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

Good day, and welcome to the Doha Bank Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Seetharaman, CEO. Please go ahead, sir.

Good afternoon, gentlemen. Thank you all for joining. It's always a pleasure to have investors, and the including questions is a joy for us to collectively share our wisdom. Now, the macroeconomic update of Qatar's, let me not dwell on it. Straightaway, we'll get into the results. Q3, we reported a profit of QAR 892 million, which is 15.6% year-on-year. Total assets, QAR 103.4 billion, as a downturn of 2.9% year-on-year. I'll give you a reason in a minute. The next one is net loans and advances, QAR 64.8 billion, which is up 2.7% year-on-year. The [indiscernible] Ministry of Finance over dropped -- reduced nearly QAR 7.2 billion between the second quarter and third quarter. That had an impact on the overall total assets. And customer deposits, QAR 59.9 billion. That is 7.3% year-on-year. Total equity stands at QAR 14.4 billion. That's 5% up. Interest income, QAR 2.69 billion, is down 6.3%, as you all know, in line with the interest rate reduction across the globe. We have reached our debt servicing capacity of [ agencies ] and institutions. And that's the reason we have 6.3% reduction. Interest expense, my Treasury is here. Treasury & Investment had good news here. We have planned it well. That is down by 35.5%. Net interest income, again, as a result of interest income and interest expense is QAR 1.94 billion, which is up by 13.7%. So the operating income is up QAR 2.34 billion. I should tell you at this point, even if you look at last 3 years, net operating income was always up between 2018 to '19, 4%; '19 to '20, 7.2%. Even quarter-on-quarter, if you look at the comparison, '19 to '20 is 5.2%; and '20 to '21 is 7.1%. Now coming back to the return on equity, 10%; return on assets, 1.15%; NIM, 2.56%; NPL, 5.83%; cost-to-income ratio, 28.1%; cost of risk, 1.68%; specific provision coverage, 57%; total provision, specific provision plus ECL coverage around 88%. When it comes to CET ratios, core equity, 13.08%; total cost, 19.81%; loan-to-deposit ratio, 108.3%; loan writeoff, we have QAR 1.164 billion. And that's the essence of the performance. We're excited to respond to your questions with me, the Chief Risk Officer, Mr. Abhik Goswami; and Chief Treasury & Investment Officer, Mr. Gudni Stiholt and; acting Chief Financial Officer, Mr. Sanjay Jain. Over to you, gentlemen.

[Operator Instructions] It would appear we have no questions at this time, sir. I'd like to turn the call back to you.

Wait. This is Shahan from QNB Financial Services. I have a question regarding your provisioning for this year and possibly next year. For example, can we expect provisions for 2021 to be low -- credit provisions to be lower than last year's or in line? And can we expect a gradual drop in provisions in 2022?

Thank you, Shahan. Yes, that's going to be the case. We have incurred the maximum in the last 3 years. In fact, this year, it will be in line with the extrapolation of the 3 quarters what we have provided. So it will not be -- nowhere near the last year provision of QAR 1.8 billion.

Okay. Excellent. And another question regarding your GCC exposure, how much of your GCC exposure have you written off?

In terms of cross-border, we have written off around QAR 5 billion, QAR 5.1 billion over the years.

If I can add to that.

My Chief Risk Officer would like to say something.

Yes. See, basically, I can give you the comfort that most of the exposures in our overseas books primarily, of course, in -- which is in Kuwait and UAE, they have been provisioned. So there's hardly any exposure of what its name, which is not provisioned. And we don't expect any incremental major fallout in this region going forward.

Okay. Great.

Cross-border risk and counterparty risk we measured, and we have taken the maximum. And that's not going to be a surprise.

We do have a question on the phone from [ Vinod Suraniran ] from AllianceBernstein.

Am I audible?

Yes, Vinod. We can hear you.

Yes. I wanted to have your views on the recent Fitch ratings, was negative that it has placed the entire Qatari banking system on concerns that is increase of nonresident deposit funding. Are you in talks with Fitch to resolve that issue? And is there any possibility of ratings downgrade? Are you taking steps to resolve their concerns? I mean, any comments from you on that end?

Thank you, Vinod. Thank you for the question. And last Wednesday, we had a very intense discussion. And when this communication came, I told them, what's the basis, and they explained the basis. [ Rostered to ] GDP, and again, they are looking at the overall lending growth versus deposit growth and the split of nonresident deposits. I have a very different opinion, see. If you look at the asset -- when you say in substance, negative watch, the financial stability is subject. Now we have gone through the acid test, where we have gone through the experimentations. There were immediate reactions during the blockade from June to December. And the monetary policy has worked. Central Bank proactively supported all the local banks for improving liquidity in this mass exodus of funds in the first 3 to 4 months. And again, they disinvested a bit from the external results, and overall liquidity was brought to the previous level before the year. Perhaps you can read the numbers. It was $44 billion to -- it came to $31 billion and $30 billion, $31 billion. In terms of Central Bank, cash and all put together. It was a regression for first 3 months and then eventually by year-end, they filled the gap. Now you know the current -- the overall Central Bank cash position has improved a lot. It is touching now nearly over $55 billion to $58 billion.

External reserves are multiple market, multiple sectors. So when you compare the overall financial stability, the gross debt to GDP is one aspect in emerging market, where we have either a carbon growth or low hydrocarbon growth, which are all coming up, and we have a good scale up in terms of revenue enhancement through hydrocarbon. It was the largest project announced last year. So definitely that our recurring revenues will come over the years, and long-term contracts have been signed across the globe. So Qatar sustainability is not at stake. That's the message, number one. Number two, gas hit the GDP, apart [indiscernible] the GDP versus others, GDP versus total reserves. That's the comparison they should look at it. And again why have the banks all gone to international market? Because it's cost-effective. If you look at the overall rating, one aspect, plus Qatar's economic linkage, and the brand equity which we built in across, whether it's Japan or South Korea, Singapore, or rest of the Western economies or European economies or American economy, we have a large-scale economic linkage. And the banks and financial institutions have been looking at overall governance, economic progress and social progress and the political progress, and they see a stability in the whole frame. And the block had also reinforced self-sustenance. So we never had a problem in getting it from international funds or even pension funds or insurance companies across investment authorities, they all have pumped money across the globe. It is cost effective. That's why when we had an opportunity to borrow during the blockade term, most of the banks have experimented. And they're all stable friends, friend in need actually. There was no short of commitment from our international relationships. We experimented. It has worked. And most of the banks have availed this opportunity to be more cost effective in terms of funding. And rest of the senior debt or subordinated debt, which we borrowed also, has been well-responded over the years. You have seen it, of course, because the petroleum this time first even after 16, 17 years, they experimented, they've also got it. So we have reasons to believe they should not rush to judgment. They should look at the overall long-term vision and the allied development programs Qatar has envisaged and take a balanced view. This is what we manifested, and I'm sure there'll be concentrate in the overall scheme of things. Does it answer your question, Vinod?

Definitely. I mean, I completely agree with you.

We can now take our next question from Janany Vamadeva from Arqaam Capital.

I have a couple of questions, if I may. The NIM picked up nicely during the quarter on a sequential basis. I'm just wondering whether you could show some color on the drivers, mainly the asset yield has improved? And just wondering if there are some one-offs in Q2? Or should we expect this Q3 trend to sort of continue into Q4?

Good question. Thank you for asking this question. My Treasurer is here. I can tell you at a macro level, the gross yield on lending has come down. If you see the percentage as well as interest rate, we have revised it to support the overall debt servicing, as I mentioned in the preface. Now the cost of fund has come down because the overall local liquidity has improved. In addition, international support we have had from various countries, as I just mentioned, were all cost effective in the current context. Now well, the margin will hold good in case if there are new promulgations to reduce the nonresident deposit, even to -- gradually over the period of time, there could be -- NIM will go down. Gross [indiscernible] will go up. Am I right, mister...

Yes. Just to add there, there is no one-offs in Q2 or Q3 so generic Q3. There's a tick-up a little bit, some fractional tick-up happened because of the government [indiscernible] over the last moment, so that reduces your average interest earnings. So that's the thing. Going forward, I will still remain our guidance for Q4 around 2.4%. And next year, we still see because whether you call it the Fitch or [ S&P ] going forward, the rate interest and rate revision happens. So we may see some attrition of 10 basis points, 10 to 15 basis points next year. So we have guidance for the next year around 2.25% to 2.4%.

And my next question is on NPL formation. So in Q3, NPL formation, when you include the writeoffs as well, it was 0. So how sustainable is that? And given the deferral is going to end as well, like how do you see NPL formation and asset quality in your banks domestically and, of course, outside Qatar as well?

Well, let me take this question. This is Abhik Goswami, CRO of the bank. See, One thing is there, that most of our incremental NPLs, et cetera, are actually basically on the basis of precautionary provisions taken or precautionary downgrades done in discussion with the Qatar Central Bank as well as our auditors -- external auditors in view of the environment, which of course, you will appreciate over the last 1, 1.5 years and the fallout also, which we anticipate something will be there in 2022 when the government support programs are lifted. So apart from that, these are not something which has happened to customers which we have onboarded in the last 1, 1.5 years. These are customers which, as anticipated, might weaken. And in view of that, we have been restructuring to align their debt repayment capability with the cash flows and the terms of repayment that we have. In addition to that, wherever required, we have taken some precautionary provisions and precautionary downgrading. Will this go up? We don't think it will go on. Yes, to some extent, it might happen also but at a reduced level compared to what has happened. So it is steadily going down, definitely, as the books are cleaner, and also the incremental impact of the COVID crisis, et cetera, are reduced. So 2020 was high. 2021 was -- is much -- it is a little bit there, but it will be reduced compared to that. And 2022 will be even further reduced. By 2023, we anticipate the books will be much, much cleaner, and the cost of risk will mostly come down to normative levels, normal levels of the pre -- or pre-blockade levels. So that is the overall picture if that helps you.

And my last question is on FOL. Could you give us any update in terms of like where you stand after the Board approval? That would be helpful because we have not seen anyone issuing a notice for the EGM. So any color on that would be helpful.

This is Hesham. Yes. So as I might have shared with you in the e-mail that once the Board recommended the adoption of the 100% foreign ownership limit, the bank wrote to the Ministry of Commerce and Industry, there is a lag in between us and holding the EGM. We require the council ministers to actually approve it. So once that happens, you could probably appreciate that all the banks or the major -- banks that are the most -- sorry, let me rephrase that. The listed companies that are due to receive significant inflows from the various investors should take place in Q1. And that would be in line with the rebound of MSCI and FTSE in April and May.

So it's more Q1 event, Q1/Q2?

It will be a Q1 event, but the benefit of having that -- those limits revised after the QCSD puts it on the registry would be in time for the MSCI and FTSE rebalances.

We can now take our next question from [ Sawsan Ali ] from SICO Bank.

This is Chiro Ghosh from SICO Bahrain. A very quick question is, I want to get a sense of your strategy going forward, especially from the liquidity side because, if you look at your peer bank, they are going for a much higher loan-to-deposit strategy, while you seems to be going more towards that 100% or 110% zone. So just want to get a sense of what is the liquidity seen on the ground? And what is the way ahead for you? And that's -- and even second question is also related to your strategy going forward is, would you continue to be primarily public sector focused? I mean, the loan growth or the private sector would also be a big chunk of your loan growth? Yes, these are my two questions.

First question, my Head of Treasury & Investments unit.

Yes. So in terms of the loan-to-deposit ratio, we have amongst the lowest ratio amongst the banks, which is a good thing. High ratio is the negative thing. So you might have got the performance slightly twisted there. However, for us to look at it, we try to balance two things: cost of funding and duration. Again, we have benefited from our foreign source funding. If you look at it, foreign funding is usually 50 basis point cheaper than local funding. That has definitely benefited us until now. And we take advantage of that. If you look at our numbers, we have the lowest cost of funding of all the Qatari banks, standing now at 1.16%. That has given us a huge competitive advantage as the CEO has explained, the strategy of the bank is to pursue more government lending. And in order to do that and make and meet and have a decided return to profitability, you need to have low cost of funding, and that is our game #1. And the second game is, of course, to do that within the risk parameters which we set ourselves. And in order to do that, diversification is key. And when I say that, I mean diversification not only in terms of products but also geographies. Local deposits, as good as they may be, and this is something we've been highlighting to the Fitch rating agency, as good as they may be, they, of course, fluctuate with oil prices, et cetera, et cetera, whereas if we have a right level of foreign deposits, preferably from various jurisdictions, you are enabling and harvesting diversification. We are going to be embarking on that journey going forward. We're going to be low -- decreasing the emphasis on shorter-term deposits and increasing the emphasis on long-term funding. We have already been once in the market this year with an EMTM issue, and we're contemplating to go again to the market, again, reaping the benefits of the low interest rate environment and adding duration to the balance sheet. Does that answer your question?

Yes, it definitely does. No, because some banks are increasing their loan to deposit maybe to support their margins, so from that context, I was trying to ask. Of course, the lower...

Yes. That's good. But historically, if you look at -- I mean, Doha Bank is always beating the LDR ratio as compared to the system. And currently, September system is 124 and 108. So guidance for us, I mean, it should be in the range of 115% plus minus 5%. So we should keep our LDR ratio to that engine, and that's -- I mean if you, look at it, despite that LDR ratio, I think we're doing good in them. So I think we're comfortable with that LDR ratio.

On the growth part of it, we have to concentrate on public sector. Now the government overdraft is a concern. I mean, it has come down substantially between the second quarter, third quarter, as I mentioned. So we have to look at semi-government, other government enterprises, not necessarily the Ministry of Finance, which we used to leverage on it. They're reduced in the system. That's one aspect, which the government is planning to reduce the gross debt to GDP in line with the statement which came from Fitch, I suppose. And our way forward will be -- we have to look at the rest of the public sector. Now we have public-private partnership models evolving for service sectors. We will [ deliver ] on it. We'll go on private sector. We have industries are doing well as other trade is growing. So we have to look at the private sector loan booking more and more. Ghosh?

Yes, just one quick thing. I don't know whether I missed it or not. The UAE asset quality concern, which you had, so do you expect some kind of recovery or unlikely?

Yes, as we have legal, and of course, slope that we have taken substantial provision for UAE over the years. Now we need to get the legal cases sorted out. Our lawyers are working on this.

We can now take your next question from Ankit Mittal from HSBC.

So I just wanted to know like out of the total public sector loan, how big are the government overdraft? So what's the percentage of government draft as a percentage of public sector loans and this outlook on public sector loan growth for next year and overall loan growth? But if public sector loan remains like weak, what would be the like loan growth for next year? And secondly, on the same point, so if the share of government loan comes down, what would be the implications on asset yields and margins? So if the private sector exposure goes up, will that be an improvement in asset yields and NIMs? And just last question on cost of risk. So what would be the outlook on cost of risk for next year, any quantitative initial estimates for next year? That's about it from my side.

Yes, I'll take your question. First on the government, the split of the government is on 40-60, 40% of the government is temporary sourcing, which comes over the [ wood rock ], which we mentioned in the last call. So -- and which comes and goes. So that's, I think, a majority of that has been gone, to be very frank with you. And I'm not sure on the future, there could be a possibility of that, but we have 60% that there could be some attrition we could see. As you just now answered the question on the loan growth in the private sector, we are well aware that the contracting, we are not going to grow. We have very limited scope on the real estate. The sector which has left us reeling industry and services, which is -- there's enough room and there's a lot of projects that are coming through, and then we'll participate in that. So that's on it. On the cost of risk, we have a guidance on this year-end around 170 to 175 basis points and next year, below 150 basis points. And Abhik just still mentioned that, 2023 onwards, we should go to a normalized pre-COVID. If you look at 2017, we had a cost of risk of 100 basis points. So we may achieve that in 2023.

Okay. And just on my question of -- so now that the government overdrafts are going away, so any implications on asset teams? Because I assume they would be at a lower rate as compared to, say, other public sector loans and private sector loans?

Correct. It impacts, but so that material, you know that they are very -- the sector which we are targeting growth on, and there will be a lot of competitions happening. So we will have some sort of very competitive pricing. If you were to grab those loans in the future, like CSA, most of the things, what sort of growth is going to happen, if at all. Next year is through those 2, 3 sectors. So there'll be a lot of competition. But we are very selective in our approach while picking. So when you're selecting, you have to shed some of your yield on that side. So that's going to balance out. Plus if you look at our cost of funds is going to go, as Gudni mentioned, your nonresident deposit is not going to be sustainable for the next year. We need to reduce that. So that will balance out on new maintenance.

We can take our next question...

This would be the last, please.

Okay. Very good. We can take our next question from Waleed Mohsin from Goldman Sachs.

Thank you for the presentation. Firstly, I wanted to kind of confirm that the guidance for 2022 you are effectively downgrading your cost of risk guidance or increasing the cost risk number? Because if I remember correctly, on the last call, the expectation was 150 to 160 for this year. It seems it's more going to be around 170 basis points mark. And then my understanding was that, by 2022, we're expecting around 120 basis points cost of risk. So are we expecting the normalization to take longer than expected? And then obviously, it seems that the expectation around loan growth is a little bit more muted than it was previously. So that's one question on guidance. And then just quickly moving to the other couple of questions I have for you. The capital position seems to be pretty solid. It's one of the best core capital ratios we've seen in a while. How do you think about the capital position? Are you now in a position where you're slightly overcapitalized, especially given the lower-growth opportunities? Or is it going to be a function of doing more private sector? And given that that's high-risk weight that is going to absorb that? And the final question I have is that you have some very useful disclosure on digital, which shows tick-up in digital transactions. I want to understand if you're starting to see some benefit of that in terms of your cost strategy and how this can, in the medium term, lower your cost base.

Okay. I understand you have 3 questions, one on the costs, right, and on CAR, and the guidance of the cost of risk, right?

That's right.

So as cost is concerned, we have fit the bottom sort of the -- if you look at this in Q2, there's some tick-up on the staff cost and admin cost. Now things are a bit changing in the sense that now all the banks are going towards digitization and some sort of expenditure, which Doha Bank is also following. So next year, we see cost growth of around 5% in totality. And coming to your CAR, yes, we are about the strongest in CAR. And given the...

Cost of risk [indiscernible]

Yes. Okay. [indiscernible] Yes. On the CAR side, we have the strongest CAR, which is around 19.81%. If you look at the government sector, it's gone now. When we go in the private sector, you will see some -- your CAR is going to be impacted by at least 100 basis points. So we see next year, our CAR in the range of 18.5% to 19% because of the loan growth which is going to happen. And coming back to the cost of risk, yes, we have given guidance around 150, 160 basis point. But given the scenario of what we have, we just revised our cost of risk guidance, just so we told that's around [ 160 ] to 170 basis point. The earlier guidance was 120 to 130 basis points for next year, which we have revised to 150 basis points.

Got it. Understood. And just maybe a follow-up on this then. So you said loan growth will obviously absorb some of the capital. So then I mean, if I were to ask more explicitly what kind of loan growth are you looking at for next year?

We expect at least 5% growth. This year is going to be flat because of the government oil gas reduction, functional reduction [indiscernible]. Next year, again, we foresee around 5% from the base. So the market should grow around 3%. Our trade expansion should be around 5%. This is what projection is all about.

Thank you all.

Thank you. That's all the time we have for questions today. I'd now like to turn the call back to our hosts for any additional or closing remarks.

Thank you. I would like to thank Dr. Seetharaman and Doha Bank's management for giving us an update, and we can pick this up again next quarter.

Yes. Just to conclude from my side as well, we conserve the resources. We have a strong capital adequacy ratio. We have stable NPL. We have strong NIM, efficient cost fund management, strong liquidity again, operating income has been steadily improving, profit should also be consistently growing up. This is what our way forward is likely to be. That's the big picture in time. Thank you all for the participation. Thank you.

Thank you, sir. This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.