Speaker #1: Good afternoon, ladies and gentlemen, and welcome to the KFH Q3 2026 earnings call. This is Ahmad El-Shazli from ELGMS, and it's a pleasure to have with us on the call today from KFH, Mr. Fahdim Mukhayzin, Group Chief Strategy Officer and Acting Group Chief International Banking Officer.
Speaker #1: And Mr. Abdelkarim El-Sandan, Group CFO. We will start the call with the management presentation for the next 10 to 15 minutes, and then we'll open the floor for questions.
Speaker #1: If you'd like to ask a question, you can just type it in the chat box at any time during the presentation, and we'll address it during the Q&A session.
Speaker #1: I'd like to mention that some of the statements that might be made today may be forward-looking. Such statements are based on the company's current expectations, predictions, and estimates.
Speaker #1: There are no guarantees of future performance, achievements, or results. And now, I'll hand the mic over to Mr. Fahd to start with the presentation.
Speaker #2: Thank you.
Speaker #3: Thank you, Ahmad. Welcome to KFH's Q3 2026 earnings call. I'm Fahdim Mukhayzin, Group Chief Strategy Officer and Acting Group Chief International Banking Officer. KFH entered the final quarter of 2026 from a position of strength, remaining the largest listed company on Bursa Kuwait by market capitalization as of September 30.
Speaker #3: I will briefly cover the economic backdrop and our key strategic actions. The global economy remains resilient; in October, the IMF raised its 2026 global GDP growth forecast to 3.1%, while maintaining 2027 at 3.4%, supported by AI-driven investment.
Speaker #3: Kuwait's outlook reflects temporary pressure from regional conditions and oil disruptions. The IMF projects a 2026 GDP contraction, followed by a strong rebound in 2027 with a GDP growth forecast of 17.1%, as energy production and transport are expected to normalize.
Speaker #3: Kuwait’s $122.7 billion pipeline of planned and unawarded projects offers significant longer-term financing potential. In Q3, power and gas represented more than 80% of project awards.
Speaker #3: Inflation in Kuwait remained at 2.19% in July 2026. The IMF projects, on average, a moderate inflation rate of 2.2% in 2026 and 2.4% in 2027.
Speaker #3: The central bank of Kuwait maintained the discount rate at 3.5% in September. The new government sukuk law establishes a framework that can diversify sovereign funding, broaden the investor base, and support a Sharia-compliant yield curve.
Speaker #3: The new mortgage law, the new mortgage financing law, broadens bank participation and allows eligible beneficiaries to combine subsidized and unsubsidized financing for terms of up to 25 years.
Speaker #3: Both frameworks create promising opportunities for KFH as implementation progresses. The opening of the Al-Qayrawan Center brought our group service centers in Kuwait to three, strengthening service centers for customers across the regional network.
Speaker #3: We continued to advance our digital capabilities through KFH Online, Smart Branches, upgraded ATMs, and the enhanced ECO platform for corporate customers. KFH Bahrain also demonstrated strong digital progress, reporting a 40% year-on-year increase in active customers through digital channels and having successfully automated more than 150 banking services.
Speaker #3: Bringing the total number of digital banking services to over 300. These initiatives strengthen group integration, customer experience, and efficiency. The Banker recognizes this progress by ranking KFH as the best-performing bank in Kuwait and in its Top 100 Arab Banks 2026 rankings.
Speaker #3: KFH continues to support national initiatives of strategic impact, including a $13 million contribution to the Kuwait Emergency Response Fund and an additional $6 million planned contribution to support power station infrastructure needs.
Speaker #3: KFH continues to earn international recognition, including being ranked number one best-performing bank in Kuwait in The Banker's 2026 Top 100 Arab Banks, the Euromoney Award for Wealth Management, ESG, and Digital Banking, World's Best Islamic Bank by Global Finance, and Best Digital Bank in Kuwait by MEED.
Speaker #3: Q3 demonstrated the strength of KFH's diversified franchise and our continued execution. Our priorities remain clear: focus on customer centricity, deepen integration, accelerate digital adoption, and pursue quality growth with disciplined risk and liquidity management.
Speaker #3: We remain confident in our ability to deliver sustainable shareholder value, support our customers, and contribute to Kuwait's long-term development. With that, I will now hand over the mic to our Group Chief Financial Officer, Mr. Abdelkarim El-Sandan.
Speaker #1: Thank you, Mr. Fahdim Mukhayzin. Good afternoon, everyone. The nine-month results show a stronger operating earnings base, reflecting growth in financing and fee income alongside lower expenses.
Speaker #1: Net operating income rose 11.7% year-on-year to approximately KD 1 billion, with cost-to-income at 30.8%. Shareholders' profit increased by 6.2% to KD 523.4 million, with higher provisions and non-controlling interest absorbing part of the operating improvement.
Speaker #1: Higher distribution on perpetual Tier 1 sukuk also explained why earnings per share grew more slowly than the shareholders' profit. In Q3, lower funding cost through effective funding deployment helped margin recover, and net financing and fee income both improved from Q2.
Speaker #1: Investment in foreign currency income was lower, however, and was the main reason shareholders' profit declined to 160.3 million KD from 186.5 million KD in Q2.
Speaker #1: The financing portfolio is now 7.5% above the year-end, reflecting continued deployment of liquidity into customer financing. We have maintained our operating guidance and revised our cost-of-risk expectation and growth expectation related to net fees and commission income, to reflect the business dynamics we have seen through September.
Speaker #1: For the final quarter, our focus is on sustaining the progress in core earnings, while pricing growth for the cost of funding and credit cost. The group's recent performance provides useful context for its current earnings capacity.
Speaker #1: Between 2023 and 2025, the group's net operating income compounded at 13.1% a year. The average return on tangible equity was 20%. The corresponding figures for 2015 to 2021 were 4.5% and 10.7%, respectively, while the 2026 return on average tangible equity is 20.42%, based on the 9-month period results.
Speaker #1: Returning to the 9-month earnings bridge, I would separate the bridge into three layers. First, financing and fees provided most of the income increase over the 9-month period.
Speaker #1: Net financing income reached KD 989.5 million, up 4.8%, while net fees and commission income of KD 200.2 million was 20.6% higher. Together, they contributed KD 79.5 million to the year-on-year improvement.
Speaker #1: Expense saving added another 14 million. These are the more repeatable sources of earnings momentum. Second, the remaining non-funded income lines contributed a further 12.2 million KD to the year-on-year increase.
Speaker #1: Higher investment in foreign currency income more than offset the decline in other income. These lines include disposal gains and valuation effects, which we assessed separately when considering the recurring earnings base.
Speaker #1: The third layer covers provisions, accounting effects, and profit attribution. Higher provisions and impairment absorbed KD 50.2 million of the improvement generated by the first two layers.
Speaker #1: A smaller IS29 net monetary loss provided a KD 16.0 million benefit, while the tax charge increased by almost KD 5 million. The result was an 11.8% increase in total profit to KD 630.7 million. Of that amount, KD 107.3 million was attributable to non-controlling interest, compared with KD 71.3 million a year earlier.
Speaker #1: This higher allocation accounts for slower growth in KFH shareholders' profit, which rose by 6.2% to 523.4 million KD. On the quarterly bridge, the principal reason for the sequential decline in reported profit was the non-recurring KD 40.4–40.5 million Saudi real estate disposal gain, recorded in Q2, that did not recur in Q3.
Speaker #1: Compared with Q2, net financing income rose 7.1% to KD 340.1 million, and net fees and commission income rose by 5.2% to KD 72.7 million.
Speaker #1: Their combined increase was KD 26.2 million. Kuwait-Turk also recorded lower foreign currency revaluation gains, gross investment foreign currency and other income. The combined decline was KD 58.6 million.
Speaker #1: Lower expenses, net monetary loss, and taxation cushioned part of that income decline, while provision charges increased. Therefore, the total profit moved from KD 215 million in Q2 to KD 196.6 million.
Speaker #1: Shareholders' profit was KD 160.3 million, against KD 186.5 million in Q2, with more profit attributable to non-controlling interest. The group's earnings are geographically diversified.
Speaker #1: The international business accountant accounted for 57.9% of the shareholders' profit over nine months. At September, they represented 38.6% of the group's financing and 49.6% of the deposit.
Speaker #1: Kuwait-Turk's contribution was 27.3% of the shareholders' profit, 21.4% of the financing, and 32.1% of the deposits. The Q1—excuse me, the Q3 margin recovery is consistent with the moderation and pressure that we anticipated at the H1 earnings call.
Speaker #1: Margin recovered from 2.73% in Q2 to 3.09% in Q3. Lower funding costs contributed 140 basis points to the movement, more than offsetting the 104 basis points drag from lower asset yields.
Speaker #1: That lifted the 9-month margin to 2.92%, compared with 2.84% at H1, but still below 3.16% in the same period of 2025. Without Kuwait-Turk, the cumulative margin increased from 2.09% at H1 to 2.14% at September.
Speaker #1: We retain a stable margin outlook. The extent to which Q3 improvements carry into the final quarter will depend on the relative pace of the asset and funding repricing.
Speaker #1: Alongside competition for deposit and business mix, we are managing funding maturities and currencies while protecting the customer deposit base. Finally, the benchmark rate sensitivity indicates the group margin effect of approximately 5 basis points for a parallel 25 basis points movement in the benchmark rates.
Speaker #1: Assuming no other changes, customer behavior and changes in the balance sheet can alter the actual effect. The growth in fees and commission income for the nine-month and three-month periods was mainly supported by banking service and investment-related activity at Kuwait-Turk, and we revised our guidance to reflect our growth expectation of net fees and commission income to be above 18%.
Speaker #1: Nine-month non-funded income totaled 462.7 million KD, an increase of 11.1% over the same period last year. The gap between income and expense growth remains favorable.
Speaker #1: Compared with the same 9-month period last year, operating income was 6.6–6.7% higher, while expenses fell by 3% to KD 447.5 million, creating a spread of approximately 9.7 percentage points.
Speaker #1: As a result, the cost-to-income ratio improved by 3.1 percentage points to 30.8%. The quarterly ratio moved in the opposite direction, from 29.7% in Q2 to 31.4% in Q3.
Speaker #1: Expenses fell to KD 144.8 million, but operating income declined more sharply as investment and foreign currency contributions fell during the quarter. Efficiency measures so far have focused mainly on discretionary non-staff expenditure. At the same time, we continue to invest in high-performing teams, technology, and customer experience.
Speaker #1: In fact, we currently expect full-year IT-related expenditure to be approximately 15% above the 2025 level. Our full-year cost-to-income guidance remains below 32%. The asset bridge shows continued redeployment into financing and debt securities, alongside the effect of currency translation.
Speaker #1: The September balance sheet stood at KD 43.8 billion, 2.4% above the year-end. Business growth added KD 3.53 billion, which was partly offset by a reduction of KD 1.69 billion in cash and bank balances and financial institutions, and approximately KD 800 million from foreign currency translation.
Speaker #1: Financing receivables and debt securities both grew faster than total assets, with debt securities increasing by 9.1%. By September, the financing portfolio stood at KD 23.4 million, 7.5% above year-end, compared with growth of 4.4% at H1.
Speaker #1: Most of the financing portfolio is in Kuwait, followed by Kuwait-Turk and Bahrain. Personal financing accounts for 27% of the portfolio, and real estate accounts for 17%, making them the largest sector categories.
Speaker #1: We monitor these concentrations within each market as business volume increases. We retain our low double-digit growth expectation while preserving underwriting standards and risk-adjusted returns.
Speaker #1: In September, the non-performing financing ratio was 1.89%, versus 1.82% in June and 1.51% at year-end. Impaired financing increased from KD 433.9 million in June to KD 462.2 million, and coverage fell to 227%.
Speaker #1: The increase in MPFs during Q3 was concentrated mainly in KFH Kuwait and Turkey, rather than reflecting broad-based deterioration across the group. In KFH Kuwait, new MPF formation was principally within real estate and personal financing, while Turkey's additions were more diversified across trade, SME financing, manufacturing, and certain other exposures.
Speaker #1: This was partly offset by collections and write-offs. It is important to distinguish the movements in MPF from the overall provision and impairment charge. The nine-month charge includes specific provision against identified exposure, and KD 28 million of precautionary provision.
Speaker #1: Of the precautionary amount, KD 20 million relates to credit exposures. The full precautionary charge was recorded in the first half of the year, while the third quarter charge reflected the updated assessment of the identified exposure, with no additional precautionary overlay recorded.
Speaker #1: Separately, KD 49 million of the nine-month period provision and impairment charge relates to the group's takaful insurance activities, and therefore it is distinct from the provisioning against the banking financing portfolio.
Speaker #1: The regulatory provision balance remains above the IFRS 9 expected credit loss balance. Against the expected credit loss balance of KD 549.8 million, provisions under the Central Bank of Kuwait regulations stood at KD 1,049.7 million.
Speaker #1: The resulting buffer was KD 499.9 million, slightly down from KD 504 million in June. This remains a substantial potential reserve, although future impairment charges will continue to depend on exposure-specific developments and updated economic scenarios.
Speaker #1: The IFRS 9 staging measures show different portfolio dynamics. Although stage 2 balances increased modestly to approximately KD 2.8 billion, their share of gross financing fell from 12% at year-end to 11.35% at September, as the total portfolio grew faster.
Speaker #1: However, Stage 3 increased from KD 509 million to KD 606.2 million, with its ratio rising from 2.24% to 2.48%. The Stage 3 and MPF measures have different classification bases.
Speaker #1: Customer deposits represented 64.7% of the Group's $35.1 billion funding base, excluding other liabilities. Banks and other financial institutions represented 30.8%, with Sukuk and term financing accounting for 4.5%.
Speaker #1: The customer deposit balance was approximately KD 22.7 billion. Current and saving accounts made up 47.1%, broadly unchanged from H1. Kuwait-Turk provided 32.1% of the group deposit, up from 29.8% at June.
Speaker #1: September liquidity ratios remained comfortably above the current regulatory minimums; the LCR was 137% and the NSFR was 120.7%, both above their minimum of 80%.
Speaker #1: Kuwait financing-to-deposit ratio was 84.3%, below the 100% ceiling. LCR declined from 228.3% at year-end, primarily reflecting the deployment of excess liquidity into financing growth and the non-renewal of selected wholesale funding.
Speaker #1: While NSFR and Kuwait financing-to-deposit ratio have changed a little, as financing grows, we assess the available liquidity against the expected funding needs and stress requirements.
Speaker #1: The reported September capital ratios capture the distributed interim dividend and exclude interim profit under the applicable regulatory treatment. On that basis, CET1 was 13.12%, Tier 1 was 15.4%, and the total capital adequacy was 17.2%.
Speaker #1: The corresponding current requirements were 10.5%, 12%, and 14%, respectively. Higher-risk weighted assets accounted for approximately 110 basis points of the movement from the year-end total capital ratio of 19.8%.
Speaker #1: The reduction of Tier 1 SOCOC and the interim dividend accounted for a further 70 basis points and 80 basis points, respectively. This leaves approximately 320 basis points of headroom above the current total capital requirements.
Speaker #1: Kuwait-Turks' underlying operating contribution remains strong, although its translation into the group's shareholding earnings continues to be affected by exchange rate movements, hyperinflation accounting, taxation, and non-controlling interest.
Speaker #1: Kuwait-Turks net gain from foreign currency relates to precious metal deposits that are swapped into USD or EUR to support asset growth, and it represents approximately 70% of the group's net gain from foreign currencies.
Speaker #1: The highest 29 monetary loss for the nine months was $86.9 million, compared with $103 million a year earlier. The conversion factor was 1.24% against 1.25%.
Speaker #1: Changes in the net monetary position also affect the charge. Finally, our year-end inflation estimate is still close to 30%. Operating guidance remains unchanged except for the cost of risk, and net fees and commission income.
Speaker #1: We have revised this to reflect the business dynamics up to September and our current expectations for the fourth quarter. We continue to expect low double-digit financing growth for the full year.
Speaker #1: The financing outlook is supported by the business pipeline, with continued pricing and underwriting discipline. For the full year, we expect net financing margin to remain broadly stable relative to the nine-month 2026 level of 2.92%.
Speaker #1: This outlook reflects our current expectation for asset yields, funding cost, and balance sheet mix, subject to market conditions. Our cost-to-income expectation remains below 32%, including continued investment in business and the effect of inflation in Turkey.
Speaker #1: However, we revised our guidance to reflect the growth expectation of net fees and commission income to be above 18%. Finally, based on current portfolio developments and our expected fourth quarter run rate, we anticipate the full-year cost of risk to be approximately 60 to 65 basis points before recoveries, and approximately 35 to 40 basis points after recoveries. The final outcome remains subject to the timing of recoveries and any further credit developments.
Speaker #1: Our priorities for the remainder of the year are to sustain core earnings momentum, maintain disciplined growth, and manage credit, capital, and liquidity prudently. Thank you. I will now return the call to our Investor Relations team for the Q&A session.
Speaker #1: The Q4 guidance of 2.92% assumes how many hikes?
Speaker #2: Currently, our guidance reflects the up-to-date benchmark rates, so it does not assume any rate hikes in the future. Should a rate hike occur in Q4, we have given you guidance of 5 basis points extra.
Speaker #1: The majority of your questions were already covered in our presentation. We will share the presentation in a disclosure shortly after the call is conducted. If you have any further questions, please feel free to reach out to Investor Relations at kfh.com, and we'll be happy to answer your questions.
Speaker #1: Thank you all for attending, and I'll hand the mic to Ahmed.
