AlRayan Bank Q.P.S.C. (MARK) Earnings Call Transcript & Summary

Hello, and welcome to the Masraf Al Rayan conference call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Shahan Keushgerian to begin the conference. Shahan, over to you.

Okay. Thank you. Hello, everyone, and welcome you to Masraf Al Rayan's First Quarter 2024 Financial Results Conference Call. So on this call from management, we have Tahir Pirzada, Group Head of Treasury and Financial Institutions; and Alexis Neeson, Group Chief Risk Officer. So as always, we will conduct this call with first management reviewing the company's results, followed by a Q&A session. I will now turn the call over to Alexis. Please go ahead.

Thank you very much, Shahan. Good afternoon, everyone, and welcome to Masraf Al Rayan's Q1 2024 Financial Results Conference Call. We reported a consolidated net profit of QAR 406 million versus QAR 384 million in Q1 2023. While the earnings per share for the period was QAR 0.044 versus QAR 0.041 in Q1 last year. The book value per share also increased slightly compared to Q1 2023 at QAR 2.48 versus QAR 2.42 last year. The net profit margin stood at 1.98% compared to 1.81% in Q1 '23, and the return on average equity is 6.97% against 6.75% in Q1 2023. Despite the rising cost of funds and the pressure on margins, profitability improved by 5.5% in Q1 2024 compared to Q1 2023. The cost-to-income ratio increased to 26.3% compared to 23.8% in Q1 '23, mainly due to the ongoing IT digitalization and transformation process. On the balance sheet side, the group's total assets equal QAR 159 billion, which is 1.7% lower than Q1 last year, while customer deposits closed at QAR 105 billion, up from QAR 94 billion in Q1 last year. The decline in assets reflects the merged bank's strategy of consolidating its balance sheet. In terms of asset quality, 48.6% of financing assets is financing to government, 87% of investment securities is sovereign debt and 83% of investment securities is State of Qatar issuance. The coverage ratio of Stage 3 financing assets is 59.9%. The group's nonperforming financing assets represented 5.86% of total financing assets, which is an improvement of 31 basis points compared to Q1 2023. In terms of ECL, 73.6% of total exposures subject to ECL are in Stage 1, 22.6% are in Stage 2 and 3.8% are in Stage 3, demonstrating the bank's consistently strong base of high quality assets. The total ECL provision booked during Q1 2024 was QAR 262 million compared to QAR 272 million in Q1 2023. This increased the coverage ratio of Stage 3 financing assets to 59.9% compared to 49.9% in Q1 2023, and increased the overall coverage ratio to 2.71% compared to 2.45% in Q1 last year. In terms of liquidity, the Qatar and GCC markets remain sufficiently liquid. Liquidity continues to be sufficiently available despite the recent volatility in U.S. treasuries. These have underperformed across the curve, mainly on the back of persistent inflation rate in the U.S. and the Fed's outlook pushing the rate cut cycle further down towards the second half of the year. In fact, Qatar, following its rating upgrade to AA, continues to attract an increased liquidity through a pool of diverse investors given the volatility in other financial markets. On a year-on-year basis, the nonresident deposit rule in the Qatar banking system has reduced further and is currently averaging at around 18%. For Masraf Al Rayan, high-quality liquid assets are roughly at QAR 35 billion, reflecting a strong liquidity position that continues to support financing asset growth in government, corporate and private banking sectors. Finally, the bank's capital position continues to be strong and well above the minimum regulatory requirements of 15.89% as a DSIB. The capital adequacy ratio stands at 23.6%, and the core capital CET1 ratio is 21.56% compared to 20.73% and 19%, respectively, in Q1 last year. Thank you very much for your time, and we're available for any questions.

[Operator Instructions] Our first question comes from the line of [indiscernible] from Bloomberg.

I have 3 questions around the asset quality. The question #1, what could mean the higher for longer rate, use rate for your asset quality? The question #2 is the size of your Stage 2 loans, which is significantly higher versus the Qatari peers. So what could be the key triggers for you to move these asset classes to either Stage 1 or Stage 3? And question #3 on the cost of risk size for 2024. What would be your target expectation of cost of risk in basis points, please?

Sure. Thank you very much for your questions. I will take the second and third ones, and then I will ask my colleague, who's better versed in rate expectations. In terms of the size of our Stage 2 exposure, I agree, it is above our peers. However, I would say it verges more towards Stage 1 assets. We're in the process of trying to move some of our book back to Stage 1. In order to do this, we need regulatory approval and the customer needs to have shown improved financial positions for at least 12 months. So we are in the process of requesting the movement of some of these, and that we hope that will either be this year or next year. So if there are movements from that Stage 2 boat, we expect them to go towards Stage 1. In terms of cost of risk, we remain in line with the guidance we've given over the last couple of meetings that we've had, which is around 100 basis points area. That's where we're comfortable with. It's what we did this quarter and what we expect to do in future quarters, with not in line with our plan for building up our provisioning to get in line with our peers.

To answer your first question, that is asset quality and impact of higher for longer rates. So we are a little bit different in this. Meaning as a country Qatar, while rest of the world, we see taking advantage of higher for longer rates reflecting in their improved profitability. But in Qatar, because we have seen the accelerated loan growth as a result of the FIFA 2022, we have seen growth level stabilizing and not going at aggressive level that we have seen in peer countries. Number two, because some of the banks are chasing asset growth and in absence of real growth, we see some price competition on the assets, which could potentially negatively impact acquisition of any new assets. But we are uniquely positioned. As Alexis said, we are still in a consolidation mode post merger. And this year, we will continue to consolidate and focus more on asset quality. Therefore, we don't see much impact on this for our bank particularly.

Our next question comes from Andrew Brudenell of Ashmore.

I got on a couple of minutes late, so apologies if you already spoke about this. But could you just talk a little bit about the loan book contraction. I think the market and I were a bit surprised at the end of the year '23, when the guidance seemed to shift from -- we're still in consolidation and shrinking the book to actually we think will grow a little bit. and then the year starts, and it drops 1%. I know it's only 1 quarter. But just can you just sort of reiterate what the thinking is here a little bit, please?

So I think you joined a little bit late. We just addressed this. We are continuing to see consolidation at our end. We are not going to grow the book for the sake of growing the book. We will only add assets that are good in asset quality and that are also going to add on our profitability. In Qatar, the growth levels are still being chased by banks in absence of significant real growth. So we are being patient, and we will only step in when we see real value in any acquisition.

Yes. Okay. Understood. Understood. And then sorry, just on -- there was a question on asset quality, which I heard. But just in terms of, obviously, there's been certain areas, certain real estate projects and hospitality areas that you touched on post sort of World Cup hangover, so they've been really difficult. Some banks this quarter have begun to say they're seeing some improvement there. I wondered if you could give your thoughts on what you're seeing there? And I think there was like a removal of an asset last quarter, fourth quarter, which helped your numbers quite a bit, which is, I think, I believe, a discussion with the authorities. Are there going to be more of those? Is there ongoing discussion between either the Qatari government authorities or the regulator on maybe kind of moving some of these assets elsewhere to help the banks breathe a little bit more? Or is it a one-off event that happened for you guys in the fourth quarter?

Okay. Thanks, Andrew. In terms of the first one, yes, I mean, there's definitely a feeling that there is a bit of improvement in the hospitality sector. Whether that translates all the way through to a complete recovery, we'll see. But certainly, it seems to have picked up a little bit. In terms of your second question, maybe there was a bit of a misunderstanding. We didn't have an asset removed. We did have some write-offs in Q4, but no different than we would have write-offs in any year. These are fully provided -- people that have been fully provided for more than 12 months. They're not showing signs of improvement. So they are effectively written-off the balance sheet. That's a standard practice. So that was what happened in last year for us. There wasn't any specific removal in terms of discussions with the regulator last year.

Okay. So the -- I'm not going to pronounce this correctly. But the Msheireb Downtown Doha mosque plan that was Qatar Foundation project that you guys financed. My understanding was that, that was removed from your book. Is that not right? Did you just write that off? Or is that entire rumor, just not true?

We can't discuss client names on a call. However, there was no write-off of anything like that last year.

Our next question comes from the line of Aybek Islamov of HSBC.

A couple of questions. First, can you comment a bit more about your loan contraction, how many quarters of loan contraction do you think you're going to go through? And I think you have a good visibility on your loan portfolio, as in originations in the pipeline versus what could be the repayments and so on and so forth. So that's one question. Secondly, can you comment about what triggers reclassification of loans from Stage 2 into Stage 1? What kind of events need to be met so that you reclassify loans from Stage 2 and Stage 1? That's my second question. And thirdly, on deposits. Very strong growth in the first quarter. What could be the implications for the funding mix going forward? What's standing behind this strong increase in deposit in the first quarter? And obviously, what are the implications for the cost of funds for the rest of this year?

Okay. Thanks for your questions. I will take the first 2, and then I'll pass over to Tahir for the deposits question. In terms of the loan contraction, Tahir already touched on this a little bit. What we're very focused on is our profitability. That's our key driver at the minute. So when we see banks, there are different strategies. Some banks are looking for growth at the minute. They want their balance sheets to grow. And to do this, they have to accept a lower profitability. That's not a headspace we're in right now. We are focused on profitability and therefore, we will see some contraction as we focus on higher profitable customers, and we don't chase asset growth at the cost of that. How long that will last for? We have some good deals in the pipeline. That's really all I can say. And we do expect some good growth from new deals this year. It will really depend on what we see -- kind of what we defend against other banks and what we choose to let go, that will be decisions we'll make throughout the year. But we should -- we expect that to end this year, that kind of consolidation process. In terms of reclassification, so to move from Stage 1 to Stage 2 in the first place, we -- a customer has to be past due for 60 days. When that happens, a customer in our portfolio is automatically moved to Stage 2. This can happen for a number of reasons. Sometimes just the payment cycle here, sometimes it's a delay from a paymaster, various reasons. The client isn't necessarily bad, they've just had a delay in repayments. When that happens, unfortunately, we classify them to Stage 2. That's in line with regulations. To move them back to Stage 1, they need to show 12 months of no past dues effectively. So once the customer is remediated, we then need to see 12 months of performance at that level before we can request to move back from the regulator. So that's why when I say I can see the customers I want to move back to Stage 1 is because they've been performing, but not for the full 12 months yet. It has not been 12 months since the initial issue with their payments. So I'm hopeful to move them back. However, I cannot do it until I have that 12 months of history. And that's the issue I have there. I'll pass over to Tahir now to deal with deposits.

Yes. So yes, you noticed improvement in the overall deposits. We have rolled out some new products that we have historically used in our previous bank also. We are seeing decent traction on that. So this was a conscious call to increase the product suite and see if we can create a niche and tap into that. We have been successful, so that's good. In terms of funding mix, we will continue to attract funding via the term funding, whether in a syndication format or bilateral as well as in a Sukuk format. We have a Sukuk maturity coming up in November this year. So we are likely to renew that. It's subject to timing in the market. But we are all geared up for a good, diverse funding mix forward towards the end of the year.

Implications for the funding cost, just a follow-up. So I mean, your funding cost was pretty much flat sequentially in the first quarter. Is that the peak level, you think?

I think these are the peak levels. And we have consciously strategized, as I said, on the funding side to improve cost of funding, and we will continue to do so. So we don't see much negative impact on the cost of funding when we attract these term fundings towards the second half of the year.

Understood. And on the asset yield, just a follow-up question. So your asset yields are gradually actually improving since last year. I mean, we saw the same trend in the first quarter, further gradual improvements. Where do you expect this to go? And what's driving the improvement in SPs? Are you repricing loans higher? Can you give some detail here?

So the replenishment of any assets that have matured or have been rolled over, they are clearly being rolled over at current levels. So that is positively impacting the asset yield, while we mentioned that we are not aggressively growing our asset book, but we are trying to keeping the book as is or not let it deteriorate or downward adjust too much. So basically, that is helping us because that is being happening at the current levels.

Our final question comes from Abhinav Sinha from Deutsche Bank.

You did -- I think in your last quarter results, you did speak about growth coming back in second half. So would you like to comment anything on the magnitude of that growth? Because I think -- yes. I mean, given that most of your peers have talked about a mid-single-digit growth for the industry and for the banks in general for the full year '24. So what kind of growth you are looking in the second half to compensate for the first half decline?

As we mentioned, we are kind of focused very much on the profitability side. The last question we just saw, our yields are increasing because of this consolidation, where we are defending where we believe it makes sense to the bank and there's quality that we want to hold on to and letting go where it's not there. We have some good deals in the pipeline, but how that will grow in the portfolio will depend on what we defend and don't defend in the current portfolio. Tahir, do you want to add anything?

No, I think you summarized it well. Look, we are not going to aggressively grow. We've repeatedly said that we are going to be mindful on the asset quality and we'll only add assets which makes sense for the book, where commercially, they make sense. And we take full advantage of that acquisition. Otherwise, just for the sake of growing the balance sheet, we are not there.

There are no further questions at this time. I will now hand the call back over to Mr. Shahan Keushgerian.

Okay. Great. If there are no more questions, we can wrap this up. Thanks, Tahir. Thanks, Alexis, for giving us an update and we'll pick this up again next quarter.

Thanks, everyone. Thanks for your time. Appreciate it.

Thank you. This concludes today's conference call. You may now disconnect.