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

Good day, and welcome to the Doha Bank Q4 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, sir.

Good afternoon, ladies and gentlemen. It's a pleasure for me to interact with you all. And today, with me, my Chief Treasury Investment Officer, Mr. Gudni Stiholt; and acting CFO, Mr. Sanjay Jain and also Investment Relationship Manager, Hesham Kalla are all with me. Together, we are going to present the overall performance for the year 2021 and the way forward for 2022. Qatar's big picture is solid, stable economic conditions. That predicted GDP growth is sitting at 4%. That's what IMF says. The inflation according to IMF is around 3.2%. The guidance we got is between 2.5% to 3%. And oil reserves and gas reserves are effectively used the hydrocarbon momentum, which you all know is scaling up investment partnership joint ventures are all taking place. Government fiscal side, the budget was [indiscernible] at $55 per barrel. Now the average price you all know, it should end up with fiscal surplus from a deficit, a small deficit has been focused in the budget. Currently, the big picture is -- expenditure is around QAR 200 billion. That's confined to the existing modernization, health care, education and infrastructure creation. So effectively, the financial stability is there, and overall economic momentum both in hydrocarbon as well as non-hydrocarbon is visible. Last year, the overall lending growth has gone up to 9%. Deposit growth is around 5.8%. The sectoral distribution, if you look at it, Services picking at 15%, the system I'm talking about. And Contracting sector is around 6%. Consumption is around 9%. Overall, different opportunities there in terms of trade. That's around 11% incremental growth. And government borrowing has gone up by [indiscernible]. That's a big picture. As far as Doha Bank is concerned, we have reported the numbers last week. The net profit is around QAR 704 million and significant highlights are as follows. The incremental profit is not stable. It is just flat. And we were closing the books with the IFRS standard, and the regulators have suggested to keep a precautionary provision. Accordingly, we have taken extraordinary provision. And we also have managed to moderate the dividend to 7.5%. The operating profit is up by 5.8%. The net interest income has gone up by almost 11.8% and the overall [indiscernible] strategy, which we embarked on has worked, rationalization, which turned out to be a positive impact. We have brought down the cost income ratio to 28.2% from previous year at 29.5%. Overall, if you look at the net interest margin, it stands at 2.59%. NPL to gross loans has come down from 5.98% to 5.36%. Specific provision coverage, 54.3%; total provision coverage, 84.2%; CET, 13.5%; Tier 1, 19.07%; Total capital adequacy is around 20.22% that's arguably highest in the interbank. The loan-to-deposit ratio stands at 24.4%. Total assets, there's a contraction and matching impact on the liability as well in terms of customer deposits. The government has withdrawn nearly QAR 9.2 billion from their overdraft as it is the policy to reduce the gross debt to GDP. That had an impact. Nevertheless, the private sectors are taking momentum. We expect to continue to focus both on the international trade, service sectors and again, selective contracting. Based on the budget, there are a lot of projects, including public-private partnership models are evolving. So we want to partake in those specifics. We also have selective real estates. So that is the big picture. And if you look at the indicative momentum in the marketplace, we should be taking loan growth to incrementally around 8%, between 6% to 8% is what we foresee in the coming days. And in case the government with the draws of balance, overdrafts which we have, it will have [indiscernible] the projection that we have. But nevertheless, we are working on more on the semi government side as well as public partnership side and also core private sector. Private sector's momentum, definitely, we foresee around 8% in terms of loan book. That's the basic [indiscernible] I would like to. Me and my colleagues are here to answer your questions. Over to you.

Diana, while you're polling for questions, I have a few questions I want to ask. Just a quick question. I have a few questions. Coverage ratio, I noticed is around 54%. Are you targeting 100% or slightly less, depending on the collateral? The another question is about your cost of risk. It's like around 211 basis points. What kind of cost of risk can we expect this year? And then the final point is the Tier 1 payments. That never -- you guys didn't pay the Tier 1 payment. Are you -- it's subject to QCB approval, but I don't know like is it going to happen or not? That's all I got.

Okay. As far as the Tier 1 is concerned, we have given the -- after the appropriation, we have given the recommendation to the Central Bank. Anytime it may come. I have spoken to pension fund as well. So we'll be clearing that. There's no issue on that, since we are issuing dividend. Definitely, that will be resolved. That's one. As far as the rest of the questions coverage, as you know, this is a specific provision, 54.3%. We will move up to 60% this year. Total provision coverage should go around 90% plus. And this is excluding the risk reserve which we are building, as you know. We have over QAR 1 billion is risk reserves we have. Cost of risk? Yes. The -- it's a deviation from the first 3 quarters, as I mentioned. If we have gone by the IFRS certified audited members, our provision requirement was [ 1.150 ]. We have taken the extra provision just to make sure that, if at all, there is any material impact on account of the sectoral deflection, otherwise post-COVID, then the government will adjust the incentives sometimes in April. [indiscernible]. And my indication is that we're not going to further incentivize. That's the discussion I had in January. So we said it's appropriate for us to look at objectively and provide the maximum that Central Bank recommended saying that the long-term interest provides more and that could be impacting the market. That's global, regional and local as well. So that's what the reason why cost of risk has gone up. We expect to bring it down to 1.5% in 2022.

[Operator Instructions] We will take our first question from Waleed Mohsin from Goldman Sachs.

A couple of questions from my side. I wanted to get a sense of the direction of net interest margin. We've seen some improvement in certain quarters and then there's been some volatility. So I just want to get a sense of how you're seeing asset yields performing currently, liquidity should be readably a burden given where hydrocarbon energy prices are. And then obviously, we have a global rising rate backdrop. So if you could please talk about one, the sector trends impacting NIM and then how the rates will impact your NIM outlook for this year? Secondly, in terms of loan growth, you talked about positive momentum. It seems there's been a good origination, but repayments are obviously impacting the net loan volumes. Are you seeing any indications of further repayments. Obviously, given the liquidity backdrop, the public sector can continue to repay some of the existing loans. And then obviously, there is the origination of new projects, et cetera. So just want to get your sense on a net basis as you're alluding to. How realistic is a high single-digit growth -- loan growth target for this year? And finally, just adding a third question to that. In terms of the provisioning that you've taken, the provision which the regulator asks you to take. Could you please provide some details on which sectors is the regulator concerned about and what sectors are driving that incremental provision this quarter?

Sure. The first question on the liquidity, the net interest margin, I have Gudni with me. Please?

Thanks for the question, Waleed. So the way we look at it and the angle I'm coming from is, of course, in anticipation to possible rate hikes and what is going to be the net impact on the balance sheet coming from a NIM of slightly above 2.5%, we contemplating what's going to happen with the rate changes this year and how that is going to affect the liabilities versus the asset. So if you look at the notes on our financial statements, you can see that we have just over QAR 70 billion of assets that are repriced this year versus a lower number on the liability side if we take into account the [indiscernible] numbers which are not rate sensitive. So we think net-net, the impact of rate changes, now specifically the rate changes, it's going to be, I would say, slightly positive this year or even flat. So we don't see there's going to be a lot of impact on our P&L coming from rate hikes this year. So that is kind of the big picture. So in terms of the NIM, my colleague, Sanjay, the acting CFO, will probably tell you the same news that [indiscernible] going to remain stable from where it is now.

Yes. We are expecting those NIM to remain stable -- now we have budgeted a couple of rise in 2021. So the first rise may not have an impact on the first half, but we will see minor impact happening and that NIM is going to be balancing it out in the second half, basically. I mean we do not see much on the positive side of the P&L on the NIM in the second half. The reason being that, first of all, we have to catch up with our LDI ratio. So that's actually a cost of fund. So our guidance will be around 250 basis points NIM for the year and next year.

Second question on the loan growth. Actually the government has decided, that is Ministry of Finance, their borrowing with the local banks will be reduced. That's the policy decision they have taken in some time in August last year. If you look at we had around QAR 18 billion in June closure. It was killed down in 2 quarters to over QAR 9 billion. That's a reflection we are seeing, and I have spoken to them this year, again, they said there could be some reduction, not in full scale. But we're mapping. How we are mapping? We are working on project specifics where the downstream industries are involved. And there's syndications opportunities within the claim. So a few banks are stepping in. [indiscernible] government entities, we are pushing for our bids in the coming days. We have seen some semblance of it, and I'm waiting for their approval. [indiscernible] work on semi-government and quasi-government and public private partnership models. Otherwise, as I said, the government has been focused on reduction. We have another QAR 9 billion left out in the books that may not go in total scales, few billions will go. That's what I'm anticipating. On the private sector, definite momentum, we foresee. That growth is what I mentioned as 8% incremental. Our continuing efforts to look at the market opportunities in terms of service side -- service sector, we have opportunities with growing projects, with build-operate-transfer schools and hospitals are shaping up. And we have pitched for some of them. So if that will continue, we'll partake in this either group of banks or ourselves. On the [indiscernible] side, we'll go both on the funded side as well as non-funded. On the contracting side, there are many, many cropping up, but you want to be selective. The lessons learnt in the past was very mixed in contract financing side. Now things are improving. One of the days when we had over 27% of the market. If you look at 2019, we brought it down to 13.8% now. We're very selective in terms of contract financing, and we are mapping the complete credibility of the customer as well as the market risk. And we want to make sure we are ensuring the overall security for the bank. So that will be very selective, but we will lend. On the SME and free zones, there are new crops, multinational companies are stepping in for short-term financing requirements. So there is an opportunity, again, we'll work on. 8% is possible, definitely. Overall, even if the government withdraws 5% is what I foresee a net growth in the loan book. The last part, which you mentioned -- provision side, what we have done is when the Central Bank suggested because we -- throughout the COVID, we made sure we take the prior approval before disclosure. There is -- first 9 quarters, which was endorsed by them because they look at the combined banking strength. The customer specific maybe earning good in your bank may not be the case in other banks. So their suggestions are valid most of the time. So when we close the books in line with our external audit validation that was by all the banks and auditors and Central Bank, we have agreed prior to the first quarter of closure in 2020, which at the time of COVID starting stage, we'll go by IFRS. But IFRS and QCB regulations are -- there are gaps as you know. It's wise to fix the gap. That's what we thought. And the change of governor, plus the team also is getting realigned. And when we have closed the books, we said this is what exactly the auditors want it. We agreed. Then they came with additional suggestion, saying that these are the customers we have better to be cautious. I completely provide the incremental provision wherever, even if you have collaterals in the cross-border provide 100%. In terms of legal, we told them very clearly that we have a legal recourse. We have full collaterals. And we're in advanced stage that the court judgment is in our favor, we were enforcing it, are in the final stage of court verdict. So [indiscernible] up and write it off so that you don't have to worry about it. Your books will be confined to only local market risk. That's a good advice given by the regulators. And that's why certain sectors are impacted. So it is overseas in specific terms. And if you look at the split which we have given in our analytics, it is GCC market that we have completely exempted even when there was no definite need for us to provide. We used this as a window to clear the goods. So we are in legal recourse. We expect a substantive recovery this year and the years to come. I'm confident that we will be writing a minimum of [ QAR 500 million ], maximum [ QAR 5 billion ] this year when the court verdict comes in. And we have won, as I said, many cases, in the final stage even in [indiscernible] appeal court savage is there and expert opinions are your advantage. We have -- that is a major chunk which has gone. On the local side, again, it's a contract which was residuals of the previous completion pending. There were some disruptions there. So we are provided for technically [indiscernible] regular. We are provided for and exhausted all the gaps and fixed it. That's where we stand.

We will now take the next question from Chiro Ghosh from SICO.

The first one is the Stage 2 loans still looks a bit high. So what is your outlook on this? How should we factor that in. Similarly, for the cost of risk, I think I missed this point, if you just can please remind us, say, what is the additional increment provision you had to take this quarter? I mean, I'm just trying to see should we deduct it from next year's -- our cost of risk calculations and around QAR 500 million also should we take it out from there to get our cost of risk for next year? And my next question is more related to the CASA. So do you believe that it's possible for the bank to further boost up its CASA? Yes, these are my questions.

Chiro, on the first one of Stage 2 loans, yes, you're right. I mean we still have a high Stage 2 loan, but we do not see that to grow. We are looking at somewhere in the range of 25% around Stage 2 loans. If you look at the previous quarters, we -- at one stage, we reached around 25.6%. But what has happened when loan growth was not there like [indiscernible] gone. So in percentage term, it looks high. But if you look in absolute term, we have been able to maintain that or just a bit of an improvement in the Stage 2 loan. On the cost of risk side, which we have given a guidance of 150 basis points and below, the recovery of those has not been factored here. I mean, if recovery comes in, that will be some added advantage for us. So what you say 150 basis points, the cost of risk is the conservative side you're talking about. And then that QAR 500 million to QAR 1 billion, if that comes in that will be a [indiscernible] update. On the CASA side, Gudni?

Yes, there's definitely the possibility for us to increase the CASA. There was a healthy increase last year, and we expect that to be reinforced this year. Again, as you probably know, the growth and the ways to attract deposits are changing. It's a dynamically structured market. And we are putting out new ways to attract deposit, that's going to be a major impact this year. Second to that, and the reason probably why you're asking the question is to have a view on the rate sensitivity. And mainly our strategy is to increase the CASA and secondly, lock in longer dated something, lock in something that is relatively [indiscernible] day, which is going to give us the benefit for a few years to come. So that is the dual [indiscernible] strategy, which we have in our funding plan at the moment.

And just a very quick follow-up. So this loan-to-deposit of 124%, are you planning to lower it? Then that might put some pressure on NIM mix.

Yes, we are planning. Our aim has always been to be lower than average of the market. And 124% is slightly higher than you've seen from us in the past, and our aim is to bring that number down.

And we will now take the next question from Essa Buheji with Integra Asset Management.

I just have a question on the NPLs. Obviously, you took a huge write-down this year, but still -- the NPL ratio still didn't go down that much, although [indiscernible] provision for. So it seems that there is a sizable formation that you are continuing and we see this addition in the second year now. So I just wanted to understand what is driving this? Is there a specific sector? Or is there a specific industry? And what's the outlook for this?

Okay. On the NPL side, I think we are on the stage where we are improving our NPLs. Last year, it was 5.98%, down to 5.36%. If you look at the -- you asked very right question on the NPL formation. Last year, it was QAR 4 billion, where we have been able to reduce this year to QAR 1.7 billion in the NPL formation. So where trajectory is on the positive side. And going forward, next year, we will see a significant decline in the NPL formation. And, of course, the write-offs will be [indiscernible] will be declined. So we see our -- the guidance on the NPL, we keep at the same level. We'll not do much of the write-off and there will be lesser NPL formation next year. And when it comes to the specific sector-wise, I think if you look at our sectorized based on an NPL, I think we are doing really good on real estate. So mostly the NPLs are also contracting in the corporate side, those 2 sectors.

Okay. And the Stage 2 assets like -- are you comfortable with the -- how much of -- what's the breakdown of this? And how much of this you think that is more vulnerable for a credit deterioration in the future?

As you said during the year, we took a cautious decision and we're conservative in our approach and [indiscernible]. And then if you look in absolute terms, your Stage 2 loan has gone down. As I said, we are working really hard. It doesn't go to the next level. So we'll try and reduce it in the range of 25% of the Stage 2 loans.

Yes. Let us put the big picture in place, say. What we did when we had [indiscernible] impact. One is on the blockade in 2017, two of our consequence operations were put in distress. We did still complete branches where a lot of days when we had over [ 10 billion ] exposure to that market. It's still now -- but we are reviving the new business model with a complete realignment of the business. More towards non-funded business and especially a trade side, Global trade we are concentrating from UAE. Now as a bank, what we did was to reduce the sectoral risk wherever there is a maximum sectoral risk or systemic risk and go on the government side. It was a conscious attempt to derisk the bank and even if there are a contraction in the lending side, we were making reorganization in terms of a certain location. Our investment books were moving from QAR 10 billion to QAR 28 billion, QAR 29 billion. Now it stands at QAR 25 billion. So overall operating income, we never compromised. Now the incremental [indiscernible] books have not grown. Those books, which were originally identified technically is regular in the cross borders. And some of them, very minuscule in the local market, we are responsible for this Stage 2. Essentially, as said by Sanjay, we will bring it down. And if you look back, the pre-blockade, our bad books, NPL used to be around 3 and below. We have a target to reach in 2024. So essentially -- and that's what a drive we'll be embarking on. And we are restructured a complete business model now in terms of asset allocation as well as sectoral distribution.

Okay. From previous discussions, as I recall, the GCC exposure was fully provisioned for. Is that correct?

Absolutely. So we have, as I mentioned, there were cases where auditors cleared everything. But to accommodate the additional request for -- to see the possible impact post-COVID, we thought we'll conserve the resources to the tune of around QAR 500 million to QAR 600 million. So what we did was even when there were collaterals or even court verdict, as I said earlier, we [indiscernible] the provision to maximum. Technically, we don't need to as per the IFRS standards. Now -- the opportunity now is there for us to write back. The auditor certificate on 23, we closed the books on February 9. 23rd January, we closed. So just to make sure that we have consulted with the regulators and their [indiscernible] is done is more important for us to look at the cross-border risk and the counter-party risk and we took a conservative approach.

Okay. So you're comfortable with the 1.5% cost of risk for this year?

Yes.

And we will now take the next question from Aybek Islamov from HSBC.

I think, yes, I mean you answered some of the questions I wanted to ask about the write-offs. And you said that you expect the write-offs to fall from next year. Do you mean 2023 or 2022? And when you say that the write-offs will fall, do you expect it to be below 1%, which is the level that was there before restructuring kicked off? That's my first question. The second question is, in your financial statements, you have this Page 38, where you discussed collateral valuation. And then there is 2 types of valuation of collateral against your loans, overall loan book and against your nonperforming loan book. One is valuation in line with the internal sort of policy. And the second one is sort of fair valuation for the purpose of provisioning. Now there's a big gap in collateral valuation almost like 50%. So the fair valuation is 60% lower than the evaluation based on internal policies. Can you explain what this gap is about, right? That will be very helpful. And do you expect any movement in your collateral valuation in 2022?

Yes, when it comes to the write-off. The first question on the right-off. If you look at -- we did around QAR 2.3 billion write-off and last it was QAR 4 billion. Prior to that, I think we will go to the normalized in 2022, 2023 when it comes to the write-off and the NPL formation. So I think we have done quite a good quantity NPLs and the write-offs in the past couple of years. So that is significantly going to go down. And when it comes to the...

Valuation. What we did in 2017 when the blockage took place when we had a cross-border branches. We said we will redo this determined value from our internal perspective as a policy, we want to make sure we take the lowest. And when it comes to fair valuation, we take 3 independent courts. And it is measured in line with the pretty standard IFRS framework and the Central Bank framework and we take the mean of the 2 or 3 values. Our internal policies are just to tighten the overall collaterals and ask for additional securities in case there is a reflection in the market. Those are internal facility offers, which we are given just to be more on the conservative side. Because of the lessons we have learned on the cross borders. But the fair valuation stands in line with the overall regulatory framework and also in line with the auditor's endorsement.

Okay. And just a follow-up question. Looking at your net provision expenses. They were quite below your write-offs in 2019, 2020, 2021, 3 years in a row, right? And that's the reason why your loan loss provision reserve ratio fell from sort of 7% level to 4.5% throughout this time. Now going forward, like in 2022, do you expect your net provision expenses to be in line with your write-off number, above or below?

Provisioning will be above the write-off. That's what we foresee. The last 3 years have been forceful exercise on account of the risk measurements, on account of blockade as well as COVID in general. So it was a cautious attempt, and we don't see such recurrence in the coming days.

And there are no further questions at this time. So I would like to turn the conference back to our host for any additional or closing remarks.

Thank you all. It's the pleasure to respond to all your queries and the bank is very stable and functional. We have conservative resources, very strong capital adequacy. We have [indiscernible] shareholders' money in either form for the last 5 years. And we don't need capital for the next -- at least for another 3 to 4 years. Looking at the growth momentum in the region and our structure. We have stable NPL. We'll continue to strive hard to bring it down to improve the asset quality. We'll maintain our trades as strong net interest margin holder efficiently, we'll manage our cost of funds, which we are progressively bringing down, irrespective of the stumbling blocks in the market space, we never lost sight of our operating profit even though the provision was incremental year after year. But our operating profit never came down fairly. That may be the trend. And even the provisions and write-offs, as I said earlier, will be optimized in the coming days. And we have huge scope for a legal recourse. Whatever we have provided now is all fully backed up by majority of them, I should say, with collaterals. So there is a definite opportunity for profit improvement. And that's all we aim at and the bank is having a considered vision in terms of the next 3 years with the changing phase of the world, changing phase of the financial services. We are going to be digital, customer improvement, customer experience. And again, the overall transformation, which we laid out, it is getting accelerated in the COVID phase. And we are going to make sure that some of the projects which we have embarked on are all will be executed in the coming years. Thank you for your participation, and we hope for the best.

I would like to thank Dr. Seetharaman and Doha Bank's management for the update, and we will pick this up again next quarter. Thank you, everyone.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.