Warba Bank K.S.C

Warba Bank K.S.C.P – 3rd quarter 2019 Earnings Call

Edited transcript of Warba Bank earnings conference conducted on Monday 4th November 2019

at 14:00 Kuwait Time.

Corporate participants:

Mr. Shaheen Al Ghanem – Chief Executive Officer

Mr. Khaled Hafez – Chief Financial Officer

Mr. Ahmed Sadek – Senior Director Financial Planning and Reporting

Chairperson

Ahmed El Shazly – EFG Hermes

3rd quarter 2019 Earnings Review – Analysts call

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Ahmed El Shazly Good afternoon, everyone, and welcome to Warba Bank's 3rd quarter 2019 results webcast. It's a pleasure to have with us on the call today Mr. Shaheen Al-Ghanem, CEO of Warba; Mr. Khaled Hafez, CFO of Warba; and Mr. Ahmed Sadek, Senior Director of Financial Planning and Reporting.

I'll now hand over the call to Mr. Ahmed Sadek. Thank you.

Ahmed Sadek Thank you, Ahmed.

Good afternoon everyone. We are glad to have you in our quarterly analyst call for the 3rd quarter 2019. In the beginning, I would like to read out a brief disclaimer for today’s presentation.

Certain statements in this presentation may constitute forward-looking views. These statements reflect the Bank’s expectations and are subject to risk and uncertainty that may cause actual results to differ materially and may adversely affect the outcome and financial effects of the plans described herein.

You are cautioned not to rely on such forward-looking statements. The Bank does not assume any obligations to update its views of such risks and uncertainties or to publicly announce the results of any revisions to forward-looking statements made herein. In addition to this disclaimer I just read now, I do encourage you all to refer to our full disclaimer which is displaying right now on page-2 of the presentation.

So, let’s move to our presentation for today, we will start the presentation with opening remarks from the bank CEO Mr. Shaheen Al-Ghanem then will be followed by a presentation of the bank CFO, Mr. Khaled Hafez; that covers in-details the updates of financial performance of Warba for the period ended 30th Sep 2019.

Upon finalizing the presentation slides, we will be ready to receive all of your questions through the webcast. Also, it’s our pleasure to take that opportunity and announce that we have launched our Investor relations platform that you will find it available through our website and for 1st time in Kuwait a dedicated mobile app. For Warba investor relations. We encourage you to download the app and get access to up-to date as well as historical news and disclosures and reports of the bank.

Now, you can download the presentation through the link on your screen on the webcast platform as I would like to hand the call over to Mr Shaheen Al-Ghanem, the Bank CEO; to take you through a brief update on Kuwait and Warba outlook.


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Shaheen Al-Ghanem Thank you all for joining us today in our quarterly earnings webcast.

During 3rd quarter 2019, Warba continue with a steadily financial performance and achieve remarkable operational targets. That’s represent a continuation to excellent performance of the bank and strictly align with Warba’s long-term strategic plan.

First off, Warba Bank’s senior sukuk is the 1st ever senior sukuk issued by any Kuwaiti Islamic financial institution. The Bank’s inaugural tap of the senior sukuk market achieved outstanding success as global investors responded positively to the issue and bid for the sukuk at very competitive price levels. The bank issued USD 500 million five-year senior sukuk structured on the Sharia concept of Murabaha from its USD 2 billion Trust Certificate Issuance Program. The issue was oversubscribed by a very impressive 6.34 times, garnering orders totalling USD 3.17 billion. The sukuk is listed on NASDAQ Dubai and the Irish Stock Exchange.

The adequate diversified funding base of Warba Bank contribute positively to enlarge the assets size reaching to KD 3.1 billion by the end of 3rd quarter of 2019, with a growth rate of approx. 40.6% from KD 2.2 billion at the end of year 2018. In parallel, Warba recorded a strong growth of profits reaching to KD 12.1 million with approx. 49.4% compare to the same period of the prior year.

In respective to Market Share, Warba has continued to acquire a marginal stake of the market growth ranged to 39% of the domestic finance across all economic sectors, that leads to increase our market share of financing reached up-to 5% compared to 4.05% in the end of year 2018. Sector-wise, our market share of corporate financing reached to 6.24% while of the retail financing reached to 3.32%.

Let me share with you some outputs of our review of the market updates, Kuwait government debt levels remain comparatively low and the implementation of projects under the current 5-year NDP is proceeding while it is indicated that it will drive the economic growth by maintaining a capital expenditure at 17% of total expenditure. The budget allocation to non-oil sector; which is expected to grow by 5.4% in 2020, is likely to support the demand conditions in the economy as well as bank profitability and financial resilience.

About, “Total Banking Assets” are also set to continue with the growth momentum of 2018 wherein the sector grew by nearly 5%. NPA’s has been stable across the industry throughout 2019.


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During 3rd quarter of 2019, The Bank’s success journey continues in accomplishment of several achievements across various fronts …

As part of the second phase of strategy, Warba Bank continues its digital factory “Al-Wateen”, which focus on offering new innovative products and services in order to position Warba as a digital-first bank.

Moreover, Warba bank is also focused on outreaching valuable customers though opening of new branches and services center. So, during the 9 months passed of 2019, Warba opened its 1st Corporate Banking Branch in Sanabil Tower to serve banks corporate customers and 2 new Retail Banking Branches including the 1st Private Banking Branch in Shuhada to serve high net worth individuals. On the side of brand and recognition front, Warba Bank has received prestigious awards since the start of 2019 from reputable institutions that reflects a strong growing image of Warba bank, such as the recently received award for “Best Digital Banking Services in Kuwait” granted by Banker Middle East, “Structured Finance Deal of the year” and “Cross Border Deal of the year” received from Islamic Finance News. Well, so that conclude my introduction and I will hand over the call now to Mr. Khaled Hafez, the bank CFO.

Khaled Hafez Thank you Mr. Shaheen, Good afternoon everyone.

First, I would like to thank you all for joining us today in Warba’s earnings webcast.

Today, we are delighted to share with you the details of Warba Bank’s performance and financial results for the 3rd quarter of year 2019.

The 3rd quarter has unique achievement about issuance of Warba’s Senior Sukuk, which is the first senior sukuk issued by Kuwaiti Islamic financial institution. The issuance received an overwhelming demand from investors resulting in an oversubscription by a very impressive 6.34 times that reflects the trust of investors not only from the domestic market but internationally as well. On the other hand, as you will see in the presentation, the bank continues its growth rate in obtaining more incremental stake of market share and support organic expansion of Warba’s operations that serve in achieving sustainable profitability and continually improve core earnings.

Now, I will start talking to you through the presentation:


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If you have a look at slide (13), you will notice that the Bank assets have reached to approx. KD 3.1 billion with a growth amounted to KD 890 million represents 40.5% compared to year-end 2018. The assets increase is attributed to growth in the financing portfolio and investment portfolio, also increase balances with banks in purpose to suffice the regulatory liquidity measures and serve businesses expansion with most convenient and attainable funding source.

The Bank largely depends on the growth of the financing portfolio, which represents 67% of total assets, meanwhile the investment portfolio stands at 12% as per the current interim period. Also, the Bank has witnessed remarkable growth in total funding reaching KD 2.8 billion at a growth rate of 45.8% thus boosting the asset growth during the 3rd quarter of 2019. Total funding includes newly issued senior sukuk amounted to KD 151 million issued by the end of September 2019.

From Asset Quality perspective shown in slide (14), the NPL downward at 1.17%, which is below the Kuwaiti market average and reflects smooth recoverability of financing portfolio and resilient credit policy of the bank. Furthermore, the bank’s provisions coverage ratio stands at sufficient level of 181% referring to Warba’s banking book has no legacy and controlled problematic assets.

Financing portfolio grew by KD 462 million by 28.7% since beginning of 2019 reaching to KD 2.07 billion by the end of 3rd quarter, mainly this is driven by the corporate portfolio, which stands at 82% of the overall financing portfolio.

In respective to Capitalization in slide (15). Here, we focus on Warba’s capitalization and regulatory ratios:

As shown in the top left corner, Warba’s CAR ratio is secured at 19.26%, which is higher than the regulatory limits of CBK of 13%, representing a surplus of 6.26% that would largely support potential growth of Balance Sheet.

Going through the chart in the right top corner, Risk weighted assets has increased by KD 378 million to reach KD 1.6 billion, however the Risk weighted assets as a percentage of total assets has reached to 50%, this ratio is one of the lowest in the market, reflecting the prudent and balanced risk appetite of the Bank, sufficient cautioned for liquidity measures despite the strong growth in different asset portfolios.

We now let’s move to earnings’ main results in slide (16), Net Profit of the 3rd quarter of 2019 shows a surge of 49.4% to reach about KD 12.1mn. A


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significant growth of about KD 7 million in the operating income to reach KD 41.9 million, which represents a growth rate of 20%. Further, the net profit before provisions reached to KD 25.9 million, showing a 19% increase in comparison to same period of last year.

Here it worth to mention that core earning is maintained at market average of 84% that shows consistent performance comparing to the same period of last year. As the major source of operating income are generated from the financing income that represents 70%, in comparison to 71% of the same period last year, followed by Sukuk income which increased from 13% reaching to 14%.

Moving to slide (17), we can see that despite the reflection of increased cost of finance of borrowed funds occurred as result of increasing deposits rates boosted by severe market competition, still the Net Financing Income increased by 17.9% reaching to KD 29.2 million that were compensated by rational composite of deposits and outreaching more convenient source of funding in terms of expanding private deposits and newly issued of sukuk programme.

In the same context, the non-financing income are mainly streaming from “investment income” and “fees & commissions”, which are increased by 22.2% and 17.6% respectively comparing to the same period of last year.

Looking to the graph at the bottom left corner, the “cost of risk” of financing portfolio has decreased by 34 bps reaching 0.61% versus 0.95% of the same period of last year. Essentially, the accumulation financing provision reflects conservative viewpoint toward prudential risk approach aiming of building satisfactory level of provisions that matching with growth in the financing portfolio.

Let’s carry on now to the last Slide (18): the major composition of costs is still staff cost that increased to 68% during 9 months of year 2019 due to expansion of all our business units as well as scaling up of operations and support services around the bank’s business groups. However, the Cost to Income ratio stands at controllable and consistent level of 38% since last year.

Here, despite the improved profitability offset by the latest capital increase, both the return on assets increased to 0.43%, slight increase, and the return on average equity decreased from 7.2%, to reach 5.56%. However, there is enhancing over the previous interim period of 2019.

The Earning per Share (EPS) has reached to 4.80 fils comparing to 2.97 fils of the same period of last year.


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I believe having now touched upon the major financial areas, we are now in a better position to move to the Q&A session of the conference to discuss further the financial position and performance of the Bank.

Ahmed Sadek Now, we will start to take your questions and we will answer them as received in order. So, you can type your question through the webcast facility, then click submit. we will allow you a few moments to give everyone the opportunity to write their questions. So Pls. go ahead.

Okay, we are back, and we have some questions that we'll start taking it in order.

So, the first question, "Can you elaborate to us on the bank Net Financing Margin expectation in the current environment?”

Khaled Hafez Well, I think I can see many questions about our net financing margin. So, I hope

that I can answer all of them under this question.

Actually, the Bank has continued to increase its profitability with net financing

income constituting the largest proportion of the bank income, NFM have

remained steady above 2.0% over the last 2-years. As per the recent rate cuts by

the FED and declining the discount rate to 2.75% by CBK, we would expect that

the structure of our balance sheet will enhance more our profitability.

We believe the recent cuts will have positive impact on the lending appetite of

the local market and financing growth will be expected resulting in higher NFM.

Ahmed Sadek Okay. The second question received here is talking about the growth. The bank

is growing faster than the market so would you expect to maintain the same

growth pace in near future, and what are the main drivers of the growth?

Khaled Hafez We are continuously looking at normalizing the business model keeping focus view on maintaining adequate capital base and hold enough regulatory ratios. It might be worth to mention that the recent rights issue we have executed at last year opened a lot of opportunities with our existing clients as well as new clients and markets, and that was a main driver for our outstanding growth in the past 9 months.

Currently, our main focus on optimizing the current resources by looking to new profitable opportunities in order to grow especially on the service segment, international business and asset management. Those would install the business model by providing a new stream of revenues and support the efficiency ratios, sustaining and outreaching to valuable customers either electronically or through corporate service centre, private banking sections or expand retail network.


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Ahmed Sadek The next question “What is the expected impact of further rate cuts, and

reduction of CBK discount rate on the bank profitability?”

Khaled Hafez Well, talking again about the current environments and the trend of the interest

rates, as you all know, Central bank of Kuwait has recently announced a new cut

on discount rate to reach to 2.75% after three sequential feds cuts, that keep

actually the financing growth stable and not disrupted by numerous fluctuations

of prices and preserve adequate timing for local banks to manage its profit gaps

on short time spectrum.

Nonetheless, Warba diversified funding base allows for more lenient adaptation

of changes of cost of funds at prevalent market prices that offset expectation of

lowering the financing yield. As we just said, new issuance of senior sukuk would

enable us to have long term and sufficient funding sources to stabilize NFM at

average market indicator and provide a resilient tool to intervene in profitable

and promising business expansion.

Ahmed Sadek Okay. We were just waiting to receive more questions. So, I have a

question saying, "There was a stress on funding costs in Half 1 due to

withdrawal of deposits from government agencies. What is the situation

now?"

Khaled Hafez Well, yes, as you rightly said, in the first half we had a systematic issue in

the market because of the governmental institutions withdrew some of

their funds from the banks, which caused a high spike in the cost of funds

for all banks. But I think now it is corrected, as the same government

institutions start re-injected their funds again in the banking system. And

we can see that the current situation now, the system is flushed of the

liquidity.

we are expecting even the cost of funds to come down because of that normalization process.

Ahmed Sadek Another question about the CET1; the Common Equity Tier 1, ratio. The question is saying, "What is the internal minimum on CET1 ratio?"


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Khaled Hafez Well, the bank has a very good roust capital planning function. So, we are monitoring closely the capital adequacy ratio, overall capital adequacy ratio, and CET1, as well. Definitely, the recent capital increase supported our CAR ratio and CET1.

The internal minimum limits we are maintaining here in the bank is 10.5% for CET ratio. As you all know, the minimum required by the central bank is 9.5%.

Ahmed Sadek Okay. The next question. We have a question saying, “Does the bank have certain Dividends policy? Would expect distribution of the bank’s 1st dividend this year?”

Khaled Hafez I think this is a very famous question and we have been asked for that in every call.The bank is really keeping an observing eye on the appropriate level of reserve that would worth to distribute dividends to shareholders which would also keep a solidarity level of equity components to suffice the compounding growth of emerging bank like Warba. We are very optimistic about fair distribution that would support internal capital generation as well as adding rewarding returns to shareholders.

Ahmed Sadek Okay. So, actually, due to the time of our session we'll take last question. And please, if you have any follow-up questions you can send it to us on [email protected], and we will be glad to answer all your questions at any time.

So, the last question in today's session is saying, "There has been a sharp decline in capital adequacy ratio with growth in assets. What is the level of CAR that you are looking to maintain?"

Khaled Hafez Well, I think we talked about our capital adequacy ratio and our capital planning. But again to answer your question, yes, it's normal because we had outstanding growth. So, definitely it consumed some of our capital charges. However, we have a minimum limit for our capital adequacy ratio, to maintain 15% internally. And the minimum required by the central bank, as all you know, is 13%.

Ahmed Sadek Okay. So, thank you all, and I think that concludes our call for today. Thank you for attending our investors call for Q3, and if you have any follow-up questions, again please send it to us on "ir@warbabank" or through "Contact Us" on the website. And you have the IR application; you can check it and get the latest news about Warba Bank.

Thank you again, and here we end our call.

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DisclaimerTHE INFORMATION SET OUT IN THIS PRESENTATION AND PROVIDED IN THE DISCUSSION SUBSEQUENT THERETO DOES NOT CONSTITUTE AN OFFER OR SOLICITATION OF ANOFFER TO BUY OR SELL SECURITIES. IT IS SOLELY FOR USE AT AN INVESTOR PRESENTATION AND IS PROVIDED AS INFORMATION ONLY. THIS PRESENTATION DOES NOTCONTAIN ALL OF THE INFORMATION THAT IS MATERIAL TO AN INVESTOR. This presentation has been prepared by (and is the sole responsibility of) WARBA BANK (K.S.C) (the“Bank”).

Important Notice

The information herein may be amended and supplemented and may not as such be relied upon for the purposes of entering into any transaction. This presentation maynot be reproduced (in whole or in part), distributed or transmitted to any other person without the Bank's prior written consent.

The information in this presentation and the views reflected therein are those of the Bank and are subject to change without notice. All projections, valuations andstatistical analyses are provided to assist the recipient in the evaluation of the matters described herein. They may be based on subjective assessments and assumptionsand may use one among alternative methodologies that produce different results and, to the extent that they are based on historical information, they should not be reliedupon as an accurate prediction of future performance. These materials are not intended to provide the basis for any recommendation that any investor should subscribe foror purchase any securities.

This presentation does not disclose all the risks and other significant issues related to an investment in any securities/transaction.

Forward-Looking Statements

Past performance is not indicative of future results. Warba Bank is under no obligation to update or keep current the information contained herein. No person shall haveany right of action against the Bank or any other person in relation to the accuracy or completeness of the information contained in this presentation. No person isauthorized to give any information or to make any representation not contained in and not consistent with this presentation, and, if given or made, such information orrepresentation must not be relied upon as having been authorized by or on behalf of the Bank.

This presentation does not constitute an offer or an agreement, or a solicitation of an offer or an agreement, to enter into any transaction (including for the provision ofany services). No assurance is given that any such transaction can or will be arranged or agreed.

Certain statements in this presentation may constitute forward-looking views. These statements reflect the Bank’s expectations and are subject to risks and uncertaintiesthat may cause actual results to differ materially and may adversely affect the outcome and financial effects of the plans described herein. You are cautioned not to rely onsuch forward-looking statements. The Bank does not assume any obligation to update its view of such risks and uncertainties or to publicly announce the result of anyrevisions to the forward-looking statements made herein.

Table of Contentso Kuwait Economic Outlook

o Warba Bank Profile

o Business Highlights

o Financial Performance

o Q&A

o Appendix

Kuwait Market

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Kuwait Banking Sector

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Warba Bank Profile

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Overview of Strategy

Transform into an Islamic CIB champion

with a lean digital-first retail businessVISION

.. Help our customers fulfil their life ambitions and grow

their businesses by providing innovative financial

solutions and outstanding experiences

.. Provide our staff with rewarding growth

opportunities and a healthy work environment and

.. Deliver steady, growing returns to our shareholders

MISSION

VALUES

▪ Can Do

▪ Winning Team Spirit

▪ Ambition

STRATEGIC

ASPIRATIONS

No

n-f

ina

nc

ial

Fin

an

cia

l

Profits: Increasing earnings significantly to both deliver returns and build buffers

Growth: Achieving relevant scale to acquire significant market stake

Brand identity: Standing out for something vis-à-vis employees, clients and external stakeholders

Capabilities: Reinforcing ability to compete and distinctiveness

Accelerating profitable growth Developing distinctive brand identity & capabilities

Key Activities

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Overview of Balance Sheet

Asset Quality

Capitalisation

Earnings Results

Earnings Results (Continued)

•

Earnings Results (Continued)

Financial Performance reviewIncome Statement (KWD 000) Q3-19 Q3-18 Balance Sheet (KWD Million) Q3-19 Dec-18 Q3-18

Placements & financing income 73,841 52,486 Cash and Balances with Banks 199 20 56

Finance cost and distribution to depositors (44,622) (27,704) Placements with banks & CBK 395 256 203

Net Financing Income 29,219 24,782 Financing receivables 2,070 1,608 1,452

Net Investment income 8,855 7,247 Financial Assets at fair value through Profit & loss 54 42 31

Net fees and commission 2,695 2,292 Financial Assets at fair value through other comprehensive income 218 149 148

Foreign exchange (loss) gain 918 335 Investment in Joint venture 78 52 32

Other Income 260 246 Investment Properties 21 23 23

Operating Income 41,947 34,902 Other Assets 28 26 22

Property & Equipment 22 18 5

Staff costs (10,828) (8,521) Total Assets 3,085 2,194 1,971

General and administration expenses (2,895) (3,657) Due to Banks and other financial Institutions 965 835 807

Depreciation (2,283) (867) Depositors' Accounts 1,637 1,053 951

Operating Expenses (16,006) (13,045) Senior Sukuk 152 - -

Operating Profit before provision for impairment 25,941 21,857 Other Liabilities 44 35 33

Provision for impairment (13,218) (13,319) Total Liabilities 2,797 1,924 1,792

Operating Profit before Deductions 12,723 8,538 Share Capital and premium 190 190 100

Taxation & Directors’ remuneration (580) (411) Reserves 21 5 3

Net Profit for the Period 12,143 8,127 Equity Attributable to Shareholders of the bank 211 195 103

Perpetual Tier 1 Sukuk 76 76 76

Total Equity 287 271 179

Basic and diluted earning per share 4.8 Fils 2.97 Fils Total Liabilities & Equity 3,085 2,194 1,971

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