KUWAIT: Kuwait Finance House held an earnings conference webcast on Monday in which speakers from KFH executive management Mazin Al-Nahedh, Group Chief Executive Officer, KFH Shadi Zahran, Group Chief Financial Officer, KFH and Fahad Al-Mukhaizeem, Group Chief Strategy Officer, KFH led the discussions. Fawaz Al-Sirri, Bensirri was the moderator.

The transcript of the conference call:
Fahad Al-Mukhaizeem:

Thank you Fawaz and good afternoon ladies and gentlemen. We are glad to welcome you to the Year End 2018 earnings call for Kuwait Finance House Group. Today, we’ll be covering highlights of the Kuwait operating environment with an overview on KFH. We’ll also share with you KFH’s strategy, as well as the year-end financial results.
The Central Bank of Kuwait left its key discount rate steady at 3 percent in December of 2018 despite the FED’s decision to hike the rates by 25 bps. On another front Fitch Ratings recently affirmed Kuwait’s sovereign rating at AA. Standard & Poor’s credit rating for Kuwait also stands at AA with Stable Outlook. Moody’s did adjust Kuwait’s score upwards both for economic strength and fiscal strength, setting it at Aa2 with stable outlook. Kuwait’s commitment to its development plan projects can be seen by the continued capital spending and project launches with the support of the private sector, and more specifically the Kuwaiti banking sector.

As an overview of Kuwait Finance House Group, the bank maintains its top position ranked first in 2018 by Global Finance Magazine as the safest Islamic financial institution in the GCC. We are the first and largest Sharia compliant bank in Kuwait and second largest Islamic Bank in the world by assets and we are the First Islamic Bank in Germany. Currently we have more than 500 branches in Kuwait and around the world.

As confirmed by this year’s financial results, Kuwait Finance House Group continues to capitalize on its strong retail franchise with a consistent track record of profitability and dividend payment, an improvement in its cost to income ratio and low NPF rates, thus affirming our customers’ confidence in KFH’s leading role in the international development of Islamic Banking and Financial Services industry.

Spending on building IT platforms, infrastructure, and front end technology has characterized KFH’s business activities in 2018, which we can call the “FinTech Year.” KFH succeeded in providing 20 high-tech banking services, most of which are unique in Kuwait. KFH launched the first fully-automated 24/7 e-branch with an advanced and wide range of technical services and self-service tools under the name of “KFH-Go”. The e-branch provides more than 30 services representing about 80 percent of the services provided by the traditional branch. Also, KFH launched a Chatbot service in cooperation with Microsoft, to improve interaction with customers. We also upgraded a centralized SWIFT network system for global payments at the group level. For the first time in Kuwait. Also KFH launched Visa Checkout to facilitate fast and secure online purchases. Along with developing the other ATMs, it also launched the mini branch which we call the XTM with seven new services, some of which are the first offered locally, including card-less withdrawals using a QR code. The Bank also introduced a fast cross-border transfer service (KFH Xpress) and an instant remittance service using the RippleNet network based on Blockchain technology.

KFH Group CEO Mazin Al-Nahedh:
KFH realized a net profit of KD 227.4 million for the year 2018 for KFH shareholders compared to KD 184.2 million last year i.e. an increase of 23.5 percent. Total financing income reached KD 862.1 million, i.e. an increase of 16.4 percent compared to last year. Net financing income reached KD 527.3 million, i.e. an increase of 18.5 percent over the last year. Net operating income increased to reach KD 453.5 million, i.e. a growth of 11.1 percent over the last year. Earnings per share for 2018 reached 36.36 fils compared to 29.46 fils last year i.e. an increase of 23.4 percent. Total operating expenses decreased by KD 12.6 million i.e. a drop of 4.1 percent over the same period last year. Cost to income ratio dropped for the fourth year in a row to reach 39.2 percent for the current year, compared to 42.8 percent for the last year.

KFH has been progressively in line with its plans and overall performance of the group, which confirms that KFH is steadily moving towards achieving sustainable profitability by focusing on operating profits from key banking activities while maintaining the advantage of diversification in its resources. KFH has also opened up to new segments with innovative and competitive products in accordance with its intended strategy. Our 3-year strategy ending in 2020 is based on improving customer experience, digitizing operations, and growing the business.

The year 2018 achieved success in all aspects including innovation of new products as outlined by my colleague Fahad, application of the highest standards of quality and governance, assimilation of banking technology, improvement of the Bank’s internal capabilities such as technology development and technical infrastructure. This has contributed to keeping pace with “digital banking” and investment in human resources (through a flexible and professional structure) especially investing in the national capabilities of the youth.

Kuwait Finance House (KFH) has a leading position in the Islamic Sukuk and Financial Services market. The International Islamic Liquidity Management Corporation (IILM) has officially announced that KFH has been ranked “Top Primary Dealer” on top of 11 IILM Primary Dealers of regional and global banks and financial institutions. The ranking is based on the allocated amount for 15 issuances in 2018 with a total of $8.11 billion.

KFH’s has positioned itself as a leader in the sukuk market by using its substantial capabilities and playing a significant role in activating the sukuk market. This ranking came for the fourth time in a row, which confirms KFH’s leadership and its prominent role as a market maker

KFH has also been awarded the “Fastest Growing Debit Portfolio in Kuwait for 2018” award by Visa International. This award is proof of the success of KFH’s strategy to motivate and encourage customers to switch from conventional cash payments to electronic payments via bank cards and payments through smart technologies.

As for year 2019, a noticeable bolstering will be witnessed of KFH’s capacity in local and international markets and direction towards a capacity to increase financing large government projects and develop its role towards supporting SMEs. This is a target that is in line with the ongoing efforts to achieve sustainable profits and focus on excellence in customer service. Furthermore, KFH continues its efforts towards innovation in Islamic finance, which will ensure the Bank’s reputation as the most trusted Islamic bank to grant shareholders and depositors the highest profits, best returns and the most innovative services.

Regarding the potential Acquisition and Merger with AUB Bahrain, we have disclosed to the regulatory authorities and the market the latest developments in this regard and there are no further updates at this time. All these disclosures were published via the official website of Boursa Kuwait and any new development will be updated as and when it comes available.

Group’s CFO Shadi Zahran:
The group net profit after tax (NPAT) attributable to Shareholders for the period ended 31st Dec 2018 stood at KD 227.4 million and is higher than FY 2017 by 23.5 percent, that’s mainly from an increase Net Finance Income by KD 82.4 million and decrease in operating expenses by KD (12.6) million, offset by a decrease in investment income by KD 43.3 million and other income by KD 9.1 million.

Net Financing Income at KD 527.3 million represents an increase of 18.5 percent as compared to last year which resulted from the increase in YoY average yielding assets portfolios by 7.9 percent and improvement in NFM by 40 bps.

Total Operating income at KD 746.0 million increased by KD 32.7 million or 4.6 percent resulted mainly from the increase in net finance income by KD 82.4 million contributing 70.7 percent to the total operating income compared to 62.4 percent contribution in 2017, (as you can see on the right side of the slide) accordingly the non-financing income (including investment income) contribution to total operating income has dropped by 8.3 percent to reach 29.3 percent (investment income contribution dropped from 14.9 percent to only 8.5 percent), and that is due to lower divestment of non-core assets as compared to last year.

Total Non-Financing Income decreased from KD 268.4 million to KD 218.7million, that was mainly due to lower investment income by KD 43.3 million (dropped from KD 106.6 million to KD 63.3 million). Accordingly, the contribution of investment income to total non-financing income dropped from 39.7 percent to 28.9 percent as we see on the right top corner of the slide

Operating expenses
The Total Operating Expenses at KD 292.5 million has decreased by KD (12.6 )million or (4.1) percent.

Staff cost at KD 177.6mn decreased by KD 10.0 million mainly from Kuwait “the Parent” (was main contributor) due to impact of labor law amendments in 2017. Other operating expenses decreased by KD 1.3 million or (1.6) percent. Which although its marginal and considering the business growth shows further cost improvement for the fourth year in a row due to the continuous Group efforts towards cost optimization
Mazin Al-Nahedh:
We spoke about the potential merger and we said that we do not have any new information other than the published information. We are currently awaiting the regulatory approvals to start the due diligence process. And then from that point on, we would carry on the exercise and naturally, if it would make sense we would present it to the board, they will look at the outcome and based on it we would apply to the regulatory authorities for final approval and then it goes to the AGM, for their absolute final approval. So, we will update you as and when there are new developments in this regard.

Shadi Zahran:
With regards to the cost to income ratio for Turkey, I can confirm that it’s improved. The improvement in cost to income ratio came from all subsidiaries with no exception. And now Turkey is in line with the Group cost to income ratio and much better than the market there. With regard to the cost of risk also in Turkey is better than the market. And we are still the second lowest NPL ratio in Turkey in the market. Now with regards to the deterioration that occurred in the currency and its impact. And that’s I think one of the questions is the contribution to the profitability for the Group, Turkey maintained the same level of contribution to the Group because as we mentioned in the third quarter, while the currency impacted the Turkish operation, the trading gain from foreign currency in Turkey due to the trading in foreign currency in Turkey itself has compensated for that. And for 2018, the contribution maintained at the same level of Turkey. So I think I covered the quality cost income ratio and the Turkish lira impact.

Mazin Al Nahedh:
Outlook for Turkey, we believe that the measures taken by the Turkish government, particularly in the fourth quarter of this year, in raising the base rate by about six and a quarter percentage points, in order to slow down credit growth and the expansion that’s taking place there. We anticipate 2019 to be a lower growth trajectory than the previous year, but given that the base rate there is at the level where it is, we still expect a decent growth, I will say in the double digits in Turkey during 2019. As a matter of fact, we’re seeing more, more stability in the Turkish operation than the fourth quarter and the turbulence that occurred then. Abu Dhabi Investment Authority (ADIA)

Representatives from Derayah Financial, Arzan Financial Group, EFG-Hermes, Franklin Templeton Investments, Schroders, Beltone Asset Management, Al-Rayan Investment, Fitch Rating, The National Investor, SICO Bank, HSBC, Arqaam Capital, ADCB and Dark Horse Capital attended the webcast conference.