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

Good day, and welcome to the Doha Bank Q1 2022 Earnings Results Conference Call. Today's conference is being recorded. And at this time, I would like to hand it over to Mr. Waleed Mohsin. Please go ahead, sir.

Yes. Thank you much. Good day, everyone, and thank you very much for joining us today for Doha Bank's First Quarter 2022 Earnings Call. It is my pleasure to welcome the Doha Bank Management Team represented by Gudni Stiholt, acting CEO; Mr. Sanjay Jain, acting Chief Financial Officer; and Hesham Kalla, Head of Investor Relations. We will start the call with a brief update from Doha Bank management and then open up for Q&A. However, before we begin our call, just a quick reminder that the call is intended for analysts and investors only, and any media personnel should hang up at this moment. So without any further delay, I'll hand over the call to Gudni Stiholt. Gudni, please go ahead.

Thank you, Waleed, and welcome to the call, and thanks for joining us this afternoon. My name is Gudni Stiholt and I'm the acting CEO of Doha Bank. Before I hand it over to my colleague, Hesham, I thought it would be useful to touch upon the economic backdrop in Qatar and how that translates into future growth for the banking sector. I also want to take you through some of the strategic priorities we are operating in the bank and also end up with -- to give you some sort of guidance on the key parameters going forward, looking into the future. But of course, and I know you appreciate that those guidance will be painted with very broad paint strokes. So these Q1 results are set against a very changing economic dynamics. The backdrop is a healthy economic growth in Qatar. We are seeing economic recovery. GDP growth this year, expected to be around 3.5% compared to 1.5% last year. And the way I see it, I see 3 positive drivers at play. First is the windfall gains as hydrocarbon and oil prices continue to be elevated and remain so. Secondly, we planned LNG oil field expansion happening in the next 2 years. In addition to that, the extra demand we are going to be seeing for that product going forward, and both of these things contribute quite nicely to the economic conditions of Qatar. And the final thing I want to bring your attention to is the normalization of relations with the neighboring countries, which will directly impact both trade and tourism. We believe that this is going to translate into a good ground for loan growth in the non-hydrocarbon space, which is, of course, the space that we, the banks, operate in. There are a lot of points of reference to underpin that statement. We have the Qatar National Division, which is supported by the development strategy. And just as a point of reference, we are expecting the manufacturing sector to reach a size of close to QAR 100 billion in the next 8 years, which is an annual aggregated growth of close to 5%. That shows you the underlying dynamic of the economy. Another change -- changing economic dynamic is, of course, interest rates. As you are as aware of this as I am that the central banks around the world are fighting inflation. We are seeing rates rise both domestically and globally. And as every other bank, we will see both our assets and liabilities being repriced this year. Most of our loans are linked to the official Central Bank rate, and -- but what I can say is that the timing of these repricings are always difficult to predict, keeping in mind that we are coming out of COVID and we need to be careful when we take that thing forward. However, if we've -- if history has taught us anything in banking, then banks do make more money in a rising rate environment, and I think we're all aware of that. So with this introduction, how does this all translate into our strategy and the priorities we have? I would like to start with risk management. As you know, for the last 3 years, we have experienced a higher cost of risk than usual. And in this quarter, we witnessed, however, an improvement. The cost of risk has declined from close to 1.6%, where it was 4 years ago down to 1.23% in last quarter. Just to reinforce, better risk management is a key priority for us going forward, and now especially that will be coming through the -- out of the government-led moratorium. And we are now working more harder than ever, engaging with both our new external auditors and the regulator to make sure that these things are being kept under control. So that is kind of the first thing I would like to bring your attention to. Secondly, I'd like to believe that every cloud has a silver lining, and what COVID has actually brought to us is it has fast-tracked a lot of the digital transformation objectives that we had planned. So just to give you a few points of reference, 9 out of 10 transactions are now happening through some sort of self-service mechanism. And our payment gateway, the volume there is up 66% year-on-year, and that kind of speaks for itself. I'm not going to list all the new products we've been developing, but this is somewhere -- this is an area which we see as an opportunity for the bank. And I'd like to believe that the importance of this transformation simply cannot be overstated. Traditionally, the main focus of banks have been to grow, grow and grow. But the direction travel is changing now, and I would even like to say that value proposition has replaced the growth metrics. We can learn from experience from other regions, and I draw from Europe this time. The number of banks in Europe is down 30% in the last decade. so we have now something like 5,600 banks in Europe. However, this does not -- this isn't -- surprisingly, the economies of scale have not resulted in increased profitability. So I'm actually saying that the banks are becoming less agile and focused more on size than actual value proposition. So what I think is happening is that we are entering into some sort of a new financial ecosystem that value proposition is going to be a key priority. And this -- the reason I bring this up is that this changes the product mix banks in the future will be offering. Banks will flourish in products like savings, insurance, SME financing, wealth management, and perhaps take more of a backseat in other products. And the reason I bring this on the Doha Bank call is, effectively, our setup. We are operating the second biggest network of branches in Qatar, some 34 branches spread across the country. Now, we see this as a huge platform and steppingstone in terms of changing our business model into product-selling. And mainly -- and the end for that will be products, I think, we're going to be focusing on. So I see the retail network moving from service-oriented, transaction-based services into sales unit. And banks need to have these sales units, because these products, as I mentioned, they need [ manual work ] -- they'll need a physical presence in front of the client. So I think we're actually strategically well poised to take this transformation to the next step. This is kind of in terms of where we are in Qatar. But as you know, we also have quite a big international presence. And there, we have -- we are actually relooking at the brand's model approach. We're looking at the cost, we're looking at the product offering and the client base we're going to be servicing going forward. Effectively, we are seeking the optimal operating model for all of these branches. They're all reaching their budget, but we think more can be done, and they can't be moved into different product segments and some products highlighted now have perhaps exited. This also applies to the land properties. We have 14 land properties across the globe, so to say. They're also rolled out, but we see more optimization structure can be thought about, making the hubs in various places just to streamline the process and get more out of them. And I have high hopes for them, all of them. So this is something that we're looking at from outside of the country. Now this is strategic, but also I don't want to leave you, hand you over to Hesham before I give you a bit of a guidance of what you might expect from us in the next few quarters and years. So we manage the bank according to various performance indicators. And there are a few here that I would like to share with you. The capital ratio, and then with non-performing loans, cost-to-risk and cost-to-income ratio. Now if we start with the capital ratio, it has been proven for the last few years. In 2017, it was 17.5%. Now in this quarter, it's close to 30%. That is the high capital ratio. However, we believe that while we're going through the NPL and -- let's call it a cleanup, that we have been going through the last few years, capital ratio needs to reflect that. We expect the capital ratio at the end of this year to be around 18.5%. But going forward into the, let's say, 3- to 5-year horizon, we will try to maintain something like around 17%, 17.5%, which I think is adequate. Yes, there's the margin. That is, of course, the million-dollar question in every bank today. These metrics actually has been something that has worked in our favor through the years. We have now, in this quarter, a NIM of 2.59, which is amongst the strongest amongst Qatari banks. This has come up from -- if I just go back 2 years of -- from some 2.2%. So we're very happy with that, how that matter has been changing. The reason with that is a very strict control on our cost of funding. We are now -- we have the lowest cost of funding amongst the Qatari banks, and we held that seat, I think, now for the eighth consecutive quarters. Going forward, I think cost of funding, with the change in rate development that I described earlier, probably going to be around 2.4%, certainly caused by NIM at around 2.4% at end of this year and increase again next year to something like 2.5% or even to the current level of 2.59%, 2.6%. Non-performing loans, you see in the results that they were, at the end of Q1, 5.97%. Our guidance for this year is going to be to keep it below 6%. But of course, once we turn the corner, then we expect, in a normalized circumstances, to be around 4.5%. I think that is what can be expected. And it goes naturally into the type of business that this bank is operating in. A reflection of that is the cost of risk. As I said, it has come down from the heights of 2018 and '19, now 1.23%. For the full year estimation, I think it could be around 1.5%. But of course, going forward into longer-term relation, I think we could be looking at 90 to 100 basis points. Cost-to-income, that is a metric we have been working on quite a lot in the last few years, has come down actually quite a lot. Only 5 years ago, our cost-to-income ratio was just shy of 40%. It's now down to 28%. I mentioned the branch network. And also, if I add to that the infrastructure and IT investments we are going to be doing in the next few years, I think going forward, we should be able to keep the cost-to-income ratio just shy of 30%. Anything beyond that is going to be driven by more growth than we expect in our plan. So that leads to the last metric, return on equity, the golden end of all. And as you can see, the Q1 results show 14%. That is just a forecast for Q1. And last year, full year results showed 5.23%. We are aiming for end of this year at, let's call it, high single digits. But of course, in the longer-term horizon, we will be aiming at something above 10%, even higher than that if rates start to move quicker than anticipated. So I hope this summary of key metrics has given you a bit of insight into what to expect from Doha Bank in quarters, and hopefully, years to come. And I think I've put a stop to it there and hand over to my colleague, Hesham, to go over a few -- go on financials. But of course, I'm here to answer questions after his presentation.

Thank you, sir. Yes, so welcome all participants. Welcome all participants. As you are very well aware, and the world is aware, we are 195 days away from the largest celebration and sporting event ever witnessed in this region. You would have possibly seen in the press and on Bloomberg today that the government agency came out with staggering numbers in terms of tourism. Year-on-year, the growth has been substantial both regionally as well as from Europe. If you look at just the population metrics in September last year, it's already grown by 10%, and year-to-date, 5.6%. And a lot of those people coming in will be on the logistics and service side of a successful launch and event for FIFA. During Q1, we witnessed branch averages close to QAR 93. And as of last trade, it's about around QAR 112. As Gudni had indicated, it's a windfall from the hydrocarbon sector, including the Japan-Korean marker that was averaged around QAR 31. It's allowing the government to shore its balance sheet. And good news/bad news, unfortunately, it has also allowed them to pay down their debt that we've witnessed over the last 3 quarters. And I believe that all of you have attended most the bank calls, everyone more or less is advising or gearing towards the private sector that we believe should be quite possible to achieve anywhere between 5% and 7% in the short and the medium term. Liquidity is very strong in the system and, as Gudni also touched on, the LNG expansion. The spillover impact, we do believe, is going to allow the government to achieve their targets in diversifying the economy and increasing our activity. Gudni highlighted manufacturing were also key on trade and service sectors. In terms of key highlights, you would have seen the financials in the announcement. Profitability was QAR 401 million versus QAR 380 million, up QAR 5.6 million year-on-year. Net loans and advances closed at QAR 60 billion. Deposits, QAR 54.4 billion. The bank, again, Gudni, not only as acting CEO but also Chief Treasury of Investment, has been able to control the cost of funds against our local peers, and we saw an improvement of 7% year-on-year. Net fees and commission, also a big spike for us year-on-year of 11%. Income from investment, again, opportunities presented themselves, we took advantage of that, up 68% year-on-year. Impairments on loan and advances, everybody knows the amount of provisioning coverage that we have to work through over the next -- over the past 2 to 3 years came in a bit lower of 18%. Shareholder equity is at QAR 14 billion, and again, as Gudni indicated, QAR is very strong at 19.8%. Highlights. We are committed, and we started a funding strategy last year where, after not being in the market for 9 years, we did our first half yard, $500 million EMTN issuance. We followed it up this year with our inaugural Swiss issuance, CHF 175 million, 2-year transaction. This is part of the funding strategy, and as and when market opportunities present themselves, we will be active in this space. Also something we're very proud of. Unfortunately, due to the low volume and turnovers over the past 2, 3 years, we were kicked out of the QE Index. We realized there was a problem. We appointed 2 LPs in helping -- of driving price discovery. We wish stock price would have reacted, but nonetheless, the 2 LPs has allowed us to create a much higher turnover in volume over the last 8 months, almost up 120% year-over-year, and then we were re-included in the index as of April 1. Something else everyone is concerned about is our foreign ownership limit being revised to 100%. We, unfortunately, were not 1 of the 4 banks that were named last August. We are tracking and chasing after the Council of Ministers' approval. Our Board and shareholders did approve the revised Articles of Association, allowing the Chairman and MD to act once that approval's in place. We hope we will be able to achieve that here in the next quarter. But again, we are dependent on the Council of Ministers' approval before the QCB will approve us to revise it officially to 100% with the QCSD. With that, we thank everybody, and Waleed, please, any questions you have, fire away.

Perfect. Thank you, Hesham. Thank you, Gudni. Maybe I can kick off with a couple of questions, and then we'll open up more broadly for Q&A. So it's very, I would say, helpful and refreshing to hear from you, Gudni, in terms of the strategy of the bank. I had a couple of questions. Number one, if I were to kind of think about the major change in strategy, would it be fair to say that the focus will be on digital derisking of the balance sheet and optimizing the cost structure? Would it be a fair assessment of the change in strategy that we should kind of think about under your leadership? That would be my first question. And then secondly, when we think about some of the long-term targets you laid out, particularly on cost-to-income and cost-of-risk, you talked about a cost-to-income ratio below 30%. When we look at some of your local peers and on their kind of local business, they're talking about something like a 20% cost-to-income ratio. And when we think about cost-of-risk, you mentioned of long-term cost-of-risk somewhere in the 90 to 100 basis points range, whereas some of your peers are talking about 50 to 60 basis points on that. So my question is, why the gap? And how much time will it take to bridge that gap between Doha Bank and the local people? Those would be my 2 questions.

Thank you, Waleed. Now, let's turn to the first question in -- about the strategic priorities. And you're spot on, we are basically focusing on the business that can be driven by digitization. We're also focusing on the business that comes natural to Doha Bank. And again, I pointed out the branch network, which we think can give us a platform to launch and successfully execute some of the products I mentioned earlier. So it is definitely a bit of a change to, let's call it, a more modern bank going forward. I hope that answered the questions. So in terms of long-term target, you're absolutely right. And perhaps something we hear sitting at this side of the telephone, we're being a bit pessimistic or cautious around the cost-to-income ratio, 20% versus 30%. Now again, we have this substantial branch network. And that is, of course, is a cost element in our operations. That will continue to be a cost element, which we kind of ignore. At the same time, we're also going to be entering into some IT infrastructure projects, which would also weigh down on that. However, that being said, we're seeing that, all over the world, the branch network -- the need for branches is always under review. And 10, 15 years from now, 20 to 30 years, more branches in Qatar? That won't be. It all depends on how the usage of our products will happen, but we are planning to close our gap. It's also -- one of the reasons is also -- why we might be more cautious than some of our peers is also the way we look at our operating income. And there is a difference. There might be difference between us and some of the other banks in terms of where we see the operating income develop in the next couple of years. There is a lot of volatility in the rate environment. We see the Central Bank has been more focused on the deposit rate rather than the lending rate, so we are a bit of cautious in terms of the denominator when we look at the cost of income ratio. Cost of risk, again, we want to be cautious. There is no need to throw out or effectively to oversell and under deliver. That's why we are throwing out the number there of 90 to 100 basis points in the medium term. Of course, at the end of the day, we see, going forward that, that number could be lower, definitely also if we change the lending metrics. This is also incorporating now that what we're looking into at the moment, is -- and I'm not sure if other banks have incorporated the same, is that the composition of the balance sheet has changed. As you can see, there has been less amount of government lending, which is replaced by -- which is going to be replaced by private lending. And needless to say, that has a higher risk attached to it. And therefore, we've been slightly more cautious than you might see from some of our peers. Does that answer your question?

Yes. Both questions are addressed, Gudni. Perhaps we can ask the operator to open up for Q&A?

[Operator Instructions] I'm going to take our first question from [ Stacy Qi, Bank of America. ] Please go ahead.

I've got 2 quick questions. One is that on the NPL ratios. If I look at your Stage 3 NPL ratios, that actually increased Q-on-Q. So if you could please provide some comments on the underlying reason, please? And the second question is on the total loans. It looks like it has declined Q-on-Q. Could you please also comment on that?

Thank you for your question. What was your second question?

The loan book, why did it contract Q-on-Q?

Okay. Yes. If you look, there's a tick up in the NPL ratio from 5.83% to 5.97%. At the year-end, it was 5.83%, now it is 5.97%. See, 2 things happens when your loan growth and your balance sheet shrinks. So your denominator is going down, basically. I mean, if you look at -- your loan growth has declined in Q1. So that was a fee-dominant reason, and your end position gets magnified because of that. That's your first answer to your question. Second is, I think most of the banks, they are facing the loan repayment from the government sector. I think that's the reason that our loan has shrunk in Q1.

[Operator Instructions] Our next question comes from Chiro Ghosh in SICO.

This is Chiro Ghosh from SICO Bahrain. Two very quick questions. First is, the loan-to-deposit ratio has come down, and it's at a much more comfortable level from the investors' point of view. So just wanted to get a sense, would this be the new norm or you will again go for a high leverage book of much higher loan-to-deposit ratio of around 1.8% plus? That's the first one. And second one is, we are hearing some kind of stress in the real estate sector, which is -- I know it's counterintuitive the Qatari market. Can you throw some light on how is the -- what's the ground reality, especially in the contracting in the real estate?

Yes. Thanks for these questions. I think in terms of the LTR, and I'll try to answer that and then ask my colleague, Hesham, to cast some light on the exposure to different sectors. Now the LTR sector is -- so the LTR ratio was at 20% at Q1. Yes, this is an improvement from previous quarters. But also, we have now a new regime from the Central Bank in terms of how that ratio is being calculated. We are now allowed to include in that ratio, as funding, long-term liabilities of the bank, i.e., all liabilities exceeding 3 years can be fully incorporated. Liabilities between 2 or 3 years with a ratio of 50%, and 1 to 2 years with a ratio or a haircut cost of 75%. So that is definitely helping the ratio, which I think is a sensible thing, and I do believe this is in line with what is happening, including in your country. And -- but going forward, we are going to be able to keep that ratio around this regulatory minimum, which is 100%. We think that is a sensible thing to do. We also recognize that not all funded is created equal, and we are conscious that the loan portfolio should be funded in long-term liabilities. But again, we are focusing on diversification, first and foremost, rather than contract maturities. Now in terms of the performance of some loan sectors, namely real estate and contract financing, I think, it was you asked for. I think I'll ask Sanjay to answer that question.

On the real estate sector, if you look at our books, our NPL is asking of the lowest in the market of 2.3%. We have NPL on real estate sector. Our real estate sector, it's quite strong in Doha Bank as we have -- most of the loans have got high collaterals on that, around [ 1% to 2.7% ]. So that's a good story on the real estate. But as far as contract financing is concerned, yes, we have -- this is the contract financing. If you look at 2020 and 2021, there's quite -- a significant chunk of those loans were written off, so that brings us down our contract financing market shares down to 14% instead of -- it's used to be in the range of 28% -- or 28%, 25%. So yes, we have released this contracting sector, so that gives something positive on our side on the contracting sector.

If I may just add a small question then. Can you please remind us what percentage of the deposits are from international bank or, like, from the non-resident deposit? Because that's one of the topics that's hot in Qatar.

Yes, absolutely. We have close to 50% of our deposit -- or our funding is from abroad. And that's kind of the -- reflects or mirrors the asset of the balance sheet. We believe that these deposits provide the diversification I mentioned earlier. They are taken from various pockets and various places of the world in various products, and we believe that we are actually reaping the benefits from that product mix, not only in terms of diversification and risk assessment and risk mitigation, but also in terms of cost of funding. As I mentioned earlier, we have the lowest cost of funding amongst the banks. Part of that reason is that we've been very nimble in attracting funds from the cheapest resources we can find. You know this that Qatar is a small deposit market, and sometimes these banks seem to fight for the same deposit amongst ourselves, and that has pushed up the expense locally. We try to mitigate that by selectively taking deposits from other regions. Does that answer your question?

Yes, I got -- I'm hoping these are not very short-term deposits, right? It's not very short duration, right?

No. Effectively, if you would look -- if you split up our book in terms of local funding and foreign funding, then our foreign funding has a much greater duration than the local funding. And in fact, it has most of the term funding we get from abroad.

There are no other questions at this time.

Well, thank you all. We appreciate it. Waleed?

Of course, Hesham. So thank you much to the management team for their time on the call and answering all the questions, and thank you very much to everyone for dialing in and asking questions. If there are any other questions, I'm sure those can be directed to Hesham himself. But if there are any final comments, Hesham, Gudni or Sanjay, from your side?

No, just thanks to all for attending.

Perfect. Thank you much. This ends today's call. Thank you.

Thanks, Waleed.

Thank you. Bye-bye.

Thank you. And this will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.