a corporate taxation law in place, before 2025.
Are there any additional capital requirements by Central Bank for Kuwaiti banks which have operations in Egypt? If yes, then what are those?
As of now, there has been no change to the requirements of capital imposed by Central Bank of Kuwait with regards to Egyptian operations. I think it is status quo.
Okay. What sector segments are behind the increase in NPA ratio?
The NPA ratio increase can be attributed to a diversified customer base, both on retail and corporate front, within Kuwait and across our international locations.
Thank you very much. I think these are all the questions that we have today. As I mentioned earlier in the call, if you have any follow-up questions, send them to the IR email address, and we will get back to you at the earliest. Thank you to NBK's management. Thank you, Elena, for the call.
Thank you very much.