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] I would like to turn the call over to our moderator, Shahan. Please go ahead.

Thank you, and hello, everyone. I want to welcome you to Masraf Al Rayan's First Quarter 2025 Financial Results Conference Call. So this call from management, we have the Group CEO, Shahnawaz Niazi; 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 now turn the call over to Shahnawaz. Please go ahead.

Thank you, Shahan. One small correction, I'm the CFO for the group, not the CEO. So let's start. Good afternoon. Thank you, everyone, for joining, and welcome to Masraf Al Rayan's Q1 2025 Financial Results Conference Call. We'll start with the profitability. We reported a consolidated net profit of QAR 408 million in Q1 2025 compared to QAR 406 million in Q1 2024. Earnings per share for the period is unchanged at QAR 0.044. The book value per share went up slightly compared to Q1 '24, QAR 2.54 current quarter versus QAR 2.48 last year Q1. The net profit margin stood at 1.6%. Q1 '24 was 1.98%. And the return on average equity is 6.84% against 6.97% in Q1 2024. Despite the high cost of funds and pressure on the margins, profitability is stable in Q1 2025 compared to last year. Cost-to-income ratio is at 27.7%, slightly up from 26.3% in Q1 2024, and this is mainly due to the ongoing IT digitization and the transformation process that we've been going through. On the balance sheet, the group's total assets are at QAR 169 billion, which are 6.2% higher from quarter 1 2024. Customer deposits closed at QAR 111 billion compared to QAR 105 billion Q1 last year. On asset quality, 54% of financing assets is financing to government, 90% of our investment securities is sovereign debt and 91% of investment securities is with the State of Qatar. The coverage ratio of Stage 3 financing assets is 64.3%. And the group's nonperforming financing assets represent 5.37% of the total financing book, and this is showing a 49 bps improvement compared to Q1 2024. On the ECL, 81.3% of total exposure subject to ECL are in Stage 1. 15.2% of total exposure subject to ECL are in Stage 2 and 3.5% in Stage 3, which is demonstrating bank's consistent strong base of high-quality assets. The total ECL provision booked during Q1 was QAR 211 million compared to QAR 262 million in Q1 '24. This increases the coverage ratio of Stage 3 financing assets to 64.3% compared to 59.7% in Q1 last year, an overall coverage ratio to 2.8% compared to 2.7% last year. On Basel III ratios and liquidity, I'll hand over to our Treasurer, Tahir Pirzada.

Thank you, Shahnawaz. So on liquidity and ratios, Qatar and GCC markets remained sufficiently liquid despite recent volatility that we have seen. U.S. treasuries have seesawed in Q1 2025 on the back of Trump's popular tariff policies. Treasuries rallied on net basis by about 40 to 50 basis points from their levels in Q4 2024, given continued prevalent uncertainty in financial markets. The economists and markets have now adjusted as to how the Fed rate cuts are going to be in 2025. We have seen mixed views from the market, that is from 4 to 5 rate cuts to 1 to 2 rate cuts. We, however, are projecting 2 rate cuts in 2025. Liquidity position in the markets, especially GCC, remained comfortable, and we continue to see interest from diverse investors parking their liquidity in a safe haven while picking up slight premium in this market, particularly Qatar. Nonresident pool of liquidity remains at around 19%. High-quality liquid assets are roughly at around QAR 38 billion, reflecting a strong liquidity position that continues to support financing asset growth in the wholesale banking sector. Shahnawaz, over to you for capitalization.

Thank you, Tahir. The bank's capital position continues to be strong and well above the minimum regulatory requirement of 15.73% as a DSIB. Our capital adequacy ratio stands at 25.5%. And core capital CET1 ratio is at 23.2% in Q1 2025. Q1 2024, these were at 23.6% and 21.6%, respectively. We can move on to the questions now.

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

Well, my first question is pertaining to your loan growth. I mean, we've seen it quite flat in spite of overall banking sector growth at around 3%. So just wanted to know, are you still in line with your target of 4% to 5% for the year 2025?

Yes, the answer to that question is yes. Our guidance continues to be 4% to 5% growth, yes.

Okay. Fine. I mean in terms of your other income supporting has been a huge delta of close to almost around QAR 100 million, which came from other income. So can you just provide any color on this?

These are -- these represent recoveries from old written-off debts that we managed to collect in Q1.

So do you see this kind of -- I mean, you're not classifying it under the ECL, you are showing it on the other income. That's what I suppose I may understand, right?

Yes. These are loans that have been written off from the balance sheet. Typically then when there is a recovery, it has to go to other income. If it was a loan that was live and on the balance sheet, yes, it would be on the ECL line.

Okay. One more question actually is on the provisions. Again, the same, I mean, lower-than-expected cost of risk of around 70 basis while your full year guidance is around 110 to 120 basis points. So can we expect in the following quarters increase? Or do you think so there could be a lump sum in the last quarter?

No. The guidance we've given in the past was 100 to 110, that was for last year. This year, I would expect it to be in the 75 to 90 basis points area. So I would not expect to see a large increase in any quarter.

Okay. So okay, gradual. And one final take, actually, in terms of your guidance on your NIMs. I mean you did mention that you could be at 1.85% for 2025. So 2025 -- first quarter has not been that great. So do you still maintain the guidance?

There will be pressure on the NIMs, primarily because of the interest rate volatility in the market. The way our NIMs work is as soon as there is an interest rate change or a profit rate change, we -- our loan book reprices -- most of the loan book reprices. But 25% of our deposit -- customer deposit base is fixed for 6 to 9 months. So we have to wait for that tenor to mature and then the deposit only reprices then. So because of the nature of how the interest rates are behaving in the market, there will be pressure on the NIM. But once the profit rate or the interest rate stabilizes, the NIMs will go back up to the levels and the guidance that we've given.

So we can expect at least in the ensuing quarter, second quarter, likely NIMs could continue to remain under pressure?

Under pressure is correct. Yes.

Okay. And one last, if may I. I mean we have seen a transfer from your Stage 2 to Stage 3 loans. At the same time, there has been a write-off of a similar amount. Is there any linkage between the write-offs and the transfer?

No, no linkage at all. Yes, to write off something in Qatar has to have been fully provided under Stage 3 for 12 months minimum. So those are separate from any movements you will see.

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

Couple of questions from my side. Sorry, if I missed the part on the loan growth. So if I look at your loan book, it grew 4% in 1Q. And of course, I understand there is a -- there are dynamics because sometimes a government can borrow and then they can repay in the fourth quarter. But net-net, can we expect a 4% growth for the full year also? And second question is on your OpEx. So you said that there has been an investment in IT and digitalization. So is there a time line till which we can expect this ratio to remain high? And then once this stops, the investment like normalizes. What kind of cost-to-income ratio we are looking at?

Okay. So the answer to the first question, Abhinav, is yes. The guidance on the loan growth for the full year continues to be 4% to 5%. And our loan growth is not only coming from the government sector, but across all segments. It also includes retail, some from U.K., some from government, some from private sector. So it's across all segments. That's one. Number two, in terms of the cost-to-income ratio, so our projects, which we are currently running, the IT digitization, core banking upgrade, they are all expected to complete by mid to Q3 of next year. At that point in time, these projects will be capitalized and depreciated over a 5- to 7-year period. As part of the depreciation, there will be cost uptick, but we expect that with the new IT digitization and core banking upgrade, the increase in revenue will be sufficient to pay for the cost, and accordingly, our cost-to-income ratio will continue. That's my guidance to the market, will continue to be at the same range, 26% to 27%.

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

I have 2 questions. The first one, shall we assume the same net interest margin sensitivity in absolute terms as disclosed in 4Q results? And the second question, could you break down the deposit growth because quarterly, there was an increase in deposits. Which sectors contributed? And whether there are a few large one-offs? And what to expect overall over the next year in terms of the liability structure?

So your second question, first. The deposit growth has come in the institutional sector and this is as a result of the diversity in our products that we have launched. So we have seen a decent positive result of that. On your first question, that was related to...

I think it was relating to NIM.

Yes. So as Shahnawaz said, that we are projecting similar level of pressure on NIM in Q2 or till we see stability in interest rate cuts. Once that stabilizes, we expect our NIMs to go back up.

But just a small thing to make sure I correctly understand. In terms of the NIM sensitivity, the amount of the NIM drag per interest rate change that was disclosed under your annual report, shall we assume this sensitivity level remains the same? Or do you have some changes there because of the different [ market structure ]?

Same. Same sensitivity level, same.

[Operator Instructions] And your next question comes from the line of Murad Ansari with GTN.

My first question was on NIM. So you've mentioned you expect margins to remain under pressure. But when you -- I mean, sequentially, when we looked at fourth quarter and first quarter, it's just a minor drop on a sequential basis. Then you're saying pressure on margins to continue. Do you expect these margins to be lower on a sequential basis further down from here or around those 1.5%, 1.6% level for the rest of the year till the deposit book starts repricing back? And second, on fee income. Decent quarter on fee income, so just wanted to get a sense of anything -- any one-offs here? Or is this largely driven by loan growth? And lastly, on the NPL recoveries that you mentioned earlier in the call. I mean, is it a few clients spread across portfolio, corporate versus retail? Any insights that you could provide on this?

So let me answer your question on the NIMs and fee and commissions. So NIMs, I expect a marginal drop in NIM in Q2 primarily, as I explained earlier, because of the interest rate volatility. Now if there are no interest rate changes in Q2/Q3, the NIMs will go back up. That's how the model is. Whenever there is an interest rate change temporarily or an interest rate decline temporarily, the NIMs will be under pressure. So I hope that answers your question on NIM. Number two, on fee and commissions, we have seen improvement coming from various areas from loan growth, loan financing, from trade finance as well as from retail business as well. So it's across all sectors, all segments. On the NPL, the last question, NPL, Alexis?

Yes, absolutely. So in terms of the recoveries, it's been across all different sectors. In terms of the ones that fed into the other income, it was on the corporate side mainly. However, we do see recoveries across all different sectors, yes, at the moment.

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

I just have one follow-up on the tax bit. So given that the taxes now we have a little bit more visibility than last quarter, so could you please throw some light on what implications it has for you?

Sure, Abhinav. So as you're aware, the tax authorities in Qatar came up with draft regulations just before the Eid holidays. And in those draft regulations, they have adopted certain exemptions, which are now available to organizations and institutions in Qatar. There are 3 criteria that the organization or the institution has to meet to be able to get those exemptions, and Masraf Al Rayan is meeting all 3 of those criteria accordingly. Based on the draft regulations that we have at this point in time, we do not expect a global minimum tax impact on our results for the next 5 years. Of course, the important point to note here is that these are draft regulations at this point in time. While the tax authorities have given an indication that they will -- that these will be made into law, but to be on the safe side, we have to wait till the law actually becomes applicable -- actually comes out before we can put a final stamp that there is no -- there's not going to be any impact of global minimum tax.

And there are no further questions at this time. I will now turn the call back over to our moderator, Shahan, for closing remarks.

Okay. Great. Thank you. I'd like to thank Masraf Al Rayan's management for giving us an update of the quarter. And we'll pick this up again next quarter. Thank you.

Thanks all.

Thank you. Thank you all.

Thank you.

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