Mazin Al-Nahedh, Group Chief Executive Officer at Kuwait Finance House (KFH) highlighted the financial performance for Year End 2019. He said that KFH realized a net profit of KD 251.0 million for the year 2019 for KFH shareholders an increase of 10.4% over last year. Total financing income reached KD 931.6 million, i.e. an increase of 8.1% compared to last year. Net operating income increased to reach KD 510.1 million, i.e. a growth of 12.5% over the last year. Earnings per share for 2019 reached 36.45 fils an increase of 10.3% over last year.

The Board of Directors has proposed 20% cash dividends to shareholders and 10% bonus shares subject to general assembly and concerned authorities’ approval.

Al-Nahedh added during the Earnings Webcast for Year End 2019, that the solid financial statements that KFH achieved in 2019 came as a result of achieving the highest levels of innovation and excellence in customer services, also these strong results confirm KFH’s ability to adapt to the challenges that the region and global markets witnessed in 2019. In addition, the prudent approach that KFH follows towards risk management created a buffer against market fluctuations and geopolitical developments regionally and worldwide.

He continued: “the high liquidity levels that KFH enjoys are one of its main strengths along with the Group’s geographical spread in Turkey, Germany, Bahrain, and Malaysia, as well as the diversified investment and banking services that are aligned with latest financial technology.”

Al-Nahedh explained that the year 2019 achieved success in many aspects as KFH made qualitative leaps in implementing its digital transformation strategy, by adopting the latest financial technology innovations. KFH also has a leading position in the Islamic Sukuk and Financial Services market. Investment in Sukuk reached KD 2.276 billion an increase of KD 713 million i.e. a growth of 45.6% compared to last year having most of the balance representing sovereign sukuk.

He pointed out that on January 20, 2020 KFH has held its ordinary and extraordinary general assembly meetings, in which it approved key aspects regarding the acquisition of AUB Bahrain including the Sharia Supervisory Board's report on the conversion plan to Sharia compliance, the assessment reports prepared by the international advisors noting the fair exchange rate of 2.325581 shares of AUB Bahrain for one share of KFH, in addition to the listing of KFH in Bahrain Bourse.

Al-Nahedh said that KFH has disclosed to the regulatory authorities and the market the latest developments regarding the Acquisition.  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.

Fahad Al-Mukhaizeem:

Eng. Fahad Al-Mukhaizeem, Group Chief Strategy Officer at KFH, highlighted Kuwait operating environment with an overview on KFH. He shared KFH's strategy, as well as Year End 2019 results.

He added during the Earnings Webcast that On Dec 18th,2019, (MSCI) announced the official reclassification of Kuwait Indexes to Emerging Markets Status. The upgrade serves Kuwait’s 2035 vision of becoming an attractive financial center through the valuable attraction of foreign capital, increased liquidity, and the enhanced levels of transparency.

As for interest rates, he said that the Central Bank of Kuwait has made a 25 basis point cut in October 2019 with interest rates unchanged at 2.75%.

On the other hand, according to the IMF, GDP is expected to witness an increase in 2020 reaching 3.1%.  As an overview of KFH’s awards and ratings,  Al-Mukhaizeem explained that KFH has won the World’s Best Islamic Financial Institution 2019 award, Best Islamic Financial Institution 2019 award in the Middle East, and the Safest Islamic Financial Institution in the GCC 2019 from Global Finance Magazine.

Further, Fitch and Moody’s have affirmed long term ratings for KFH at A+ and A1 respectively.  Moody’s have recently changed their outlook from Stable to Positive.

Al-Mukhaizeem added: “Our strategic distribution remains one of KFH’s strengths with a branch network exceeding 510 branches around the world. KFH has invested strongly in banking innovation and in the latest technology while achieving excellence in mobile banking services and the launch of digital products and services including fully-automated digital self-banking stations “KFH Go”, the digital Cheque Deposit solution through mobiles, in addition to the Jazeel app which has an “easy on-boarding” process developed in KFH Bahrain, adding to our smart digital solutions.”

He confirmed that KFH continues to participate locally and regionally in key mega projects in such vital sectors as energy, water, infrastructure, and construction.

Shadi Zahran:

Shadi Zahran, Group Chief Financial Officer at KFH said that the Group has achieved Net Profit After Tax (NPAT) attributable to Shareholders for the period ended 31st December 2019 of KD 251.0mn higher by KD 23.6mn or 10.4% as compared to 2018 of KD 227.4mn. Financing Income increased by KD 69.5mn or 8.1% resulting mainly from the increase in average yielding assets. Net financing income (NFI) has marginally increased by KD 3.0mn or 0.6% compared to last year. This is due to increase in financing income of KD 69.5 mn offset by the increase in COF by KD 66.5 mn. The increase in COF is mainly due to the full effect of increase in benchmark rates (as reached the highest level in 2018 fourth quarter) besides the increase in distribution to depositors as a result of higher group profitability. However, the reduction in the benchmark rates which started in second half of 2019 did not materially impact the COF. Net Operating income increased by KD 56.6mn or 12.5% compared to last year reaching KD 510.1mn; the increase is mainly from Investment Income by KD 66.9mn.

He added that the increase in investment income is mainly generated from gain on sale of investments and income from Islamic derivatives transactions (Islamic Currency swaps or Wa’ad structure) which led to increase in investment income contribution to total operating income to reach 16% compared to 8.5% last year. However, the other non-yielding income contribution remained at the same level.

Zahran explained that the total Operating Expenses at KD 304.2mn has increased by KD 11.8mn or 4% compared to last year. Increase in cost was mainly due to inflationary conditions seen in some markets where the group operates. In addition to supporting growth of Banking Business.

He added that despite the increase in operating expenses, the group C/I ratio continued to improve showing reduction of 184bps during 2019 to reach 37.36%. Displaying an improved efficiency, and optimized total operating expenses.

Furthermore, at KFH-Kuwait, C/I ratio at 32.7% is still below both the local Islamic Banks average of 43.1% and local conventional Banks average of 37.1% (calculated from published financials for September 2019).

He pointed out that Average Profit Earning Assets increased by 6.6% compared to 2018 and 15% compared to 2017, maintaining the growth momentum of yielding assets for the past years. (avg. YoY financing receivables and MM is higher by KD 0.5bn and avg. Sukuk is higher by KD 0.4bn) Group NFM at 3.10% shows an 8bps decrease over 2018 of average 3.18%.

He said that Group average yield was maintained despite aggressive market competition and slow discount rate evolvement compared to Fed rate. However, as mentioned earlier the COF is higher as compared to 2018 on account of KFH increased profitability and higher market rates.

Zahran said that the group total provisions and impairment charge increased by KD 34.4mn or 21.2% to reach KD 196.9mn. Higher provisions on financing by KD 101.8mn is on account of precautionary provision of KD 60mn recorded at group level on our Turkish subsidiary financing portfolio on conservative basis in view of market outlook. In addition to the increased COR in Turkey.

He continued: “Provisions and impairment for investments and others decreased from KD 105.6mn to KD 38.2mn due to last year one-off impairment for certain legacy properties in GCC. Net Operating Income (before provisions) from banking activities remained at same level of 93% of Group Net Operating income. Total Assets at KD 19.4bn increased by KD 1.6bn or 9.1% during 2019.

Zahran went on to say that the group achieved an outstanding growth in deposits in 2019 of KD 1.8bn or 15% with contribution from all banking entities reflecting the depositors’ strong confidence in KFH group in addition to group investments in digitalization mainly in Turkey and Bahrain.

He added: “Additionally, the favorable deposits mix continues to show very healthy contribution from CASA deposits which represents 44.3% of total group deposits as at the end of 2019 – maintaining same level during the past years. It’s also worth to mention that KFH Kuwait dominates the saving accounts with the market share of 41.2% (as per CBK latest published reports, Nov-19).”

He illustrated that financing receivables at KD 9.3bn increased by 1.6% in 2019. Growth in financing receivables contributed from Kuwait, Turkey and Bahrain. Group strategy focusing on assets quality resulted in slower growth besides the impact of strong market competition on pricing in Kuwait.

He clarified that investments in Sukuk at KD 2.3bn increased by KD 713mn or 45.6% compared to 2018 and contributed from all banking entities with majority of Sovereign Sukuk investment. The growth in Sukuk portfolio is a response of growth in deposits in all markets in which we operate where limited good asset quality financing opportunities are available within the Group’s overall Risk appetite.

He said that customer deposits as a percentage of total deposits at 83.1% continues to improve reflecting the healthy funding mix and shows robust liquidity.

He noted that NPL ratio reduced further to reach 1.88% (as per CBK calculation) in Dec-19 compared to 1.99% at Dec-18 on account of improvement in overall risk profile of the Bank supported by recoveries and write-offs. Coverage ratio (provision) for Group improved to 231% in 2019 (2018: 191%). Coverage ratio considering collateral for Group improved also to 284% in 2019 (2018: 247%).

He said: “In the last slide looking at the key performance ratios, the group compared to last year same period is as follow:

• ROAE from 12.45% to 13.00%.

• ROAA decreased from 1.51% to 1.40% (the decline is associated to the one-off precautionary provision impacting net profit including minority).

• C/I from 39.20% to 37.36%, and.

• EPS from 33.06 fils to 36.45 fils.

He added: “Now, in addition to the financial position and highlights provided in the appendix we have also included this time a section related to the AUB acquisition due to its importance for the investors. All of the information in those slides was made available to shareholders prior to the EGM on 20th of Jan 2020, and I will focus briefly on the key financial highlights. As already disclosed, KFH shareholders have approved the transaction and both regulators CBK and CBB have provided their conditional approvals.”

He continued: “As well disclosed, the consideration for the Acquisition (being the Exchange Ratio) is 1 KFH Share for 2.325581 shares of AUB, this will result in representation of AUB shareholders of 35% in the new combined group. The transaction positions KFH as a dominant bank in the Middle East, diversifying its footprint to 6 new markets in addition the existing ones. KFH and AUB have complementary businesses and as a result of acquisition the new combined KFH Group will offer a well-diversified full-service financial institution, with each business segment of corporate banking, retail and private banking, treasury and investment represent one-third of the group total assets post acquisition.”

Also, from the total assets perspective, he said that the acquisition of AUB will create the largest Islamic bank in the world, largest bank in Kuwait and Bahrain and 6th largest bank in Middle east with combined total assets base exceeding USD 101 billion.

From the perspective of total customer deposits, he said that KFH will be the second largest Islamic bank in the world.

The anticipated annual run-rate synergies are estimated to be in the range of 10-15% per annum of the combined group cost base, after completion of integration and conversion.

The combined group is expected to benefit from a more efficient platform, optimising infrastructure from both groups, greater scale and negotiating positions with suppliers. Further KFH Group should be in a position to capture the significant opportunities arising from existing relationships across both groups.

He continued: “The pro-forma financials based on audited 2018 financial statements of both groups and considering the issuance of the new shares, the transaction is expected to be earnings accretive for KFH shareholders by 21.8% excluding the impact of estimated synergies. And 31.8% with estimated synergies. There is also strong financial rationale for this transaction with enhancement in all key ratios as the expected ROA to be above 1.5%. ROE above 15%, C/I ratio below 35%, and CAR above 16.5%”.