Doha Bank Q.P.S.C. (DHBK) Earnings Call Transcript & Summary

Good day, and welcome to the Doha Bank Q2 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Seetharaman. Please go ahead.

Good afternoon, ladies and gentlemen. Thank you all for your participation. It's a pleasure and privilege for me to interact with you once again. And I'll take the first 10 minutes just to give you a macro update on the economy as well the performance metrics and we'll wait for your live questions, that me and my team are committed to respond. So feel that it is a professional advantage to learn from our investors. Right. The economic conditions are stable in function, as you know, in macro terms. I am at this client Qatar's economic momentum, [indiscernible], and we have reasons to believe the sovereign rating has been consistently maintained. And oil price now, we have taken a budget of $40 now. We have reasons to believe we'll run our current account surplus as well as possibly a fiscal surplus. The cash reserves are rightly deployed. Now we have scalable, measurable projects now on the hydrocarbon side from 77 to 110 in the first phase. And again, the 110 to 125, it's all happening in the Northeast and Northwest to 127 million metric tonne, finally. That's a major momentum. And the spot price of gas is also moving like oil price. Now we have reasons to believe, with the climate revolution taking place with G7 focusing on renewables and energy is going to be incremental value for environment and efficient as well. So the long-term contracts are being attempted now, that's happening. On the non-hydrocarbon side, we have momentum. We have -- we are looking forward to see the modernization, airport, seaport, roads [ drive ] and again, [ 20-22 stadiums ] are close to completion, and we have a few fine-tuning happening. And the inflation should be in the range of 2.1% to 2.2%. GDP per capita is moving in line with that. And that's a big picture, government spending and on the infrastructure and rest of the projects is a major opportunity for one and all. Recently, Qatar Petroleum has gone into international markets. They could buy cost-effective funds, many times oversubscribed, $12.5 billion. So it's -- the momentum is on in terms of overall economics and diversification. And we have reasons to believe that, that will continue with the structured solutions which Qatar governance is embarking on. Now when it comes to Doha Bank, we have reported a profit of QAR 614 million for the first half. This is 22.7% higher than the previous years, first 6 months, QAR 501 million. If I give the split, total assets have grown year-on-year, 1.2%. Net loans and advances has grown 15.5%. I'll say here, predominantly as per our derisking strategy, we have focused on government business, government related business. So that's the major focus. Customer deposits have grown by 5.5%. Investments, we are up and down. But apparently, we had market opportunity to encash a bit on available-for-sale block. And in terms of return on shareholders' equity, it stands at 10.5%; return on average assets, 1.15%. Cost income this year stands at 27.8%, NIM is holding good at 2.44 on and NPL to gross loan is 5.64. And when it comes to the CET1 ratio, it's 13.22%, and Tier 1 ratio is around 18.85. Total CAR is 20%. Loan-to-deposit ratio in the system is 125%, we are 122%. That's the big picture. I also want to highlight to you the net interest income has grown by 18.4% operating income. It's fair of the constraints we have had during the blockade time or during the global phenomenon. On the COVID side, our operating income is ascending. Now compared to last year, we have done 11.3%, up in terms of net operating income. And that's the big picture. me, along with our Chief Risk Officer, Abhik Goswami, and also acting Chief Financial Officer, Mr. Sanjay Jain, we're all here to answer your questions. Over to you.

[Operator Instructions] And we'll now take our first question, it comes from Waleed Mohsin of Goldman Sachs.

I have 3 questions. First of all, I mean, the first half results were indeed pretty strong. But I just wanted to get a sense of some of the volatility that we saw in the second quarter. And I wanted to understand this in terms of management action. We saw some decline in NIM during the second quarter. We also saw a decline in deposits. On the NPL side, we saw some write-offs, cost of risk going up. I just want to get a sense that some of the recovery that we discussed at the first quarter earnings call. Is the bank still firmly on track to deliver that? Or you were somewhat negatively surprised by some of the trends on whether it's margin or deposits or asset quality in the second quarter? That's the first question. Secondly, if you look at historical numbers for Doha Bank, there's always this volatility where the first half turns out to be very strong and then the fourth quarter turns to be very weak with high provisions, et cetera. I want to understand if some of the management actions that you've already taken during the first half reduces that volatility and we are indeed looking at a second half, which is going to be more in line with the first half. And finally, if you could share some guidance on 2021 or your outlook for 2022, given that the macroeconomic backdrop for Qatar seems to be pretty solid with improving prospects for both loan growth and public sector business.

Thank you, Mr. Waleed. Thank you for your questions. All are valid questions. Yes, compared to the first quarter and the run rate has come down, which is measurable. I want to tell you the yield on lending has impacted across the market, as you know. The customers are consistent in terms of demand to reduce the interest rate. And Central Bank has announced prescriptions in terms of the minimum. Now customers, overall relationship and the profitability from our perspective, we look at it and we have -- we want to maintain these loyal customers. So we have made sure customer, wherever there are multiple relationships, we have yielded to the request and on yield side. On the cost side, we reduced the nonresident a bit, but nevertheless, the cost of fund is holding good. Our overall -- overall, the net interest margin is still holding good. 18.4% is what I have mentioned to you. The net interest margin, 2.44, is in line with the -- one of the best in the market now. And then the only bank I could see is Commercial Bank is also 2.45. And if you look at other banks, we are in line with the best-performing bank in terms of NIM. Now when it comes to volatility, you're right. I mean we had different deflection based on the market risk, especially when we had this blockade. Historically, when we start measuring the risk, especially on certain sectors and the cross-border, we had issues in terms of contract financing, especially on the GCC branches. So we had -- when it comes to substantial and compliance validation, we thought it's appropriate to provide for them in the past. That's what that happened. But contrary to previous years, as you rightly perceived it, the first quarter versus fourth quarter, we looked at it, we have measured it. That's why if you look at the first quarter, QAR 350 million we have taken. In the second quarter also, we have taken a similar reflection. So assuming we'll not be having -- unless the COVID turns wild and the customer debt servicing capacity is going to be impacted totally, we have measured the variables. We want to make sure the customers are at least, at the same time, they have capacity to repay. So we have taken cognizance of this fact and the sectors which are impacted. We have recognized the customers who are having some cost use. We have measured them and made sure that we have a precautionary provisions built in. So that's the reason for it. When it comes to the cost of risk, cost of risk, we should be hanging around 1.6%. And that's what the trend. I did mention last year, in April, it was 2.1. We will be oscillating based on the outcome of the COVID exercise. And if it is going to continue for long term, the consequential is applicable to the system. As we see it, we should be in a push in to hold it for this year at least between 1.6, 1.65 to 1.70 maximum. And next year, we have -- if the situation turns normal, we should -- we're bringing between 100 to 120, perhaps that after, we'll bring it down further. So these are measured, unmanaged. I suppose the deposit down is concerned, it is a conscious decision to reduce the nonresident deposits as suggested by the regulators to start with. And the local liquidity is improving. So that has increased our cost a bit that is also a factor, plus and we have matching lability in line with the book booking we have done. And last time, we had, more than the system, our local deposit was having a safety margin beyond. This time, we said we will optimize it in line with the market drive. As far as the guidance are concerned, now the loan growth should be 10.3%. And just on the sector side, 10% to 12%, I should say that it kind of happen, loan growth. Perhaps that there are possibilities of further opportunity, maximum it could be 15% loan growth here. That's what I would say. Sectors. When it comes to sectors, government, yes, mostly government would be our way forward. We did have a significant market share in the past. And one of the reasons why we got into the highest NPL this lower market share from the government side. So now, I said, let me de-risk the bank and the risk has done a good job of measuring sectors, which are impacting like contract financing and wriggling away those options. And we have brought down the contract financing from, at 28% today stands at 14%, perhaps, we'll bring it down further. And on the other side, we have market opportunities. On the private side, there are certain sectors which are doing well. The Public-Private Partnership law has been pronounced in Qatar, service side, we may look at objectivity and see that whether sufficient commitment from the government whether we can support the private business as well. So that's an option. And the trade is a bigger option, and we are going to scale up the trade finance exposure. And of course, the government business will continue to work on to see that we do the maximum. When it comes to margin, I explained to you, NPL. I can give you guidance, that it is going to be between 5.62, 5.8 or 5.9 maximum, depending upon the COVID turnout. We want to build a precautionary provision, which we are building as with a smaller, bigger medium-size entrepreneurs. And depending upon the overall new normal to normal situation, we will be posting on the NPL side. Cost side, cost/income side, I should say the guidance, again, it's going to be below 30%, definitely. And as it stands now, it's 27.8%. That should hold this or even if we have new recruitments taking place, with this -- we must find opportunity to scale up further business, we will have additional human capital to put through. So it should be, anyway, less than 30%. Now fee side, it is 15% down compared to the previous year. And there are areas where we are consciously not procuring business like contract financing where there are good fee income possibilities, but we don't want to do it. We've learned lessons out of it in the past. So I should say we should see improving the fee income in the coming days. And the rest of the guidance, it depends on the regulatory way forward, how they did on the dividend side, the regulators and the Board has to come to consensus. And we will extrapolate our performance in the current context, what we have done. It's scalable for me to see that will be the trend for the year end as well. Anything else? Mr. Waleed?

No, that's very, very helpful. Just one last follow-up. So if I kind of think about the guidance that you provided, it wouldn't be unfair to assume that your normalized ROE or even your ROE going into 2022 would be back in double digits, kind of similar levels to what you were already able to achieve in the first quarter this year.

And that's a safer statement, yes. Yes, we will be well, having the highest our return on equity in the past, so within the country definition. But now with the de-risking measures we have taken, I think double digit is possible, definitely. We'll not be peaking with a short-term focus, we will be definitely maintaining 10 plus.

We'll now take our next question. It comes from Vikram Vis of NBK Capital.

My question was on the NPL ratio. Although the NPL ratio flat, although the NPL ratio stayed flat quarter-on-quarter, adjusted for the write-offs, we saw a new NPL formation come through in Q2. Also, we saw NPL ratios increase quarter-on-quarter in both contracting and GCC exposures. Is this trend expected to continue? In the sense, should we expect to see more NPL formation in the coming quarters? Or do you think most of the book is already cleaned up?

Thank you, Vikram, for your question. And I have my CRO, and he is going to respond to your question.

Vikram, this is Abhik here. With regards to the NPL ratio, you would have seen that the bank is successfully and consistently maintaining their NPL ratio. I mean, between 5.5 and 6, let us say, yes, it was going close to 6 towards the end of last year, and then we've -- it has begun kind of trended down to 5.6 levels where it's stabilized for the last 2 quarters. However, we don't expect that it will be moving in any volatile manner over the next 2 quarters. It will be remaining in the same band. What we look forward to is 2022, wherein we think that the NPL ratio will meaningfully start coming down. And of course, qualified by some normalized conditions in terms of COVID, et cetera, which we anticipate that 2022, COVID could be coming in a sensible kind of a situation. So given that, we expect that 2022, we'll see meaningful lowering of the ratio. For 2021, we can expect it to remain in the same band.

Okay. Now actually, my question was, although on the face of it, the NPL ratio looks stable quarter-on-quarter or year-to-date. If you adjust for the write-offs, you suggest that there is new NPL formation, right? And this is the thing I'm asking. It seems like the...

Not exactly new NPL formation in those terms. I mean, yes, if I've got your question right, let me respond that this is not really a new NPL formation. It's more of conservative looking at classification. And we thought that we should take some precautionary classification and provisioning as guided by Central Bank as well. So that it's -- because of this conservative stance that existing kind of weaker assets, we have proactively taken to monitor them. And we have kind of taken precautionary measures in terms of advancing those kind of classification. So we anticipate that, if there will be tremendous new -- new in the sense that we are lending something and it's going bad in the next 1 or 2 years. It's not exactly like that. We are following up. We are restructuring. And wherever we feel by the guidance of Central Bank that we have to take some precautionary steps, we are taking that.

Okay. Just one last follow-up question on this. You said you've been reclassifying some exposures into NPLs. Is this expected to continue in the next 2 quarters? Or do you think this is largely behind us?

As I said, that this overall trend will continue in the next 2 quarters, but it will be resulting in stable parameters. We don't expect anything to be out of whatever the trend you have seen for the last 2 quarters.

[Operator Instructions] We'll now take our next question. It comes from [indiscernible].

This is it Meet. My question is -- basically, I have 3 questions. First is regarding this North field expansion, which is coming up. If we go by the industry -- some industry press releases, Qatar Petroleum is going to spend somewhere around sort of $50 billion for the expansion. So what -- in terms of the banking sector contribution, how much of loan uptake is expected loan credit update you expected now for this project out of the overall -- out of those overall project costs. So what kind of a quantum are we looking at that will come from banks. My next question is with regards to -- the next question is with regards to, do we have any, say, thresholds while we lend money on the corporate or on the retail side? Do we have any thresholds below which we do not lend money? So if we can quantify such thresholds, so that will be helpful.

Okay. Two questions, Meet. One is on the Qatar Petroleum. The project's initial cost estimates, arguably it's one of the biggest projects in the world, $29.5 billion. And that's for the North Field, the expansion. As for North Field East, as well as North Field South, which I mentioned earlier in my prepared, that it's getting up the existing capacity of oil and natural gas to [ 1.27 ] annually by 2027. Now it will have an impact on the downstream industries. So you will have, it may not be a major financier directly to the Qatar Petroleum because generally, project of this size and substance is coming with a cheaper funding from various parts of the world, whether it could be EXIM banks, whether it could be international institutions. We as local bank, I think what we all can come together and support the contracts and subcontracts down the line. So there's many collaborations going to evolve. We have seen ExxonMobil is already partnering on few. And the other international institutions are coming together. And they also need local support. With our footprint across the globe, whether it's Japan or Korea, U.K. with our [indiscernible] capacity offices sitting across, or China for the matter or India, we are exploring the possibilities to see whether we can take -- partake in these syndications, whether it is big or small or medium-sized entrepreneurs, we can explore this option to see whether we can be a financier in the [indiscernible]. That is definitely bound to happen. Like it's happening already in the non-hydrocarbon side in a measurable form. But we'll have to pick and choose what fits in to your capacity and what yield we are likely to get, that's the priority. When it comes with threshold, we don't have -- we have small and medium-sized entrepreneurs. We are going to -- we don't do micro financing even in our branches. But there are established norms for SMEs. So that's a threshold, all these regulators around the world [ sitting ] backbone for any economic momentum. So we do support this on SME criterions, or big corporates, but industry which we can choose. As I said, we will be looking at a systemic risk and see which industry we should get in so that the market risk becomes measurable -- manageable. And that's the way forward from our perspective.

Okay. So any kind -- if you want to give us some ballpark number in terms of the quantum of the credit uptake that will be driven by specifically with North Field expansion, if you can give any color on the overall banking sector side, sir, for Qatar?

I'll tell you, from our side, I mentioned the indication. I mean, Mr. Waleed asked me this question, loan growth will be in the range of 10% to 12%, perhaps -- I mean the price of GDP generally is ideal for a model economy. So that's a celebrity comes in when it comes to credit creation. So economic momentum is there in Qatar. I would expect the next year to reach around 4%, 4.5%, which means 10% is normal credit expansion. So that's what we should synchronize so that our long-term value is created. So I would say hydrocarbon side there's a definite momentum. Hydrocarbon is going to drive major growth. So easily 5%, even if the non-hydrocarbon is going to shrink because after 2022, it's a different [ reflux ]. We have to diversify it in terms of tourism or otherwise, sports tourism. And whereas hydrocarbon will continue until 2027, as I mentioned. So the government is conscious of the diversification as well as the expansion in the hydrocarbon. So our momentum will be synchronized. And we foresee, as a local player, we will come to terms in terms of trade or corporate lending and through syndications in all these project specifics. So we will explore that. But 10% is a great expansion we foresee on average for the next 5 to 6 years.

Understood. So like -- regarding my another question with regards to threshold margins, which we have while lending money. So if you can again quantify or give some color in terms of is there -- are there any specific level of margins that we would like to maintain while lending money?

2 to 2.25 should be minimum. We should may be making it so that we take care of all the stakeholders. I think that's the margin we can maintain. And the whole financial service is getting remodeled, as you know. It is -- the asset allocation model is changing, cross-selling is happening as a one-stop. So we have -- we will see how it gets evolved in the coming days. Retail is losing its momentum for transaction-based processing, all going digital, so the margins are falling. So it will be a different remodeling, I should say, in terms of banking business. And we'll explore as it gets evolved. And we are ready to innovate and collaborate to make sure that we don't lose out. We will sustain, 2% to 2.5% margin, as time will prove how the overall banking industry getting into the [indiscernible] the industry consolidation if we need a size. If you look at the changing dynamics, I would easily say that amalgamation absorptions will have a bigger role because -- borrowings -- it's becoming bottomless again. And the conventional business will become -- on the e-commerce side, that's a different discipline where the margins are so low. So it's going to be a complete [indiscernible] of the banking business in the coming days. As it stands in the next 2 years, we should be maintaining between 2% to 2.25% minimum.

It appears we have no further questions at this time. I'd like to turn the conference back to Dr. Seetharaman for any additional comments or closing remarks.

Thank you very much, and I appreciate all of your participation. And we as professional outfit, we want to make sure that we have a long -- that we create a long-term value for our investors. The short term turbulence we have had on account of the supervening events like blockade or the current COVID situation. We will strive hard to make sure that we give a sustainable value creation. And that's what our focus is all about. We'll be moderating pursuit of the measurements and we'll be making sure we have -- in the past, we've given the highest dividend-paying habit, and the policy was quite different. Now when it comes to value creation in the current context with the regulators and the rest are being conservative, but the value creation will happen. The incremental value in terms of productivity or performance will be second to none, and me and my credit team will drive hard to do that. That's the big picture. And thank you again for all your participation, and we are looking forward to associate with you time and again. For any clarifications, you can reach my CFO -- acting CFO as well as my CRO. And I'm also available to you. If you send me a mail, I'll respond to you back. Thank you all.

Thank you, Dr. Seetharaman, for the company update.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.