Ahli Bank Q.P.S.C. (ABQK) Earnings Call Transcript & Summary

My name is Shankar. Please introduce yourself. I'm a Chief Executive Financial Strategy. I have Mr. Trevor with you -- with us right now who is the Strategic Adviser of the bank. This is the investor call. So this Ahli Bank investor call, gentlemen -- ladies and gentlemen, whoever has joined, please, I know we welcome you to the Q1 2024 results coverage and the management commentary. My name is Shankar. I am the Chief Executive Financial Strategy. And I have with me Trevor Bailey, who is the Strategic Adviser to the bank. So we are quite happy to share our views and brief you about what happened in Q1. So you have the numbers, numbers are disclosed, but we'll just highlight certain things. Our net profit grew by about 6.6% with considering the circumstances. I think we say that we are satisfied at a satisfactory performance. And in line with the steady financial performance of the bank over years, quarters -- so many quarters, quarter-over-quarter, et cetera. So this is a steady performance. And there has been a soft growth environment, and we are in line with those metrics. If you look at the markets, like loans and advances was flat. Customer deposits, of course, grew by slightly low single-digit 3%. The other key metrics which we normally cover in our commentary is the NPL ratio, the asset quality that is, which is once again quite steady and it has not deteriorated. The provision coverage, we continue to be conservative. And as we have always been, this is not something new. This is not a surprise. We continue to be provisioning on an absolutely cautious -- we're very cautious about these things. So the NPL ratio in terms of percentage is 2.49% as opposed to 2.5% around that during last year same quarter. So it's kind of holding on and coverage has gone up because of conservative provisioning. Loans and advances are -- numbers are flat. Customer deposits single-digit growth. So net profit has grown by 6.6%, which is quite satisfactory as we disclosed. So this is quite satisfactory from a management point of view. And in terms of capital, one very interesting development has happened. As we all know, there has been a change in the regulatory environment. The capital adequacy stood at about 22%, which is quite high by any stretch of imagination, which is quite strong by any stretch of imagination. One of the reasons for this spike is, of course, the regulator has allowed banks to add quarterly profits as a part of the calculators. So that has had some impact -- positive impact. Overall, there have been some changes in the way the calculator works, and we have had a net positive impact. So the regulation, although was supposed to be tight... [Technical Difficulty] So we were talking about capital, and we were just giving an update on that in terms of regulatory developments. So the overall regulation, which was -- has had a favorable outcome for us. Capital adequacy stood at 22.3%. This is after the dividend and dividend was 25%. We all know that, cash. So that's a very positive. It's a strongly capitalized bank. And as we said, in terms of other metrics, cost-to-income ratio was in control. Return on equity was 12.4%, which was once again, we think it's very satisfactory, steady as it has always been the last 4 years. And NIM also took quite strong. And the other thing which we normally talk about is stable funding, et cetera. So in terms of funding, we have had an EMTN program, which is ongoing. So that EMTN program, we issued the first trend sometime in 2021. Ever since that, about 3 EMTN programs are outstanding as -- 3 EMTN issuance are outstanding. And one of them will come to maturity in -- during September 2024, about USD 500 million. So we're constantly evaluating what is the back we should do. So we are right now absolutely fine, well positioned to repay that in September. And of course, we evaluate the risk, the rates and take a call, do we do a refinance, do we just hold back. All these issuances were at very, very attractive rates. As you may know that the last issuance was done at about 2%. Prior to that, it was at 1.875%, that's USD 500 million each. The one which is maturing is at about 3.625 -- 3.125%, sorry. So right now, the rates are very high. We all know that. So we are just evaluating the options. And as of today, our thought process is that at this point in time, we may not need any U.S. dollar, we can deal with that -- the outflow in September. So that is what is an update on this long-term funding. So the program will continue. I mean we are, as we said, constantly evaluating the options in front of us and what is in it that can generate profits, so this has to be very profitable. We are aware that some of the other banks have -- in Qatar has come out with this issuance, CBQ and so on. But we are in no rush of all of the bandwagon. We'll take a decision based on our situation in the bank and -- like we normally do. So I'll just pause here. We will just pause here if you have any questions, we will take that and the results are out in the public. So there's a lot more details available in that disclosures.

Yes. I have a question. I see that -- well, in Q4 last year, you said that you'd sort of reached 100% coverage of Stage 3 and that was your target. And so I see now in this quarter, you've started to provision more for Stage 2. Is that -- have you provisioned more for Stage 2 just because you've kind of already done Stage 3 and now you're moving there? Or is it because you feel like there's more -- there is a move from -- amongst your Stage 2 towards Stage 3?

So Mark, the way these things work, there is a churn that happens, which means there is something on Stage 3, and we go for a settlement, it gets settled, the court gives a favorable or unfavorable verdict, et cetera. So those things are ongoing. I'm talking about Stage 3 before we move to Stage 2. So there have been some verdict which are in favor of us, which is ongoing, et cetera. We are confident of a positive outcome, if you like. So that is about Stage 3. We have provided 100% and the collaterals also which we can -- we are expecting the court will give us an option to sell, for example, and recover our money, et cetera. And we always have ongoing discussion with the customer. So that churn will also release some of the provision which we have made for safety. This is just a background before we -- in terms of how we are positioned in Stage 3. Now Stage 2 is also a kind of situation where we have not sued these guys because the moment you go to the court with this any delay in payment, et cetera, then you have to classify it as Stage 3. But we're conservatively approaching these customers. We are talking to them. And you know that last year -- early last year, the QCB itself came out with the option of banks going to their customers and making a restructuring offer for once. And so that we don't go to QCB for any bail out, et cetera. So that was the objective of QCB allowing banks to do this kind of restructuring. So once you do that, automatically, the model, so for example, a 5-year loan becomes a 15-year loan, then the model itself, the IFRS 9 model itself will require more provisioning. So this is one reason why the Stage 2 provision is going up, point number one. Point number two, in case where there are sectors we all know that is going through some tough time which includes contractors mainly. So those contractors typically in terms of lending, there is no collateral -- generally they don't have collateral. The collaterals are in real estate sector and various other sectors. So this sector, as we also discussed with the rating agency anyway in detail. This sector is where there is stress, and there is -- it is not collateral generally. Except that there is assignment of proceeds, there is Hawala [indiscernible], which we call -- it's now called Hawala [indiscernible]. So the proceeds from the project comes to the bank for us, then we'll settle the loan, et cetera. All that is covered and personal guarantees may be there. But typically, the contracting sector does not give any collateral. It is based on projects. It's a project financing and the project proceeds will come, will adjust. So that is the structure of the lending. So in these cases, we are covering ourselves on a conservative basis. So if we don't have collateral, we said as a bank, we should do something about it. And it's going to take a while. It does not mean that it will become stress free. It does not mean that we will not recur the money. It does not mean that customer will not pay it on its own -- on his own. Because these -- typically, if you look at our customer base, we are very Qatari-focused bank, almost every family in -- big families, business families in Qatar bank with us. And they also bank with other -- they also have accounts with other banks. So this is -- and they are all kind of conglomerate. They have contracting, they have some other business and the other trading and so on and so forth. So this part of this business is, at this point in time, at a macro level is a bit under pressure, point two. The point three, what has happened in -- we all know that the interest rate environment has really become adverse for our customers because the interest rate environment because of Fed moves market moves, et cetera, has gone up. So our cost of funds have gone up. So we have to pass it on. And typically, these contracts are fixed rate, it doesn't matter. So there is that pressure on their margins, which is also impacting -- we know that it has an impact on their ability to take. So considering all this, it's a very conservative move on our part to bump up the provision for Stage 2. I hope that answers your question.

So -- I mean, obviously, your coverage was quite low, like the rest of the bank is around 5, I don't know. Where was it before? And where is it now after this quarter?

So just give me a second. I have one more presentation, that percentage. Hold on. I'll just back to you on that.

I mean I was talking to another bank and they say that, look, with these Stage 2 loans, some of them, they drift back to Stage 1, but then the Central Bank doesn't let you classify them as Stage 1 because they've got to like stay there for a lengthy period of time. And so it's often like higher than it probably merits, but I'm not sure if that's the case for you. Because EUR 7 billion is quite high.

So the rule is the Central Bank will have to -- there is a cooling period of 1 year. So if you classify something as Stage 2, then 4 quarters, it has to perform normally. They will have to pay. And then you can request Central Bank to move it back to -- and allow the bank to move it back to Stage 1. That's why it was. So that is the reason the Stage 2, if there is one loan which moves to Stage -- so it remains that the provision will remain.

Correct. Yes, I can see. It's high across the industry. I mean...

Yes, yes. So that's a regulatory environment. Now in terms of percentage of Stage 2, so when we started, it was in December '19, we had a trend plotted, it was 4.8% in terms of coverage. In December '23, it was 15.7%. So we have constantly made sure that we are covering [indiscernible] that and so on and so forth.

And as of Q1?

We are prepared and so on and so forth. So this 15.7% in December '23 has gone up by probably another 0.5% or so. So it's about 16%, 16.2% at this point in time in terms of percentage -- coverage. I think it's in line with the market. We are not -- probably slightly more conservative, I guess.

Yes, which is a shame because I was hoping once you've reached 100% at Stage 3, we might see some earnings growth from asset quality improvements. So what was the overall cost of risk?

Yes. We look forward to that, John. We look forward to recovering some of that.

What was the overall cost of risk then based on your -- this quarter?

Well, that is -- if you consider Stage 2 as a part of cost, then I think, I'll tell you one around -- for this quarter it's around 0.5%, 0.54% for this quarter, about 2% annually. That's too much. By 0.54%, you can keep it roughly.

Yes. No, that -- again -- yes, for a relatively small bank, the provisioning is still high. So I'm just...

So you were kind of right because if you look at the coverage, so coverage, as I said, was around 248%. Not all the banks would like to see that, that is getting challenged. So there is a management override here, even when we discuss with auditors, we tell them why. So there are 2 things, Mark, the way we are approaching this. And I'd like to share our approach in a very transparent manner and also why we do what we do. So typically, you're right, we are a small bank. And one of the comments, if you look at rating agency on Ahli Bank is that we are concentrated on assets and liabilities both sides. So when that is the case, and the model tells you that it doesn't -- model completely ignores the concentration. This concentration is there for all the banks, but considering we are small, we have more concentrated kind of -- impact will be high. So for that, we make sure that we have adequate coverage in terms of a little bit higher provisioning where the loan amount is higher. So even if it is in Stage 1 or Stage 2. And if there is exposure, which is a little bit higher, this is a judgment call. We put more provision on that, not necessarily because it is just a conservative provisioning, part of our conservative provisioning process.

Fair enough. Okay. So on another question with regards to your capital, it's interesting that you went up. Obviously, the 2 risk areas for the sector as a whole is the currency mismatch treatment and changes in the loan to value of real estate. Could -- obviously -- and then I didn't realize this quarterly profit thing actually. So obviously, you benefited from the quarter but was there any impact on the other 2 risks?

So currency mismatch, we are absolutely within the limit imposed by Central Bank. So we have no issues on that. And the others, I think we had a very insignificant impact. So that's why -- there was a -- all this has a little impact, yes, but it was not material.

Right. So anyway, I guess, with the capital ratio of 22%, you can definitely afford to increase the dividends. I mean reduce capital a bit. I mean, or else, I guess, you need to ramp up loan growth or there's opportunity there, right? Like...

There is headroom, yes. But when there is just a catch here. So this quarterly profit will go up. But in the quarter 4, the QCB says, if you have a proposed dividend, you reduce that. So it will fall back into a normalized world of capital, which is...

Get back to '18, we'll be happy.

But that is -- you're right, that's one of the considerations when we said let's bump the dividend to 25% from 20%, and that's all cash because we are adequately capitalized. So that's just that you're right, that was one of our assessment we made that, okay, we can dish out more cash outflow in terms of dividends, and that all cash 25% dividend. So that is part of the equation you're right. Absolutely, you are spot on.

Okay. Could you just elaborate on NIMs like in terms of your outlook for the rest of the year?

I would say NIM, generally -- so what has happened in a rising interest rate environment, interestingly, banks benefited, including us. So for example, tomorrow as the rate goes up, immediately, the retail loans will get adjusted. So entire loan book will get adjusted, entire corporate loan book will get -- because it's QCB+. So in an environment -- but the deposit will not be because it's fixed term, 3 months means after 3 months only. So there is a lag between asset repricing and the liability repricing in a rising interest rate environment, favorable to the bank. Now we are all expecting federal reduced the rates, et cetera, and then how will it impact us. So if the rates start coming down, then suppose QCB reduces the rate. So immediate impact will be exactly opposite, which means we have to reduce the price of the loans. But the tone for liability will remain. So if you -- what I'm trying to -- in summary, I'm saying in an environment where the rates are likely to come down over -- we don't know exactly when, it could be next quarter, it could be -- but it's going to come down over a bit of next 1, 1.5 years or next 6 months to 1.5 years. There will be an adverse impact because the pricing of assets will come down immediately. The liability will have a lag, which is a reverse of what happened when the rates were going up. So the NIM will be impacted negatively. But overall, on the long-term basis, we will always defend that every bank defenses name, and we will do that. So for example, there is a 2 rate cuts within 3 months then we will reduce the rate in terms of rate cuts, but we will bump up the margins, which we have done. We saw in a rising interest rate environment, customers put pressure on us, okay, you increase the rate, but reduce the margins which you are charging. So we had to do some adjustments depending upon who the customer is. It's very specific to a good customer and a bad customer, all that's aggregated. So we'll do the same thing, meaning -- so that macro outlook, if interest rates go down, then it will adversely impact us, yes. But we'll also increase that we have the option of increasing the margin and defending our margins. So we'll take a call. Overall, I can say -- what we can say is that the margins are steady and on a long-term basis, it will remain steady. There will be a short-term 1 quarter-to-quarter impact, but it gets adjusted over time.

Okay. That's useful. I don't have any further questions.

So if you have just please call us, and both of us are here any time, send the mail, et cetera, we can meet and clarify whatever you want. Anyone else in the call, gentlemen, investors, so we can take that -- those questions because we just have 3 minutes left. It was a 30-minute call. I think somebody tried to join, but I'm not sure. Okay. So a couple of more minutes left. All we can say is it's a very satisfactory Q1. It's a normal Ahli Bank trend, no surprises, conservative provisioning, steady results and that has been our story for so many years. So this is who we are. That is how we manage. That is how this bank is managed. So there is no other further questions. There's nobody else then we'll close this investor call, and we are always available for any clarification through e-mail or call us and happy to answer any questions.

Thank you very much.

All right. Thanks a lot, gentlemen, ladies. We'll catch up the next quarter. Thank you.

Thank you.