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 Shahan Keushgerian to begin the conference. Shahan, over to you.

Thank you, Gavin. Hello, everyone. I want to welcome you to Masraf Al Rayan's Third Quarter 2024 and 9 Months Financial Results. So in this call from management, we have: Shahnawaz Niazi, the Group CFO; Tahir Pirzada, Group Head of Treasury and Financial Institutions; and Alexis Neeson, Group Chief Risk Officer. So as usual, we will conduct this call with first management reviewing the company's results followed by a Q&A session. I will turn the call over now to Shahnawaz. Please go ahead.

Thank you very much, Shahan. Good afternoon, everyone, and thank you for joining the Masraf Al Rayan's Q3 2024 Financial Results Conference Call. We'll kick start with the profitability. So in Q3, we reported a consolidated net profit of QAR 1.3 billion versus QAR 1.2 billion in Q3 2023. Earnings per share for the period edged up slightly to QAR 0.139 versus QAR 0.133 in the last -- in Q3 last year. The book value per share also went up slightly compared to Q3 last year, QAR 2.58 this year versus QAR 2.51 last year. Our net profit margin was at 1.96% compared to 1.94% last year. And the return on average equity was 7.23% against 7.1% last year. Despite the high cost of funds and the pressure on the margins, our profitability improved in Q3 compared to last year, as I've explained above. Cost-to-income ratio was at 26.4%. This has slightly gone up from 24.2% in Q3 last year. And this is primarily because of our investments in technology and our strategy. Moving on to the balance sheet. Our group's total assets were QAR 166 billion, which is 1% higher compared to Q3 last year. Customer deposits closed at QAR 109 billion versus QAR 93 billion in Q3 last year. Moving on to asset quality consistent with the last quarters, as you would have seen, 48.4% of our financing is to government. 88% of our investment securities represent sovereign debt, out of which 84% is with the State of Qatar. Our coverage ratio of stage 3 financing assets continue to improve. This now stands at 63.4% and the nonperforming financing assets have gone down compared to last quarter. This is now at 5.91%, which represents a 56 bps decrease compared to Q3 2023. On ECL, 72.2% of our exposures subject to ECL are in stage 1, 24% are in Stage 2 and remaining in Stage 3, which is demonstrating bank's consistent strong base of high-quality assets. Total ECL provision booked during the quarter was -- sorry, booked during the 9 months in 2024 was QAR 732 million compared to QAR 829 million in the 9 months of 2023. This has increased the coverage ratio of stage 3 financing assets to 63.4% and this was only 57.3% in Q3 2023. An overall coverage ratio of 2.9% compared to 2.87% in Q3. On Basel III ratios, as you are all aware, the Qatar GCC markets remain sufficiently liquid despite recent volatility in rates. U.S. treasuries have weakened by about 30 to 40 bps across the curve on the back of stronger data from the labor market. You would have also seen 50 bps rate cut from Fed last month, against the 25 bps rate cut projections. This move signaled the market that we might see aggressive rate cuts of up to 75 bps for the November, December FOMC meeting. However, market since 4th of October and after the labor data has reversed its rally probability of rate cut is also adjusted to circa about 50 bps. We continue to see liquidity flowing to this region from a pool of diverse investors given a safe heaven and risk premium paid by this region. On capitalization, the bank's capital position continues to be strong and well above the minimum regulatory requirement of 15.89%, our capital adequacy in Q3 2024 stands at 23.3% and core capital CET1 ratio at 21.3%. If there are any questions, happy to take them.

[Operator Instructions] And your first question comes from the line of Abhinav Sinha from Lesha Bank.

So just I had 1 question on the impairment. So if I look at your results, excluding the impairment, there is actually a decline in your proposed pretax pre-provision profit. So what's driving that? That's my first question. Second question is that the reduction in impairment, is it due to the recovery of some assets? Or is it because of lower provision booking? Those 2.

Okay. I'll take the first part of the question. The only reason why you see our profit before the impairment cost declining is because of the additional investments that we have done in terms of cost on our technology and strategy. Apart from that, there are no other reasons. And this is despite significant pressure on the margins, as is being witnessed by all the other banks and specifically Islamic banks in Qatar. Part 2 of the question.

Yes. Thanks for the question. Regarding the impairments, yes, these were down in this quarter, and that is due to recoveries. So we continued with our plan for impairment building. However, we did have some recoveries in Q3, which decreased the net figure.

Okay. And like, can you give an indicator like which sector was it from or it's confidential.

I mean it's spread across our large ones. So it can be a real estate is a big one, obviously, because that's where we can get some tangible recoveries.

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

Can you please give us some color, did you sell any real estate assets or any other assets during the third quarter, which could have led to lower benefit charges. Just this is looking up to your previous question. And secondly, how do you read the Central Bank of Qatar cutting policy rate by 55 basis points, whereas the U.S. set cut by 50 basis points. That's my second question. Just curious to see your opinion. And thirdly, again, on the rate cuts, what will be the knock-on effect on your funding costs? How soon should we see an improvement in the cost of funds for Masraf. Is it -- should it be fourth quarter as early as fourth quarter FY 24 and what about the margins right? Again, we asked many times about the margin rates, right? Now, how do you see the margins going into Q4 '24?

Okay. I'll jump in on the first 1 there, and then I'll pass over to Tahir who can deal with the various rate questions. No, we didn't sell assets. We had some recoveries from our nonperforming customers and some settlements, which is why we saw the figures go down there. But no, no sale of assets. And now I'll pass over to Tahir, who can answer all the rest, I think.

Thanks, Alexis. So on your question related to policy rates from QCB. Well, QCB works independently. So they can decide whether they have to go in alignment with FOMC or they want to take their own call. I think if you take a deep dive and look at the inflation numbers, GCC, including Qatar, inflation was not even closer to where it was in U.S. and Europe and other regions, which was the main driver in the cutting rates. So I think their decision is independent. We don't have any comment on as to why it was 55 basis points as opposed to 50 basis points. With regards to your question on cost of funding and margins, yes, we do expect improvement in our cost of funding as well as margins. Would it come within this quarter? It could, but it may not be noticeable this quarter. But in following quarters, you will see the results which will have a positive impact.

Your next question comes from the line of Salome Skhirtladze from Bloomberg Intelligence.

So I have 2 questions. First one, could you confirm your initial guidance on the cost of risk that was somewhere between 100 and 110 basis points with a 5% to 7% reserve target? Is it still in place? And the second one, do you expect or do you see any signs of moving Stage 2 also across different stages? Or shall we expect some significant progress in that respect by end of year?

Sure. Thanks for your questions. I'll take both of those. Regarding the cost of risk, yes, the initial guidance still stands between 100 and 110 basis points. With some of these recoveries, it has dropped a little bit. I believe we're at about 89 to 90 bps for as Q3. So I still think the 100 is a valid target. but it's going to be on the lower side of the range we gave. In terms of the second in terms of Stage 2, it is a big focus for us. We want to drive down that figure. We're aware 24% is relatively high. I don't expect a large amount flow in Stage 3. If anything, I expect our Stage 3 ratio to decrease by the end of the year, we are looking at moving from Stage 1 if we are given permission. So I would like to bring that Stage 2 figure down, and that's 1 of my goals for this year.

Your next question comes from the line of Vikram Vis from NBK Wealth.

My question is on the margins. If policy rates dropped by 100 bps, what will be the impact on the -- on Masraf Al Rayan's margins?

So look, first of all, as we've just mentioned on previous question, you will not see imminent noticeable impact, but the margin would be 0.25%, if there is a reduction of 100 basis points roughly.

Sorry for every 100 bps, you are saying how much is the impact on the margins?

0.25%, which is 25 basis points.

Okay. Okay. Yes. My second question is in most of the GCC countries, Saudi Arabia and United Arab Emirates, the loans and deposits are priced off the interbank rates. So when we talk about policy rates in Qatar, what rates should we be looking at? I mean do you price your loans and deposits of the 3-month interbank rates? Or what exactly should we be tracking in order to assess which way the policy rates are headed.

So look, we have got this direction coming from the QCB. So most of your loans are priced at QCB lending rate. And we have a QMR rate, which provides a direction towards the deposits. So we have a clear direction as to how these -- both assets and liabilities are priced here.

So you price the loans of the QCB lending rate, right?

Yes.

And deposits, price of the QCB deposit rate.

QMR, yes.

What is QMR?

QCB deposit rate, as you said.

QCB Deposit rate. Okay.

[Operator Instructions] And your next question comes from the line of Andrew Brudenell from Ashmore.

I just wanted to double check what you said about NIM because when you're asking, when you're answering another question about negative profits and OpEx spend, you said there was a significant pressure on the NIM and then you said that the NIM will be better in the fourth quarter, and we'd see improvement sort of the quarter after that. Can you just set a significant pressure by the NIM is actually going on or did I misunderstand? Can you just clarify what you mean by those comments, please?

So the significant pressure on the NIM, if you continue to onboard assets that are good quality assets and priced at a tighter range, this will have a pressure on your NIMs. But if as a strategy, what we are doing, we are choosing and selecting assets that work best for our balance sheet, meaning that they are profitable as well as quality is acceptable. That will have a positive impact on the net interest margin. Given where we are today, what we said previously, with the rate cut environment, have we seen significant improvement in our NIM, we said that we have seen some improvement and the continuity of this improvement will be more visible in the following quarters. This quarter, you will have improvement, but it may not be significant. This is what we have said.

Got it. Yes. Okay. And then just on the loan growth. So you had a you had like a better quarter -- quarter-on-quarter loan growth there. And you had sort of guided that essentially, the book would be about flat and now we're up like a couple of percent or so, I think. So things looking better there in terms of credit demand? Or is it what you sort of mentioned on your previous answer to me that you're just being a little bit smarter or working a little bit harder to find things that fit your balance sheet. So should we assume that this sort of 0% to 2% is probably all that's possible this year, I guess, is what I'm asking. Or is there now a bit of a change where credit demand seems to have picked up so that there might be a little bit more growth in chargeable assets over the next few quarters?

I think the latter part of your comment basically is the answer to your question. It is that we are seeing a little bit of demand. And like we have given -- we've communicated in the past as well, we are going for good quality assets, where we can attract a good NIM for the bank, the quality of the asset is good. So we are attracting those NIMs. The increase that you see in the quarter is as a result of those initiatives and the focus around that area only.

Yes, yes. And this is, I think, partly what you're asking, while market has seen the growth in assets at about anything between 9% to 11%. Our lower growth is a testament that we are choosing as to what to be onboarded in our balance sheet.

[Operator Instructions] There are no further questions at this time. So I'd like to hand back to Shahan.

Thank you very much. I'd like to thank management for giving us an update on the third quarter, and we will pick this up again in the fourth quarter. Thank you.

Thank you very much, everyone.

Thank you. Thank you all.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.