NBK's Al-Sager: Our profits prove our resilient business model

NBK Group CEO, on the Sidelines of the Analysts’ Conference for the 1Q 2021

• We maintained good loan growth, strong asset quality and capitalization metrics
• We will continue to leverage our leading position in the local market in both consumer and corporate banking segments
• Mortgage loan is becoming a necessity in view of the growing residential housing demand in Kuwait
• The current low interest rate environment is a favorable opportunity for passing public debt law to secure the government’s funding needs

Ronghe:

• Our financial results demonstrate our healthy balance sheet and strong capital base
• The Group has a solid financial position and high credit quality

Mr. Isam Al-Sager, the CEO of National Bank of Kuwait Group, said that the growth in the bank’s profitability for 1Q 2021 was a result of steady recovery in operating income, continued cost management efforts and improved cost of risk.

On the sidelines of the Analysts’ Conference for 1Q 2021, Al-Sager added: “We started 2021 from a position of strength as the Group recorded adequate growth across all business lines even in these challenging conditions. We achieved net profit of KD 84.3 million during 1Q 2021, growing by 8.5%, compared to 1Q 2020, and 8.6% compared to the previous quarter.”

Despite the headwinds in the markets we operate in, we are pleased to have demonstrated resilience by maintaining good loan growth and safeguarding our asset quality and capitalization metrics, he noted.

Al-Sager emphasized that the bank will continue to focus on capitalizing on its diverse geographical presence, which supports provision of an increasingly wide range of products, services in all business lines.

Our regional focus will be to grow organically in key markets, in particular Egypt and Saudi Arabia. We will continue to leverage our local market leading position in both consumer and corporate banking segments while growing Islamic banking contribution through our subsidiary Boubyan Bank, which remains an important driver for earnings growth and diversification, mentioned Al-Sager.

At the same time, the implementation of our Digital Transformation program continues to carry heavy emphasis. The program is designed to have the dual impact of improving the efficiency of operations while catering to a wider clientele in all our markets through a more holistic and seamless experience, he pointed out.

Gradual Recovery

During the first quarter, we continued to see economic activity gradually recovering as vaccines were rolled out across the region. In Kuwait specifically and despite a slow start of vaccine rollout, the pace of the trend picked up significantly, with the administered doses exceeding one million as of today, representing more than 20% of the population, Al-Sager said.

This has led to economic growth slowly returning with private and government consumption as well as higher oil prices driving the rebound.

Mortgage Law

Regarding the updates on mortgage law and the optimism around it in the market, Al-Sager stated that Kuwait is one of few countries that don’t have a mortgage law, noting that the existing subsidized structure to finance housing by Kuwait Credit Bank has worked historically but is becoming a bottle neck in today’s efforts to resolve the issue of growing residential housing demand with the growing size of the young population.

Al-Sager stressed that a proper financing mechanism should be in place to help accelerate the allocation of land to eligible citizens; as land allocation is becoming very difficult, indicating that the proposed law offers the same benefits to citizens but the execution will be done through the banks to ensure a faster process, expand the loan size and ensure a proper credit underwriting process.

The banks will be a major beneficiary, as they will offer a new product that is expected to have large demand in the Kuwaiti market similar to what we have seen in other GCC countries, he added.

Public Debt Law

Moving to the updates on public debt law, Al-Sager mentioned that there are still ongoing discussions between the government and parliament around the details of the law and mainly the size of the debt ceiling. Talks have been present for some time and faces political divisions hindering its progress.

Although it is not going at the pace we were hoping to see but the overall direction is promising. Also today’s low interest rate environment along with Kuwait’s very low debt to GDP ratio, make debt issuance the most attractive funding alternative, provided the law gets approved, indicated Al-Sager.

Recently, the government has managed few temporary solutions to finance the budget deficit, mainly through asset swaps between the General reserve fund and future generation fund but we don’t believe this is sustainable, he added.

Loan Deferral Program

On the extension of debt payments for citizens for another 6 months, Al-Sager mentioned that the deferral this time is different from last year, as the current deferral program is approved by virtue of a government law, and the government is to bear the cost of that deferral, unlike last year when banks took the initiative.

Strong Balance Sheet

On his part, Mr. Sujit Ronghe, Acting Group CFO said that 1Q21 witnessed gradual improvement underlying operating drivers, volume growth supported by lower provisions and impairments.

Although some areas of our business lines remain challenged; a healthy balance sheet, comfortable liquidity levels and a solid capital base have been a feature of NBK’s 1Q21 results, he mentioned, adding that the bank saw an improving trend in the NIM over the last few quarters and that was primarily driven by lower cost of funds as our liabilities were repriced at a lower rate as and when they matured, thus benefiting from the drop in funding cost.

We are expecting a good loan growth and CASA deposits to remain stable, which would in turn result in our NIM remaining broadly stable around the levels we saw between 2.22 and 2.26 in the last two quarters, he noted.

Improved Cost of Funding

On the expectations about cost of funding picking up this year, Ronghe explained that the bank had a significant increase in its CASA deposits coming from retail portfolio in both Islamic and conventional banking.

As the economy started opening up in the last quarter of 2020, we were cautious and monitoring the levels of CASA deposits. We have not seen any attrition in CASA deposits even though loan installments resumed and people started spending, he added.

We are optimistic that the current lower funding cost will continue and don’t expect the funding cost to pick up during this year, indicating that the second deferral of consumer loans instalments which is underway, could result in additional CASA deposit for banks, which could lead to more CASA deposits coming into the system thereby impacting funding cost favorably, he noted.

Fees Income

We saw some growth in fees income during the first quarter and we expect fees income to do better than last year although some sectors remains challenged, Ronghe stated.

For example, a portion of our income comes from credit card spend overseas, and as long as travel restrictions continue we would have to bear with lower income from that side of cards business. However, we are seeing a pick in the trade activities so we are expecting fees income to be better than last year although probably not as good as 2019 levels, he noted.

As regards loan growth, loan growth in 2020 was 5.7% and we saw a 2% growth during 1Q21. We are expecting a mid to high single digit growth for the full year 2021. We expect the full year 2021 net interest margin to remain broadly in this range, he added.

Ronghe mentioned that cost to income ratio is currently at c.37% similar to 2020. A challenging interest rate environment, the current macroeconomic situation together with the continuation of our investment program in support of various Group initiatives, will result in this ratio remaining in the high thirties.

Although business and economic activities have partially resumed, the pandemic is not yet over and its global repercussions are still unfolding. Hence we are of the opinion that it is not prudent to give guidance on cost of risk and consequently on earnings / capital adequacy. We are, however, hopeful of maintaining capital adequacy ratios in line with our internal targets above the regulatory minimum.

-Ends –

© Press Release 2021