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

Hello, and welcome to the AlRayan Bank Conference Call. Please note that this call is being recorded. I would now like to turn the call over to our moderator, Shahan. Please go ahead, sir.

Thank you, and hello, everyone. I want to welcome you to AlRayan Bank's Second Quarter 2025 Financial Results Conference Call. So on this call from management, we have Shahnawaz Niazi, the bank's Group CFO; and Tahir Pirzada, Group Head of Treasury and Financial Institutions. 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, Shahan. Good afternoon, everyone, on the call. So let's start. Thank you for joining the AlRayan Bank's First Half 2025 Financial Results Conference Call. Let's start with the profitability first. So we reported a consolidated net profit of QAR 821 million in first half 2025. This is against QAR 789 million for the same period last year. This represents a 4.1% increase year-on-year. Earnings per share for the period was slightly higher at QAR 0.088 versus QAR 0.087 year-on-year. The book value per share went up also QAR 2.59 this year versus QAR 2.52 last year. The return on average equity is 6.82% against 6.72% in H1 2024. Despite the high cost of funds and pressure on the margins, profitability remained stable in the first half 2025. Our cost-to-income ratio is at 28.3%. This is slightly up from 26.1% in first half 2024. The increase in cost-to-income ratio is mainly due to our ongoing investments in our digitization and in our transformation process. Moving to balance sheet. The group has achieved its highest ever total asset base, reaching QAR 176 billion as of June 2025. This represents an increase of 8.8% year-on-year. Customer deposits closed at QAR 111 billion, representing 1.6% increase over last year. During the first half of the year, the financing assets grew by 3.4%, clocking at QAR 112 billion, and this was driven by continued demand from both our corporate and retail clients. Investment securities is the biggest contributor to the growth in the asset base. These increased by 26% year-on-year to be at QAR 48 billion, and this reflects our continued focus on value-generating assets. In terms of asset quality, 53% of financing assets is financing to government. This has remained more or less the same compared to last year. 89% of investment securities is sovereign debt and 86% of that is investment securities with State of Qatar. The coverage ratio of Stage 3 financing assets is 64.4%. This was 61.9% last year. The group's nonperforming financing assets are at 5.38% compared to 5.86% last year. This represents a 48 bps decrease from last year. On the ECL, 81.5% of our total exposure, which is subject to ECL is in Stage 1. 15.1% is in Stage 2. This percentage was 23.7% last year. And in Stage 3, 3.4% are in Stage 3 compared to 3.8% last year. The improvement in both Stage 3 and -- Stage 2 and Stage 3 demonstrates the bank's consistent strong base of high-quality assets. Our total ECL provision, which has been booked in first half 2025 stands at QAR 415 million against QAR 548 million last year. Our coverage ratio for Stage 3 loans has increased to 64.4%, as I previously mentioned, compared to 61.9%. And overall coverage ratio remained stable at 2.9%. On the capitalization, the bank's capital position continues to be strong and very well above the minimum regulatory requirement of 15.73% as a DSIB. Capital adequacy ratio stands at 25.9% and core capital CET1 ratio is at 23.7% in first half 2025. Last year, these were 23.7% and 21.6%, respectively. I'm handing over the floor to Tahir to take us through the Basel III and liquidity.

Thank you, Shahnawaz. Good afternoon, everybody. On the Basel III ratios and liquidity, just to highlight that Qatar and GCC markets remain sufficiently liquid despite recent geopolitical situation that we have seen. U.S. treasuries have also stabilized a bit in Q2 2025 compared to previous 2 quarters on the bank -- on the back of Trump's tariff policies. Economists and markets are now adjusting the Fed rate cut projections for the remainder of 2025. We have seen mixed views from economists. Some are talking about 4 to 5 rate cuts. Some are talking about 2 to 3 rate cuts. We, however, expect 1 to 2 rate cuts for the remainder of 2025. Liquidity position in GCC remains comfortable, and we continue to see interest from diverse investors who want to take exposure in GCC markets and also pick up premium on their placements in this market. Nonresident pool of liquidity in Qatar remains more or less same. That is around 19%. High-quality liquid assets are roughly QAR 42 billion, reflecting strong liquidity position that continues to support financing asset growth in the wholesale banking sector. In May of this year, AlRayan Bank has successfully issued $500 million 5-year senior unsecured regulation S Sukuk, which was oversubscribed more than 3x, reflecting strong investor confidence and financial strength and creditworthiness of AlRayan Bank backed by strong asset quality, liquidity and capitalization. So with that, I think we conclude.

Yes Thank you, Tahir. Shahan, over to you.

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

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

Could you please summarize your strategy on the net interest margin and quantify the impact from the securities portfolio increase from the volume versus the compression we had year-to-date? And could you also break down the drivers behind the credit growth in the first half of the year?

Okay. So let me take the question on the credit growth, and I'll hand over the mic to Tahir for the margins on securities and the additional investments. So the credit growth has come from both the corporate as well as the retail side. We've seen -- we have a healthy pipeline in terms of our corporate business. We have seen some repayments from the private banking business, but that has been offset by new growth in the retail space. Plus our U.K. franchise is producing very good results in terms of asset growth. For the last 2 years, they've been showing QAR 1 billion of asset growth year-on-year. So that is also very good. From a Qatar perspective, like I mentioned, we see -- we have a strong pipeline in both the corporate and the private banking space. We've seen growth in the retail space. The growth that you see right now in first half, mainly from corporate, U.K. and the repayments that happened in the private banking space, which was offset by growth in the retail space.

Okay. On the interest margin strategy, so basically, I think we have explained this over the previous quarters also that whenever you have interest rate variation, meaning interest rate cuts or interest rate hikes, the return on assets get an immediate impact while you have to wait for the adjustment on the liability side. So we are going through that phase at the moment where some of the price deposits are coming due for redemption this quarter or next quarter. And therefore, by the end of the year, we expect some of the reversal of the tightening of NIMs that we have seen in H2. With that, as you asked about the securities, so we have aggressively invested in securities, Sukuk, mainly State of Qatar issued by the government. As you would also agree that given AA rating of this, security, the return is not as wooshy as you would expect. So that might have some role to play, but we need these securities to manage the HQLA and to manage the regulatory ratios. So we continue to invest in them. And equally, we are investing in our corporate banking and retail segments to grow the book away from government. So government book is about 53% as of now of the total financing book. And there is a concerted effort to increase the nongovernment book, which basically brings in a higher return on assets.

Our next question comes from the line of Andy Brudenell from Ashmore.

Can I -- just to make sure I understand the margin point. So just to be clear, so second half, there's optimism of refinancing at lower levels. Is that correct? So what is the margin guidance then? Sorry, if you could just reiterate that, please?

So the margin guidance, Andrew, is -- and I think we met earlier as well where I explained the portfolio is such -- the portfolio of our book is such where as soon as the rate cut happens, we have to reprice the assets. But 25% to 30% of our deposit book is fixed for tenors ranging from 6 to 9 months. We are unable to reprice that till the deposit rolls over or matures. And during that time, we have to take a cut in our NIMs, in our spreads. But this is a timing difference. As soon as the deposit matures or rolls over, it reprices and the NIMs go back up. So from September to December last year, we saw a 100 basis point cut in Fed rates. We had to reprice our loans, but then we had to wait for the deposits to reprice. All our deposits are going to reprice relating to whatever was there last year are going to finally reprice in June, July and August. June and July have done. We're just waiting for the August maturities to reprice. And once that happens, we expect our NIMs to go back up. So we expect -- so at the moment, the NIMs are hovering around 1.6%, we expect them to go back up to first half 2024 levels around August or September time. I hope that answers your question.

Yes. Great. Yes, I just wanted to reconfirm that. And then on the fee side and kind of nonfunded income in general, obviously, some big numbers there. Could you just maybe just talk a little bit about the drivers and specifically sort of any nonrecurring, like what's the sustainability of this kind of growth? And is there like a nonfunded income contribution to total income kind of target that management is thinking about? Or I don't know, maybe if you'd be interested to get a bit more on that, please.

Sure, sure. So the growth that you see in the fee and income line, 50% of that growth, Andrew, are all one-offs. These are deals that we've been working on in the past, which were booked in the past, but we have only been able to recover the one-off piece this year. So 50% of the growth is coming from there. And the remaining 50% is coming from -- we have revised our schedule of charges. We have added more services under that schedule. We have increased our trade finance flow, LC confirmation flow. So that is a BAU business, and I expect that growth to continue. But yes, the 50% of the growth that you see in the fee and income lines are clearly one-offs.

Okay. Sorry, is that both the fee line and the other noninterest income line?

No, no, I'm just referring to the fee income line, the net fee income line.

Okay. Fee income line. Okay.

And the other income line are all recoveries that we've been able to generate from our previous written off fully provided nonperforming loans.

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

A couple of questions. One is for the cost of risk, do you hold the guidance for 2025 as you communicated earlier? Or is there a decrease given that the net provisions decreased? And second is that do you still hold your target of stable profit for 2025, excluding the impact of tax?

Yes. So in terms of the ECL guidance, our guidance continues to be the same that we gave in Q1, which is going to be that -- full year ECL is going to be around QAR 800 million to QAR 900 million. In the previous calls, we've said that in 2022, post our merger and our integration, we started a cleanup exercise of the legacy portfolio. Unfortunately, one of the legacy banks pre-2022 when we merged -- 2021 when we merged, the level of provisioning that they did was not adequate. After the merger, the anomaly was identified and our road map was agreed with QCB that whatever additional incremental provisions that we need to cover for legacy premerger portfolio, unprovided for, we will do that over a 5-year period, and we are going -- continuing with that journey. Now '22, '23, '24, our ECL levels were around QAR 1 billion. Now agreed -- as agreed with the regulators, we will slowly and gradually taper it down. So our guidance is this year, ECL is going to be EUR 800 million to EUR 900 million. Next year will be EUR 800 million, and we will slowly and gradually continue to taper it down till whatever provisions we need to cover us from a legacy perspective are all done. That is the answer to your first question. And the second is -- the second answer is our guidance in terms of overall profitability for 2025, we expect to meet our profit targets. So the previous guidance continues.

Our next question comes from the line of Murad Ansari from GTN.

I had a few questions. Firstly, I mean, going back to noninterest income. I just wanted to understand this when you say that the 50% of the growth is coming from one-offs. So essentially, the way to look at it is that last year was -- average first half was about QAR 70 million per quarter on fee income. So the average about QAR 90 million, QAR 95 million that we've seen the incremental growth, half of that over last year is what you're referring to coming from one-off. Is that the way to look at it? I mean that means roughly about QAR 10 million to QAR 15 million is roughly what's coming off from one-offs. Is that the right way to look at it?

Yes, Murad, allow me to explain that. So -- and I'm reading from the financials. Our net fee and commission income for 6 months has grown by approximately QAR 45 million, the net fee and commission income. It was QAR 140 million last year. It's QAR 185 million this year. Out of the QAR 45 million, approximately QAR 20 million to QAR 25 million is one-off and the rest is growth in our BAU business.

All right. Okay. All right. And then just going down on noninterest again in the other income line. I mean, you had a similar number last quarter, about QAR 99 million, QAR 92 million. So -- and I believe last quarter was also on recoveries. I mean, is that something that we should continue to expect over the coming quarters? And if you could just give us some color on what these recoveries -- are these corporate or retail books that's driving those recoveries?

So as I explained, Murad, there was a lot of -- at the time of the merger, there was a lot of legacy nonperforming portfolio. From 2023 onwards, the bank as part of its strategy, embarked on a journey where we instituted legal suits, legal claims against that portfolio. And we are now beginning to see recovery efforts actually materialize on that portfolio. Last year, we were able to get one big recovery. This year, we've managed to get 2 recoveries. The title deeds have come to us. And the legal process continues. And over the next, I think, a year to 18 months, we expect to see same level of recoveries quarter-on-quarter. Again, it all depends on when we get those mandates from the courts it is a legal process. It is all dependent on the court. The court proceedings are going in our favor. Of course, we are there to recover our bad debt. And courts slowly and gradually are handing over the collaterals. They're transferring the title deeds into our name for those properties. So we expect the same to continue over the next 12 to 18 months. I hope that answers your question.

Yes, it does. My next question was on your loan staging. So if I read this correctly, I think you've got about QAR 700-odd million, QAR 800-odd million increase in your Stage 2 loans. We had a significant drop in fourth quarter. How should we see this evolving into the end of the year? I mean, is there any part of the portfolio that you're discussing with the Central Bank in terms of potential movement on back to Stage 1? I mean, last year, the big change happened in fourth quarter. Is that something that we should expect possibly happening this year as well? Is that a curing period kind of thing that's driving that? So just wanted to get a sense of how you see that Stage 2 loan portfolio evolving over the next 2 quarters?

So from my perspective, there is nothing alarming in terms of Stage 2. Why is that? Because the nature of how business is done, unfortunately, such that even our best customers sometimes do not pay on time. There could be sovereign names there as well. I mean, of course, I'm not at liberty to say the names, but we keep on following up with the customers to make sure that the payments are done. And as soon as the payments are done, then we have to wait for a 90-day period and 12-month period. Thank you for correcting me, Tahir. 12-month period before we can apply to QCB to allow us to reclassify back to Stage 1. So as soon as there is an overdue, we immediately transfer that loan to Stage 2. And this is what we were able to get done in Q4 last year, as you've mentioned. The same process is continuing, Murad. If we are successful in getting a timely decision from QCB, we will again move them these loans back to -- or part of these loans back to Stage 1. But if the QCB delays or tells us just wait for some more time, then the process will be delayed. It is all regulatory driven, unfortunately. But as far as the names are concerned, Murad, names in Stage 2 are concerned, they're all, from our perspective, very good names, performing loans.

Great. Just last one quick question on NIMs. You've mentioned that this year has been -- your deposits reprices over a 9-month cycle. I mean, given how the past 6 to 8 months have been in terms of challenging NIMs due to this lag in deposit repricing and potential for further rate cuts going towards the end of this year and next year as well. Is there some discussion going on around potentially changing the repricing profile of these deposits? Or these are kind of standard practices and once your current deposit book matures in September -- around September third quarter, whatever, that -- is that going to be a similar exercise that these deposits are going to be fixed for another year? Or is there some discussion around potentially shortening the repricing profile of these deposits? Could that -- can that be done? Because I mean, if rate cuts happen again, then you're potentially stuck in another cycle for 12 months?

So Murad, this is Tahir. It's a valid question and a good question. Unfortunately, there is a background to it, and that is that resident deposit share in Qatar, there is a shortage of about 19%, which is reliant on nonresident sources. So when you are faced with that, what that does is that gives the liberty to the depositors to dictate the terms. So while at the bank's level, we do try either to keep the tenor short or try to come up with other solutions, we are not at liberty to apply those solutions at our will, unfortunately. But having said that, I mean, this is a known issue, and we try to manage it within the guidelines that we have available to us. Internally, I think we are trying to push for shorter-dated deposits, although that is also perceived negatively at the regulators level because they are looking at NSFR very, very closely. So it's a mix of things that we are watching and trying to implement. Hopefully, with time, we will be able to get more control on it.

There are no further questions. I'll turn it back over to our moderator, Shahan, for final words.

Okay. Great. If there are no more questions, we can wrap up this call. I would like to thank Shahnawaz and Tahir for giving us an update on the second quarter, and we will pick this up again in the third quarter.

Thank you very much. Thank you.

Thank you.

The meeting has now concluded. Thank you all for joining. You may now disconnect.