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

Hello, and welcome to Masraf Al Rayan Conference Call. Please note that this call is being recorded. [Operator Instructions] Now I would like to hand the call over to Shahan, you may begin.

Thank you very much. Shanawaz, please go ahead. Please start.

Thank you Shahan. Hello, good afternoon from Qatar. We will start the call. Thank you, everyone, for joining, and welcome to Masraf Al Rayan December 2024 Financial Results Conference Call. We'll start with profitability. We reported a consolidated net profit of QAR 1.507 billion in 2024 versus QAR 1.452 billion in 2023. Earnings per share for the period is QAR 0.157 versus QAR 0.151 in same period last year. The book value per share went up slightly compared to December 2023 and Current year is QAR 2.59 versus QAR 2.53, respectively. Our net profit margin stood at 1.86% in 2024. In 2023, they were 1.87% the return on average equity is 6.33% against 6.25% in 2023. The cost-to-income ratio at 27.1%, this is slightly up from 25.6% in 2023, and this is mainly due to our spend on our strategy, on our IT digitization and on our rebranding in 2024. On the balance sheet, the group's total assets are at QAR 171 billion. These are 4.2% higher from same period last year. Customer deposits closed at QAR 108 billion. Last year, they were QAR 93 billion, up 16%. On the asset quality, 48% of our financing assets is financing to the government. And 88% of our investment securities is sovereign debt and 84% of investment securities is with the state of Qatar. The coverage ratio of Stage 3 financing assets is 62.3%. The group's nonperforming financing assets represent 5.45% of the total financing book, which is an improvement of 26 bps compared to December 2023. On the ECL, 81% of our total exposure subject to ECL is in Stage 1; 15.6% is in Stage 2 and 3.4% in Stage 3, demonstrating the bank's consistent strong base of high-quality assets. Our total ECL provision booked during 2024 was QAR 1.041 billion, compared to QAR 1.165 billion in 2023. This has increased the coverage ratio of Stage 3 financing assets to 62.3% compared to 56.7% in December 2023. And the overall coverage ratio of 2.7% compared to 2.6% in Q4 2023. On liquidity and the Basel III ratios, the Qatar GCC market remains sufficiently liquid despite recent volatility in rates. The U.S. treasuries have weakened, as we all know, in Q4 2024 by about 100 bps across the curve on the back of stronger data from labor market and in anticipation of Trump policies that could lead to fewer rate cuts in 2025. Post the 50 bps rate cut from Fed in September, we have seen 25 bps in November and 25 bps in December. Cutting the total interest rates by 1% in 2024. For 2025, rate cut expectations have come down to probably 1% to 2% from that of 4 rate cuts, that market was earlier projecting prior to U.S. elections. The liquidity position in GCC remains comfortable, and we continue to see interest from diverse investors parking their liquidity in a safe haven while picking up slight premium as well. Nonresident pool of liquidity in Qatar remains more or less at the same level, which is circa 19%. High-quality liquid assets are roughly at QAR 38 billion, reflecting a strong liquidity position that continues to support financing asset growth in the wholesale banking sectors. On our capitalization, the bank's capital position continues to be strong and well above the minimum regulatory requirement of 15.73% for DIB our capital adequacy ratio stands at 23.9% and core capital CET1 at 21.7% compared to 21.8% in 2023 and CET1 ratio in 2023 was 20%. That's it. Shahan, back to you.

Okay. Great. We can open it up for Q&A, please.

[Operator Instructions] And your first question comes from the line of Nikhil Poani with TBFS.

Well, my first question actually pertains to your anticipation for 2025 in terms of your cost of risk, where you see it and ROEs, net of tax for 2025?

Okay. Thanks for the question. I'll take the first one. In terms of cost of risk, we expect it to be around the 100 basis points mark for 2025 again, consistent with what we saw in '24.

And on cost of equity, I expect with the pillar 2 faces that are planned to be implemented, I expect the ROE to go down by about 25 bps.

You're saying 25 basis points down on 2024?

Correct.

I mean, coming to your provisioning ECL model, what we are saying is you have write-offs and you've been able to also show an increase in recoveries on a yearly basis and even on the cumulative basis, you have done well in that way. So -- and given the fact that now you're seeing QR could be in line with 2024, so do we expect that further recovery likely in '25, hopefully, I mean, not much write-offs so that you can also improve your coverage ratio?

Yes. I mean, you can see the coverage ratio increased from high 50s to 62%, 63% this year. We will continue working on that. That's part of our plan to build that up. As I said last year, we want to get up in the 70s at least for our Stage 3 coverage, as well as improve our Stage 2 coverage. So we're going to continue on the path that we've done over the last couple of years.

So your target, you're saying it could be much more higher, I mean, 2025, ending around 70%?

No, that's our long-term target to get in the 70s. So as you've seen over the last couple of years, we've consistently built our Stage 3 from mid-50s to the 60s, we continue with that to get to 70s -- whether that will be in '25 or not is another matter.

And lastly, on your top line LTT growth, where do you see loan growth, what do you see in 2025?

I think you can look at some of the growth we've had. Government is obviously always a big sector for us. Private banking is somewhere we look at. We've already seen some in areas like telecoms and trading. So we'll continue in those sectors.

Are you going to put a number on this for 2025?

Not at this stage, no. I think and then maybe on the later calls this year, we'll be able to give you a better view of that.

Your next question comes from the line of Abhinav Sinha with Lesha Bank.

A couple of questions from my side. So one is your loan book, if I look at it, the primary growth came from the -- from the commercial sector. So could you shed some light on that, whether that was from one customer or like most at a diversified base growth. Second is on the ROE, you just mentioned it will be down by 25 basis points. So we are talking about like QAR 1.4 billion kind of net income. So to reach that, what kind of NIM do you need? Like is it closer to your 185 to 190 basis points? Or should it -- will it be like 195 to 200 basis points?

So can you comment on that?

Yes. On the first one, no, the growth was across a number of customers and a number of different sectors as well. And again, we expect to see the same in '25.

Abinav, on the NIMs, we expect the NIMs to be same as this year despite the pressure on NIMs, which is across the custody market, but we expect our NIMs to hold steady at around 1.85%, 1.88%.

So okay. So we are talking about roughly QAR 1.4 billion net profit is at that NIM mostly. QAR 1.35 billion to QAR 1.4 billion something. Is that like a rough --

Our indication to the market -- our guidance to the market is that next year, our profits are going to be more or less at the same level as 2024.

Your next question comes from the line of Vijay Singh with Fiera Capital.

The first question I have is, could you provide a bit more granularity on the movement in Stage 2 loans? And I'm just wondering what caused it? And is it like a single client exposure or multiple clients because it's a large movement. So if you can explain the delta?

Sure. As you know, in terms of staging, we need central bank permission to transition customers from 1 stage back to a better stage. We have a number of clients in Stage 2. We gave some guidance last year that we applied to move these back. They were performing. They were doing well. And that permission was granted in Q4. So that's why we had that big movement from 2 to 1. But to move on they have to show 12 months kind of performing metrics.

I'm just wondering, is there more in the pipeline that could come to fruition sometime '25?

There will always be some movements back and forth, but not to the -- not on the same magnitude we saw in '24.

Understood. The other bit is, what is your target for Stage 2 coverage because I think you've highlighted the Stage 3 coverage as somewhere in the 70s. So what is the Stage 2 coverage target? And what is the time line for achieving that?

Sure. I would like to get around the 5% to 6% mark. That's where I'd be comfortable with. At the minute, we're around 3%, I believe. So it will be another couple of years. It's a match between looking at our Stage 3 coverage and our Stage 2 coverage and working on the 2 of them simultaneously. So we expect to see them both increase this year. But it will still be another couple of years before where we want to be.

The third question is on your cost of risk guidance. You mentioned another 100 basis points for 2025. I'm just trying to understand what is the gross versus net of this? What is the extent of recoveries you're expecting because maybe somewhat much stronger this year.

Yes. I mean, obviously, if the recoveries are better than expected, we have some built-in if they're better than expected, we may see a lower cost of risk going forward. We -- there will certainly be some in '25. It depends on the market. It depends on interest, in terms of collateral and so on. So there are a number of possibilities to go with that. So if the recoveries are greater than expected, then yes, the cost of risk will decrease.

I'm just wondering, is there -- are you expecting similar level as 2024 or ...

Yes.

And one last question. I've taken a lot of time is on the NIM side of things. I mean given where yields are on securities book. I mean, I'm a bit surprised that some of these are not being taken advantage of and you are guiding to a relatively flat NIM -- so that's one bit. And the second bit is that if you're thinking of an environment where we're going to see rate cuts, how do you see the sequencing of that to translate into your loan growth and lines?

So let me answer that question. So in a declining rate environment and in the long term, I always feel that, that will definitely benefit our business. The reason why we do not see an immediate impact on the NIM is because in the short term, because we have -- because 75% of our book -- of our deposit book is fixed rate. But again, fixed rate up to 9 months only. So there is a time lag between when we reprice our assets and we reprice our liabilities. And -- but it's the time lag is -- can range from the 6 months to 9 months. So I would expect to see the benefit of a reducing rate environment in 2025 to start kicking in. I hope that answers your question.

Certainly. And why -- when we look at the security side of the inside you have obviously risk-share much higher than the long-stage rating. How are you thinking about this and whether you're looking to take more advantage of the long dated yields which are available?

So I'll take that one. It is are. Of course, given that the projection of rates have changed and the issuances this year, as you know, has been pretty aggressive but issuers have to pay up now and suddenly started to appear attractive returns given what we were seeing about 6 months back. So yes, we have that in mind. However, we are also constrained by the regulatory ratios that we have to manage. That is 15% cross-border investment limit that the regulator has imposed upon us. And it's a very precious remit -- whatever we could do, we'll try and capitalize on that.

Your next question comes from the line of Adnan Farooq with Jadwa Investment.

Just a question on the fourth quarter itself, NIM seems to be on the weaker side. Any particular reason for that? And so this is the first question.

So the answer to that question, Adnan, I just responded to Vijay with a similar response. That for us, whenever there's a rate cut, which happens, it immediately gets impacted on my pricing, on my asset pricing. But my liability pricing, deposit pricing takes slightly longer to see that impact. So that's the answer to your first question. What's the next one?

Yes. Just a clarification on this. There was no one-off in the fourth quarter, which impacted gross yields per se, other than what you have just mentioned.

Confirm. No, there were no one-off.

Great. The second thing I wanted to ask first to confirm the tax rate for you guys. Do you have clarity on what the tax rate for you would be? And when would it be applicable?

So I assume your question is relating to the global minimum taxes, the Pillar 2 because we've got operations in U.K. and France, therefore, Masraf Al Rayan will be impacted by global minimum taxes and the tax rate would be 15%, in line with any other multinational entity or any other financial institution, which has got multinational or overseas operations.

And do you think the 2.5% tax that you pay would be adjusted with this or this should be on top of it?

So we are trying to lobby with the local tax authority to allow not only Masraf Al Rayan, but the other banks as well to adjust their 2.5% with the global minimum tax liability.

Your next question comes from the line of Murad Ansari with GTN.

First question, a follow-up on MEMS from what Vijay and Adnan discussed. I mean you're guiding towards relatively flat NIMs for 2025. With the rate cuts that have kicked in, a potential deposit repricing that you're expecting will start kicking in next year as well, and we're not expecting a lot of rate cuts next year. I'm a bit surprised that NIM guidance is flat rather than a slight improvement from this year. So just your thoughts on what do you think the counterbalancing factor here on lower deposit cost to keep your NIMs flat. My second question is on loan growth outlook. How do you foresee that you've talked about sectors, private sector focused. I mean just some guidance and granularity around what kind of growth you expect for 2025 on the book and what segments will be the prime contributors here?

Sure. Murad, I'll take that question. On the NIM side, as Shahnawaz said, because of the structure of the balance sheet over here in Qatar, we have to understand why the structure in the background and how it gets played in cutter market. You have to realize that there is a data of the deposits that the market relies on nonresident deposits, right? So that gets placed. On the NIM side, as Shahnawaz mentioned, whenever there is a rate cut, you have instant adjustments on the asset side. But on the liability side, there is a lag clearly because of the method profile, right? So now with the rate cash projections coming down from 4 rate cuts to probably 1 or 2, this impact will be minimum as you rightly projected. But nevertheless, whatever rate cuts come, we're going to have that lag, and we will have to go through that adjustment period accordingly, and we are projecting that NIMs will remain flat. We are a little bit conservative. If there is improvement, we will be very happy, and I'm sure you will be happy. On the growth side, on the loan side, as Qatar is projecting 4 to 5 basis point GDP growth, we are also projecting to grow at the same level. We are not aggressively growing our balance sheet. We are quite watchful conservative as to what kind of assets we grow. In terms of which sectors, which segments, I think this has been discussed initially. Alexis, as mentioned, 50% of our balance sheet is extended to government. So you're talking about government, you're talking about trading, you're talking about private sector. These are the areas that we are focusing on.

Your next question comes from the line of Abhinav Sinha with Lesha Bank.

Just a follow-up from my side. Any guidance on the loan growth, please?

I just answered that. If you need anything else, we can have one-on-one after the call.

Your next question comes from the line of Nikhil Potani with TBFS.

Well, I actually mentioned right now about your non-recurring deposit at 20%. So just wanted to understand, I mean, from the QCP perspective, are you comfortable? And what do you see going forward?

Sure. Nikhil, so this 20% roughly figure is for the banking sector, all the banks, including that is the average. However, for us, it's about 6% to 7%, maybe less than that. So we are very comfortable with that. And QCB is quite appreciative of the fact that we are not relying on this, while the banking sector average is almost 3x of that. I hope that answers your question.

So nondefined deposit, you're saying is around 6% to 7%, not 20% of your...

For Masar Al Rayan Bank, while the banking average is about 20%.

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

So yes, a couple of questions I would say, from me. One is on the pricing of deposits, you mentioned that you have around 70% deposits, which are fixed rates for 6, 9 months. Is that like an industry practice? Or is it Masraf specific? That's one thing I want to clarify. The second one, I think I've heard you on the call earlier, you mentioned that you expect your net income to be nearly flat on 2024. I mean that's your 2025 expectation, if I understood you correctly. So when you give that comparison, is it on a pretax basis or is it on an after-tax basis? So that's my second question. I think thirdly, I would be interested to know how we are planning to tackle that increase in the effective tax rate. what levers do you think you can pull if possible at all? Or you will see some that are hit on the bottom line?

Sure. I'll answer your first question, and then Shahnawaz can take question number 2 and 3. On the deposit side, I think the -- most of the bank's price deposits at a fixed rate very rarely, you have structured deposits where you price them on a floating basis. But otherwise, these are fixed rates, as market convention Shahnawaz?

Sure. So our guidance to the market is the profitability will remain flat at a pretax basis. As we all know, the global minimum factors is something which is new, which is going to come for the first time in 2025 and that will have an impact on the net profitability yet.

Your next question comes from the line of Murad Ansari with GTN.

So just a quick follow-up question. I mean your capital ratios are quite robust. I mean, CET1 at about 21%. It's been going up steadily over the last couple of years, and I appreciate fact that you've been very cautious in terms of growth, in terms of the asset quality of the book, which remains a key focus area. But how should we think of this capital ratios going forward? I mean, should we think that these continue to go up over the next few years before you get comfortable on the quality of the book? Or is there room for improvement in payout ratios?

So Murad, the answer to that question is the capital ratios are expected to be more or less at the same level over the next couple of years. At the moment, you see them at 23.9%, but that's because the dividends have not been distributed. Once the dividend gets distributed, this will come down to approximately 22.3% to 22.4%. So more or less in line with previous year. In terms of guidance, in terms of how do we see these capital levels going forward. I think that our guidance to the market is that over the next medium term, 2 to 3 years, the capital levels will remain more or less at the same level.

There are no further questions. I would now like to turn the call over to the speakers for any closing remarks.

If there are any further questions, we'll be more than happy to answer them on e-mail. Please feel free to call us as well. If they are none, then we'll conclude the call. And thank you very much for your attendance.

That concludes our call. Thank you all for joining. You may now disconnect.