Gulf Bank: Central Bank approval for Islamic conversion is not the final one

Sami Mahfouz, Acting CEO of Gulf Bank, said the Central Bank of Kuwait's current approval of the bank's conversion is not the final approval, which will come when the bank is actually permitted to operate as a Sharia-compliant bank, according to the Q3 2026 analyst conference script the bank filed with Boursa Kuwait on 5 November 2026.

Mahfouz described the current approval as an interim approval to start converting the bank into a Sharia-compliant entity and to obtain an Islamic banking license from the authorities in Kuwait. This requires going to shareholders for their final approval and changing the bank's articles of association and commercial registration, along with many administrative steps at the corporate level and finalizing client consents.

On timing, Mahfouz said he cannot give a precise timeline because the process involves third parties, adding that the bank is progressing with the Central Bank and will disclose any developments in due course.

Mahfouz said the bank achieved two milestones on the conversion this year. Within the one-year timeframe set in the Central Bank's initial approval of August 2025, it fulfilled the regulatory and operational requirements for that stage and requested approval to proceed. It then received the Central Bank's approval for full conversion to operate under Islamic Sharia principles and to move forward with the remaining procedures. Preparations covered governance, products, systems, policies, operational processes and employee readiness, and the focus is now on completing the next phase in compliance with the remaining regulatory and shareholder approvals.

On results, the bank recorded net profit of KD 41.9 million in the first nine months of 2026, up 9.1% from KD 38.4 million a year earlier. Operating income reached KD 143.1 million, an increase of KD 2.5 million or 1.8%. Third-quarter net profit was KD 14.4 million against KD 14.3 million in Q3 2025, up 1%.

Nine-month profit growth was driven by an KD 8.8 million increase in interest income and an KD 8.1 million reduction in credit costs. These were partly offset by a KD 5.8 million rise in interest expense, a KD 0.4 million decline in non-interest income, KD 5.7 million in higher operating expenses and a KD 1.4 million increase in general provisions, taxes and other items.

Interest income reached KD 292.2 million, up 3%; interest expense KD 179.9 million, up 3%; and net interest income KD 112.3 million, up 3%. Third-quarter net interest income grew 6% to KD 38.8 million from KD 36.6 million. Non-interest income was KD 30.8 million, including fees and commissions of KD 20.5 million.

Operating expenses rose 8% to KD 77.2 million, and operating profit before provisions fell 5% to KD 65.9 million, though it improved by KD 0.3 million or 1% in the third quarter from the previous quarter. Credit costs fell 30% to KD 18.9 million. General provisions were KD 2.9 million, up KD 1.2 million, as Central Bank regulations require a 1% general provision, mainly for non-government loans booked during the year.

Return on equity was 6.6% against 6.2%, return on assets was unchanged at 0.7%, the cost-to-income ratio was 54.0% against 50.9%, net interest margin was 189 basis points against 195, and cost of risk was 40 basis points against 62.

Gross loans and advances reached KD 6.5 billion, up KD 417 million or 6.8% year to date, against industry growth of 3.8% to the end of September 2026. The growth came entirely from corporate lending, which rose 12.1% against market growth of 3.5%. Net loans and advances were KD 6.3 billion, up 10% year on year and 7% year to date.

Total assets rose 4% year on year to KD 7.9 billion, with Kuwait government bonds at KD 385 million against KD 163 million on 30 September 2025. Total deposits were KD 5.8 billion, up KD 160 million or 3% year on year and KD 61 million or 1% year to date. Other borrowed funds rose 13% year on year and 10% year to date, and total equity stood at KD 860 million.

The bank's CASA ratio was 25.2% at the end of the third quarter, against 24.4% at the end of 2025 and 27.1% a year earlier. The banking system's ratio was 26.1% at the end of September 2026, against 27.5% at the end of 2025 and 28.5% in September 2025, primarily reflecting strong growth in time deposits rather than a contraction in CASA balances.

The non-performing loan ratio was 1.2%, down 0.2% from a year earlier, with a coverage ratio of 334% including total provisions and collateral. Total provisions on credit facilities were KD 252 million, KD 89 million above IFRS 9 requirements, representing 35% of the total. Stage 1 loans made up 95.6%, Stage 2 3.2% and Stage 3 1.2%, with most Stage 3 loans being retail accounts. The bank attributed the rise in Stage 2 loans mainly to the downgrade of a few corporate accounts during the quarter.

The Tier 1 ratio was 13.7%, a buffer of 270 basis points above the 11% regulatory minimum, and the capital adequacy ratio was 15.7%, a buffer of 269 basis points above the 13% minimum. Neither ratio includes the first nine months' profits. Risk-weighted assets rose 3% year to date to KD 5,970 million. The leverage ratio was 9.2% against 9.7% on 31 December 2025, with a regulatory minimum of 3%. The average Liquidity Coverage Ratio was 235% and the Net Stable Funding Ratio 105%, against a regulatory minimum of 80% for each. On 26 March 2026, the Central Bank announced a stimulus package for local banks that cut the capital conservation buffer by 1% and lowered the minimum for both liquidity ratios from 100% to 80%.

The bank holds an A3 long-term deposit rating from Moody's, a long-term Issuer Default Rating of A and a Viability Rating of bbb- from Fitch, and a long-term foreign currency rating of A+ from Capital Intelligence, all with stable outlooks.

In the Q&A, CFO David Challinor said margin rose 3 basis points in the third quarter from the second, after an 8-basis-point improvement in the second quarter, with some retail repricing under way. Funding costs were elevated in the latter part of the quarter as tighter liquidity affected deposit pricing and foreign currency funding costs rose. He said every 25-basis-point change in interest rates has an impact of around KD 3.3 million on net interest income, and that the bank has not given margin guidance.

On loan growth, Challinor said the loan book stayed relatively flat in the third quarter as the bank focused more on asset quality, margin and capital efficiency than on volume, and that full-year growth is expected to consolidate around the high single digits. Once the conversion is completed, the bank expects to broaden its products and benefit from wider opportunities in Islamic banking.

On costs, he said most of the year-on-year increase was in other expenses, including costs related to the planned Islamic conversion and the potential merger. Excluding this category, staff, occupancy and depreciation costs, about two-thirds of the cost base, rose by less than 3%. Operating expenses fell 2.5% from the previous quarter. The bank expects these costs to normalize at some point next year as projects near completion, and full-year operating expense growth to be in the high single digits.

Challinor said the bank lowered its full-year cost-of-risk expectation during the first half to below 50 basis points and still expects the outcome to be below that level. He attributed the third-quarter weakness in non-interest income mainly to lower loan-arrangement fees due to a flat corporate loan book and softer card-related income, after 10% growth in the first half.

On the operating environment, Mahfouz noted that the US Federal Reserve raised target rates by 25 basis points in September while the Central Bank of Kuwait held its discount rate at 3.50%. He also cited the decree on real estate financing for beneficiaries of housing welfare, with detailed regulations expected in the coming months under Central Bank supervision, and the qualification of 22 consortiums under the Real Estate Developer Program, initiatives he expects to generate activity across construction and real estate.

At the close of the call, Mahfouz announced that this was David Challinor's last earnings call as CFO before concluding the executive phase of his career, after five years at the bank. Lity Mathews, who has spent ten years at the bank as Deputy CFO, becomes Acting CFO, while Dalal AlDousari, Head of Investor Relations, takes on the role of Deputy CFO.

The bank said the disclosure has no impact on its financial position.