Good afternoon, everyone. This is Elena Sanchez-Cabezudo from EFG Hermes, and I would like to welcome you all to the National Bank of Kuwait's full year 2023 earnings call. We have with us 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 Amir Hanna so that he can begin with the presentation. Thank you.
Thank you, Elena. Good afternoon, everyone. Thank you for joining us today for our webcast for the full year 2023 results. We will start the call with a 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 outcome 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 refer to the full disclaimer in our presentation for today's call.
Our Vice Chairman and Group CEO, Mr. Isam Al-Sager, will be 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. After the presentation, there will be a Q&A session on the platform. Please direct any follow-up questions to our investor relations email address, and we will answer them at the earliest. Today's presentation is available on our website for your convenience. Now, let me hand over the call to Mr. Isam for his opening remarks. Isam.
Thank you, Amir. Good afternoon, everyone. I am pleased to join you today for our fourth quarter and full-year 2023 earnings call. The global economy ended 2023 better than originally expected earlier during the year, but this macroeconomic resilience will continue to be tested in 2024. Notwithstanding the economic and geopolitical challenges globally and regionally, the GCC showed exceptional performance. This performance was supported by a positive cycle of reforms in some markets, in addition to the higher oil revenues throughout the year. This growth outlook for the GCC region is expected to remain relatively robust, but we will continue to be cautious as the GCC economies are exposed to the overall weaker global backdrop. In Kuwait, the economy ended the year on a positive note, supported by some gains in credit growth, solid through normalizing consumer spending, rebound in real estate activity, and improved stock market performance.
We expected Kuwait's GDP growth in 2024 to witness a minor contraction. Additional oil production cuts will likely keep headline growth low despite an expected level of over 3% growth in the non-oil sector. Similarly, the year 2023 marked the best performance in project awarding in the recent years, with more than KD 2.5 billion worth of awards, surpassing last year's awards by almost 300%. We see the momentum feeling into this year on a potential improved political landscape, supporting our forecast for higher non-oil growth level. As for NBK, we continued to deliver solid performance supported by our diversified business model, strategic investment, and flexibility in face of various economic conditions. We reported a net profit of KD 560.6 million for the year, growing by 10.1%.
On the operational front, we achieved a year-over-year growth of 16.6% in net operating income to reach KD 1.2 billion for the year. The increased momentum in operational performance was achieved across key areas, including, most importantly, the international operations and wealth management. We remain committed to creating value to our shareholders as our performance ratio continued to improve, with return on average assets reaching 1.35%, while our return on average equity reached 15% for the year. The group will continue executing its responsible growth strategy, investing in innovation and in new technologies. Our digital investments are positioning the bank as the leader in advancing customer centricity and prioritizing our experience. In Kuwait, our strategy continues to focus on strengthening our position in key market segments, expanding our customer base throughout digital offering and exceptional customer experience.
While on the corporate side, we remain at the forefront of Kuwait's infrastructure agenda. Our diversification plan continue to benefit from our Islamic banking arm, Boubyan Bank, and our international operations, as both have continued to grow their contribution to the group. Moreover, in line with our group's strategic plan to expand and offer a holistic investment and wealth management solution, NBK Wealth emerged to provide our high net worth clients based with tailored offering that meet their evolving needs. Likewise, in line with our strategic and multi-stakeholder approach to advance ESG through achieving higher level of integration, the bank continues to expand its responsible banking practices to customers and all our stakeholders to support their effort toward green transitions initiatives.
With that, I will conclude my comments and leave you with my colleague, Sujit Ronghe, our Group CFO, to cover quarterly and 12 months results in more details. Please go ahead, Sujit.
Thank you, Isam. Hello, everyone, and welcome. I am very pleased for the opportunity to take you through the financial results in respect of the year ended 31st December 2023. We have announced a net profit of KWD 560.6 million for 2023, the highest ever in the group's history. This is a 10.1% increase in bottom-line profit over the last year. These results stem from a strong operating performance by the group and demonstrate the continued growth in our businesses. Before going on to details of our financial results, I would first like to take a few words regarding the overall operating environment during 2023. Higher interest rate regime and an overall stable operating environment in Kuwait have benefited the bank during 2023. Inflationary conditions in the U.S. and some other advanced economies have gradually improved, although the risk of a possible recession cannot be ruled out completely.
Geopolitical developments in the region and beyond have affected the global operating environment unfavorably, especially in the last quarter of 2023. Turning to the financial results of 2023. As shown at the top left of this slide, net profit at KWD 560.6 million reflects a year-on-year growth of KWD 51.5 million, that is 10.1%. Underlying drivers for the robust bottom-line performance are higher interest rates, growth in business volumes, and a strong operating performance. Group loans grew by 6.1% year-on-year across business lines and geographies. Investment securities also contributed strongly to the group asset growth with a growth of 22.2% versus December 2022. The top right chart reflects operating surplus, that is profit before provisions and tax for 2023 at KWD 740.3 million, a growth of KWD 116.7 million, 18.7% over 2022.
Net operating income increased by KWD 157 million, 15.6%, while costs grew by KWD 40.3 million, 10.4% over 2022. The fourth quarter 2023 net profit at KWD 129.5 million, which reflected a quarter-on-quarter growth in net operating income driven by higher net interest income, was however affected by higher cost and impairment losses. I will go into the main drivers behind movements between income, margins, and cost shortly. The operating income mix profile at the bottom right hand continues to show a healthy mix of 22.4% coming from non-interest income sources. Moving to the next slide. Here, 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 905.1 million for 2023, a growth of 19.8% over 2022, largely benefiting from higher interest rates and growth in loans and investment securities across segments and geographies. You would note from the chart at the top right that average earning assets grew by KWD 2.1 billion, that is 6.3%, from December 2022 to reach KWD 34.9 billion. As we see from the chart at the bottom left, that average NIM for 2023 at 2.59% reflects an improvement of 29 basis points over 2022, driven by a higher yield despite increased funding costs. Group yield and funding cost for 2023 was at 5.83% and 3.63% respectively.
The higher funding cost results from repricing of deposits at increased market rates, limited migration of lower cost deposits to time deposits, and the longer tenor deposit and funding sourced by the group. At the same time, an overall sticky and stable base of retail customer deposits continue to benefit the group. The Q4 2023 NIM for the group remains stable at 2.68%. The group yield for the current quarter improved to 6.22% compared to 6.12% in 3Q 2023. Similarly, the group funding cost increased to 3.98% during the current quarter from 3.85 in 3Q 2023. At the bottom right of this slide, we can see drivers behind 29 basis points increase in NIM from 2.30% in 2022 to 2.59% in 2023.
Loans and other interest-earning assets backed by a strong year-on-year growth in interest rates and volumes contributed a net increase of 121 basis points and 86 basis points to the NIM, respectively. Higher funding costs negatively affected the NIM by 178 basis points. On to the next slide. As we see at the top left of this slide, total non-interest income at KWD 261.6 million for 2023, was KWD 7.7 million higher than 2022. Fees and commission income was strong at KWD 196.6 million. FX contributed KWD 36.1 million, while other non-interest income sources, mainly investment income, contributed KWD 28.9 million. Fees and commissions income reported a strong growth of KWD 14.8 million, +8.2% on 2022, reflecting robust contributions across different lines of business and geographies.
FX income for 2023 was lower than previous year, which had a larger benefit of favorable currency movements, including the hit on assets related to NBK's US dollar AT1 issuance. Other non-interest income increased by KWD 12.2 million compared to 2022, mainly due to higher net investment income favorably affected by higher market valuations and distributions. Our fees and commissions income is 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 of this slide. Total operating expenses for 2023 at KWD 426.5 million were 10.4% higher than 2022. The cost growth reflects increased activity levels at Kuwait and across the group's network. Other administrative expenses also included NBK's CSR donations of KWD 2.8 million towards humanitarian causes.
The group's operating expenses reflect continued investments in key business initiatives, digital technologies, and processes. This enables the group to offer best-in-class services 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 increasing volume of electronic transactions. We also continue to press ahead with selective product offerings in certain geographies. For example, wealth management, business expansion of 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 2023 cost-income ratio was at 36.6% compared to 38.2% in 2022. Moving on to provisions and impairments profiled at the bottom right-hand of the slide. Total credit provisions and impairment losses for 2023 amounted to KWD 103.1 million, an increase of KWD 57.7 million over the last year.
You would recollect that 2022 was characterized by significant provision recoveries, which were not expected to repeat in the current year. KWD 81.8 million of the 2023 charge was for provisions for credit facilities in course of normal business activities at Kuwait and overseas locations. Specific provisions was KWD 44.5 million, whereas KWD 37.2 million was towards general provisions, a significant component of which was precautionary general provisions in nature. The group remains committed to its conservative approach in managing credit exposures. The cost of risk for 2023 was at 36 basis points compared to three basis points for 2022, which benefited from provision recoveries, as mentioned earlier. Other impairment losses of KWD 21.3 million are mainly related to impairment of KWD 20.2 million of goodwill in respect of NBK Egypt. It is worth noting that the group's balance sheet remains strong and stable with a stable credit quality.
The NBK's capital base, along with the ability to generate healthy operating profits, provides a strong credit loss absorption capacity. On to the next slide. On this slide, I would like to expand on the matter of earning the 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. The segmental analysis, note three in the current year's financial statement, has been enhanced to reflect consumer banking results separately. Similarly, NBK Wealth, being an area of key focus and attention by the group, is now 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 18% to the group's net operating income and profit, respectively. Similarly, corporate banking contributed 12% and 25% to the group's net operating income and profit. International banking contributed 24% to the 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 KWD 80.4 million, up 39.2% on 2022, aided by lower provisions and a stronger operating performance. NBK Wealth contributed to 10% and 11% of the group's 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's earnings. Finally, International Banking and Boubyan Bank contributed 43% and 22% respectively to the group's total assets, enforcing the diversification agenda. 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 KWD 37.7 billion as at December 23, a 3.7% increase on December 22. Group's loans and advances at KWD 22.3 billion registered a year-on-year growth of KWD 1.3 billion, that is 6.1%. Loan growth was achieved at Kuwait in both conventional and Islamic sectors and at international operations. Customer deposits, that is non-bank and non-FI deposits, at KWD 21.9 billion reflected a strong year-on-year growth of 8.8%. 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 year.
NBK 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. Customer deposits comprise 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 minimum requirements of Basel III ratios. Moving to the next slide. Here, we will look at the impact 2023 financial results had on certain key performance metrics. The return on average equity for the current year improved to 15% from 14.3% for 2022. Similarly, return on average assets now stands at 1.53% compared to 1.48% for 2022. At 7.3%, the total capital adequacy ratio remains strong and stable, well above the regulatory minimum. CET1 and tier one ratios at 13% and 15%, respectively, remain stable in comparison with 2022.
As regards asset quality, NPL ratio stands at 1.38% compared to 1.42% as at December 2022. Loan loss coverage ratio is at 271%, reflecting conservative provisioning policy of the group. On to the next slide. I would now 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 the credit provision 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 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 the ECL provision required as at December 2023 at KWD 616 million, slightly higher than December 2022 levels, mainly resulting from volume growth in credit facilities. Although ECL as per IFRS 9 and CBK provisions are two different regimes and should not be compared as such, as at December 2023, the balance sheet provision as per CBK instructions exceeds the ECL by KWD 287 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 2023. As mentioned earlier, benefits of higher interest rate regime, a strong operating performance combined with a healthy balance sheet, comfortable liquidity levels, and a strong capital base were features of NBK's 2023 results.
Looking forward, ongoing regional and international geopolitics, prospects of lower interest rates, coupled with possibility of recessionary conditions 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, the group reported a loan growth of 6.1% during 2023. Given the current geopolitical and general macroeconomic situation, we expect the overall loan growth for 2024 to be in the mid-single digit range. Now turning to the NIM. As mentioned earlier, 2023 NIM has improved to 2.59, benefiting from higher interest rates and stronger volumes compared to last year. The general expectation is for the current environment of higher interest rates to come to an end, with rate cuts of varying degrees being forecasted for 2024.
We should also expect increasing competition and funding costs to remain high despite the group's healthy overall funding mix. In such a lowering interest rate environment, our guidance for 2024 NIM is to remain broadly stable, similar to that of the full year of 2023. The 2023 cost-income ratio was at 36.6%. Given the group's continued investment in human resources and digital technologies, we should expect the cost income ratio to be in the range of high 30s during the year 2024. The cost of risk in 2023 was 36 basis points. We are cautiously optimistic of a stable overall operating environment, and as such, expect the cost of risk to remain in the range of 40 to 50 basis points. However, given the overall 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. Back to Amir.
Thank you, gentlemen. Thank you all for listening and being on the call. We will break for 30 seconds as the questions come in, and we can group them so we can answer based on different themes of the questions. Thank you everyone for waiting through that break. We will start taking questions, and please, if you have more questions, just feed them into the platform. First question is on margin and interest rate. How should we look at margins for 2024 estimate? Given the uncertainty around timing of rate change, what is your outlook for margins? Sujit?
The CBK discount rate is currently at 4.25%, and the Fed at 5.5. There are talks about the varying paces of the lowering these benchmark rates. Also, we would have seen when the rates increased; the rates in Kuwait did not increase at the same pace as they did in the Fed. So in such an uncertain situation, it is rather difficult to pin exactly what would be the NIM behavior for 2024. But when we sort of put in a few rate cuts at different points of time, during the next year, we were able to project a NIM that was quite stable, compared to what we have. We were at 2.59 in 2023, and given a few rate cuts at different points of time in 2024, we would still be around the same region.
Thank you. How do you expect credit cost to trend in 2024? Can we take 2023 as a base?
On the background of 2022, 2023 was a much more normal year for the bank and the 2023 cost of risk averaged 36 basis points, comprising both specific and general provisions, including the precautionary provisions that the bank usually caters for. As I mentioned earlier, in light of a stable operating environment, we can expect 2022 to be a base on which we can project the cost of risk for 2024 at between 40 and 50 basis points.
Question on housing law. Any update on the housing law?
Well, I can say that with regard to the housing law, there are some progress, and there are some ongoing discussion involving all relevant stakeholders to improve the draft law and address the residential housing challenges. We see this as a great progress so far. But of course, it all depends on the government and their initiatives. There are some signs of cooperation between the newly appointed cabinet and the parliament. As they get closer, I am sure there will be some more hopes to see more progress on the mortgage and debt law, both.
Which takes us onto the second question, which is partially answered. Your view on the new cabinet and the developments in the political arena in terms of impact on the banking sector growth and outlook.
Of course, there is a lot of positive signs with the appointment of the new Prime Minister and his newly appointed cabinet. As we know, the new Emir, Sheikh Mishal, just took the oath following the death of late Emir, and there has been some progress in appointing the new Prime Minister. Also, the recent engagement between the parliament and the cabinet promotes a lot of cooperation between the parliament and the cabinet of ministers. There are so many things that has been delayed, mainly the mega projects that we feel that they will go ahead once there has been better understanding between the two of them.
Thank you. Another question on NIMs, but also talks about loan and deposit growth in 2024.
I think I have already answered the NIM side of the question. The loan growth that we saw during the year came mainly from corporate-related activities in Kuwait and across our overseas locations. During the year, we noted an increased demand for credit in Kuwait, and also regionally as well, and also in our overseas locations in the western side of the world. That said, the combination of macroeconomic factors, both globally and at home, we would be giving a guidance of a mid-single-digit growth for the full year of 2024. The group has a long and a well-diversified pipeline of credit facilities, which includes amounts that are already approved and pending drawdown, which will support this guidance.
Just to take it further on loan growth, comments on the retail loan growth?
The retail loan growth was noted for the fuller banking sector in Kuwait. With these levels of interest rate, we do not see any incentive for the customer to come back for loans. As the interest rates start declining, we definitely expect the retail loan demand to increase, and it would all depend on the rate at which the rate cuts take place on the CBK front.
Outlook on fee income and cost income? 2024 and 2025.
The fee income of the bank was very robust during the year, and were very well-supported across different products, business lines, and geographies. We expect a mid to high single-digit fee income growth during the year. As regards cost income ratio, the higher level of income supported the cost income ratio in 2023. The income behavior in 2024 would be sort of determined by the interest rates environment going forward. That said, and having priced in a few rate cuts, we expect the cost income ratio to be in high thirties.
A couple of questions on CASA representation and changes in deposit trends, share of CASA to total deposits, and expectation for further migration.
So, as we started the 2022 year, as we ended 2022, our CASA deposits were in the 40% range. This percentage to total non-bank deposits sort of held for a long time during 2023. However, at the last quarter, we saw a dip in the deposits, and now we are at about mid-30s as a comparison with the total deposits. The customer behavior going forward is a bit difficult to gauge at this point of time. It depends on how long the current interest rate environment continues. But we do not expect any significant migration from these levels.
A question on strategy. What are your plans for branches in Saudi Arabia and the outlook on business growth there?
Well, we've been executing our strategy, and part of it is to expand in the Saudi market, on both the corporate banking and wealth management. We've been well established in both areas already. We have three branches in Saudi: Riyadh, Jeddah, and the Eastern Province. Also we are well established in wealth management and we've been there now for more than five, six years. We look for further expansion in that area. Globally, we are also implementing our strategy to be in key markets, basically mainly in GCC where the Saudi market has been the leading area where we are into right now.
Okay. A couple of questions on the changes expected in the tax regime and impact in 2025. Sujit?
Yeah. If you note, we have disclosed the implications of Pillar Two income taxes in note number nine of our financial statements. To give a background, under Pillar Two, multinational entities whose revenue exceeds EUR 750 million will be liable to pay corporate income tax at a minimum effective rate of 15%. The jurisdictions in which the group operates, including the State of Kuwait, have joined the inclusive framework. Kuwait joined the inclusive framework of nations in November last year. The group expects to be liable for the global minimum tax under Pillar Two, starting from year 2025. As far as Kuwait is concerned, now that Kuwait has joined the inclusive framework, the Ministry of Finance, as we hear, is preparing to introduce a corporate tax law in some shape or form. The details of this are awaited, and we are yet to see any draft from the Ministry.
The expectation is that it would be in line with the requirements of the BEPS 15% tax. And the intention would be that Kuwait as a country does not lose tax revenue to other countries, starting 2025.
Do you expect further impairment of goodwill related to NBK Egypt? And what is the outlook on operating costs? Operating costs increased 10% 2022 and 2023.
I have already answered the cost bit. With respect to Egypt, we have written off all the goodwill that was related to our acquisition in NBK Egypt, so there will not be any further goodwill for impairment in future.
Questions are repeating now on margins and taxes. We will pause again for 20 seconds until we get further questions. I got some more questions. The first question we will take, how much does USD loan and deposit account for total loan book and deposits?
On both the loan side and deposit side, that is non-bank deposits, the split between foreign currency component is about 30% of the total, and a big chunk of this is US dollar.
A question on capital. Thank you for the presentation. I was wondering whether you can share what is the target level of CET1, where you would feel comfortable in 2024. Can you also share your issuance plans for this year on seniors ESG labeled subordinated paper?
Yeah. With respect to the capital ratio, the target for the bank is to maintain a buffer of between 1.5%-2% at a total level, especially at the year-end. Our minimum requirement is 15%, so we aspire to be between 16.5%-17%. When it comes to CET1 and tier one ratios, we would take some benefit of lower thresholds, but it would still be around 1.5% at the year-end.
There are a couple of questions on how the new mortgage law, how would the product be structured, and the details. I think it's too early for this. We don't have those details at this point. There are questions also on projects. Is there an improvement in new project awards? How do you see project awards in 2024?
Well, as I mentioned in my speech earlier, the year 2023 marked the best performance in project awarding in the recent years. There was about KWD 2.5 billion worth of awards last year. In the meantime, because of backlog of awards from pandemic time and the weakness in the project market in post-pandemic years, last year represented a good year so far. But the value of projects were almost tripled year on year. In 2023, it reached 2.5, and there are some optimism that it might be reaching double this amount this year and after. I would say there are some market forecasts for more than KWD 5 billion-KWD 6 billion of projects to be awarded mainly in the energy sector and oil sector.
We are a bit optimistic, especially after the reform and the appointment of the new government, that there will be more project to be awarded in various sectors in Kuwait.
I think that is it for today. We have covered all questions. As we always say, if we missed anything, the question list was quite exhaustive. If we missed anything or if you have any follow-up, please get in touch or send us the follow-up question to the investor relation emails and we will address it right away. Thank you all very much for listening today. Back to Elena.
I would like to thank NBK's management team for their presentation today and for all the answers they have provided. Thank you to all the participants for joining today. Have a good day.
Thank you.
Thank you
Thanks.
Thank you, Amir. Thank you, Sujit.