Pandemic demonstrated NBK’s digital strength
NBK Group CEO speaks on sidelines of analysts’ conference for results of 1H 2020
KUWAIT: CEO of National Bank of Kuwait Group Isam Al-Sager stated that: “The past few months witnessed challenges on all levels as a result of COVID-19 outbreak and the subsequent extreme measures taken by governments around the world in an effort to control the outbreak. However, these measures reflected very negatively on the economic activity and business sentiment globally.”
On the sidelines of the Analysts’ Conference Call/Webcast for the results of 1Q and 1H 2020, AlSager added that the Group’s business was impacted in most of our locations leading to more challenging operating environment across our network. Net profit for 1Q2020 recorded KD 77.7 million and KD 33.4 million for 2Q2020. This led to 1H2020 profits of KD 111.1 million, down 47 percent year-on-year compared to last year.
Al-Sager noted that the domestic economy was pressured and the impact of the long period of lockdown has had its toll on our operations as well. We are expecting this year’s GDP to contract by 6 percent because of the expected non-oil GDP contraction by around 4 percent.
Al-Sager pointed out that: “From business shutdowns to curfews and border closures, all these actions along with the change in sentiment created a severe shock to world economies. The impact of the pandemic in the GCC region was even more severe because of the large drop in oil prices and its impact on economic activity and budget deficits. In the first half of 2020, most GCC countries have seen their fiscal positions weakening with exceptionally large budget deficits projected for 2020.”
“The full closure and slower economic activity, especially during Q2 of the year, had significant impact on our operations. The drop in transaction volumes has resulted in lower fees and commissions income, whereas the low interest rate resulted in more pressure on our interest margin. Additionally, the impact of non-oil GDP contraction, the lower oil prices and the lock down period, had all increased the level of uncertainty around the cash flows outlook for many of our customers, which led to higher provision charges,” added Al-Sager.
Proactive measures
NBK Group CEO affirmed that: “From day one of COVID-19 pandemic outbreak, the bank took proactive measures and activated emergency plans at the very early stages of the crisis, in order to protect our employees and ensure business continuity.”
Al-Sager added that NBK business model showed great flexibility during the crisis, which enabled it to provide support and advice to our customers facing financial difficulties and relying heavily on our digital capabilities to maintain the level of service quality and accessibility that our customers would expect in normal times.
Al-Sager indicated that since the early days of the crisis, we realized that the virus spread and the control measures implemented by governments around the world would have a negative impact on the bank’s profitability. Therefore, we immediately introduced some cost-savings initiatives to be implemented across the Group in an effort to ease the pressure on the bottom line, without affecting our future business plans. AlSager stressed that NBK, in coordination with the Central Bank of Kuwait and Kuwait Banking Association, participated in all initiatives aimed at relieving our customers and lifting some of the pressures they were facing. We extended support to our customers by suspension of fees on POS terminals, ATMs and digital channels for 3 months, in addition to increasing the limit for contactless payments. Moreover, we provided support to individuals by the deferment of consumer/installment loans and credit card installments for a period of 6 months for all our customers. We have also provided support financing to individuals, SMEs, and economic entities impacted by COVID19 crisis.
Strong capital base
Al-Sager emphasized that despite all the challenges that faced the bank in 1H, the Bank’s balance sheet strength remains intact and still stands on firm grounds; noting that the bank’s strong capital base, comfortable liquidity levels and the quality of its profits will give it great capacity to absorb the impact of COVID-19.
Al-Sager pointed out that the impact of COVID-19 reaffirmed some of NBK’s key strengths, thanks to its strategic investments over recent years to accelerate the development of digital banking services, which provided the bank with high operational flexibility during this period.
He also mentioned that digital channels delivered virtual alternatives to branches allowing the bank to serve its customers in the best way possible, noting that the bank’s disaster recovery and crisis management plans all proved very successful when tested during the early days of the outbreak, the fact that gives the bank more comfort as we move ahead towards a recovery phase.
Al-Sager stated that it is too early to have a wellinformed discussion on dividend distribution for 2020 as we are still in the half year. In addition, dividend is a function of earnings and capital and normally this happens at year-end after the Bank assesses the closing capital position and future capital needs; noting that the priority will be to maintain the bank’s solid capital position, with the proper buffers similar to what we have maintained over the years.
Regarding the intended government cut in its budget by 20 percent and how that will affect capital expenditure and if there are any delays on expected mega projects, Al-Sager said that Kuwait as well as other GCC countries, will feel the pressures, not only from the spread of COVID-19, but also because of the drop in oil price as Oil GDP and oil receipts remain a significant contributor to the country’s GDP and to budget revenues. The immediate response to that would be budget cuts and rationalization of spending. Capital expenditure will be among those planned cuts, and accordingly, we do expect some project delays and/or cancellations and have witnessed already.
Al-Sager added that despite that negative trend, we still see some activity with the value of projects awarded in 1H2020 totaling some KD 900mn, noting that he is also hopeful to see some rebound in activity on both the execution side as well as the awards with the planned gradual opening of the economy.
On his part, Head of Group Management Accounting at National Bank of Kuwait, Shyam Kalyanaraman affirmed that the Group’s balance sheet remains strong with high credit quality and stable capital levels. NBK’s capital base along with its ability to generate healthy operating profits provides a strong credit loss absorption capacity.
Kalyanaraman added that the bank’s operating income is from a well-diversified asset mix, which is unique to NBK amongst Kuwaiti banks in terms of its geographical spread of operations, and due to its ability to conduct business in both conventional and Islamic banking. This diversification gives a significant degree of resilience to Group’s earnings and provides it with a strong competitive edge.
He also added the bank has resilient operating income from Domestic and International Operations, upbeat lending in 1Q2020, although impacted in 2Q2020 due to the slower pace of economic activity, good growth in core franchise deposits, reasonable cost growth, comfortable liquidity levels and solid capital base.
With regard to the deferral of consumer loans installments for a period of 6 months, Kalyanaraman explained that, as instructed by the Central Bank of Kuwait, the modification loss has been charged to equity not to the P&L. Our equity has been charge, after adjusting for our holding in Boubyan Bank, with KD 130mn, which will be phased-out in capital adequacy ratio calculation over 4 years starting from 2021.
Regarding the increase of provisions and impairments, he mentioned that it was notably due to the charge in respect of investment book to cater for the effects of volatility that may arise in anticipation of worsening macroeconomic factors due to the impact of COVID-19, and in respect of the bank’s operations in Lebanon while NMC exposure is covered fully as part of the credit provision.
He also affirmed that the cost of risk in the previous years normalized at around 82bps, and given the impact of COVID-19, we do see some provisions with respect to some of our Kuwaiti corporate and retail portfolios, in addition to some precautionary charges as well in anticipation of future circumstances.
“There has been no big issue with respect to credit quality. What we have seen today is only with respect to liquidity issues with our corporate customers, but we have not seen any deterioration in credit quality,” Kalyanaraman said.
He also pointed out that despite the relaxation offered by the Central Bank of Kuwait regarding some regulatory requirements; the Group was able to maintain the original mandated liquidity levels.