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

Welcome to today's Doha Bank Q2 '22 Results Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to to begin. Janany Vamadeva, please go ahead.

Thank you, Jordan. Good morning, everyone, and thank you for joining us today. This is Janany Vamadeva. On behalf of Arqaam Capital, I'm pleased to welcome you to Doha Bank's Q2 2022 Earnings Conference Call. I have with me here today from Doha Bank management Gudni Stiholt Adalsteinsson, the acting Group Chief Executive Officer; Sanjay Jain, the acting Chief Financial Officer; and Hesham Kalla, the Head of Investor Relations. Without further ado, I'll now turn the call over to the acting Chief Executive Officer, Gudni Stiholt Adalsteinsson. Gudni, over to you.

Thank you, and good morning to everybody. Good to be on the call again with the investment and analyst vote. Just to kind of give you a bit of an update who's on the call with me. Here today, I'm joined by a couple of my colleagues, acting CFO, Sanjay Jain; Head of Treasury, Rowan Luke; Head of Credit Control, Tahir Alagha and Head of Investment Relations, Hesham Kalla. So I'm happy to report that the results are in line with our guidance as to be expected. But before I hand it over to the CFO to talk about the numbers, I thought it would be useful just to really briefly go over the economic outlook. Now one of the recurring questions we get is what is going to happen in Qatar after the World Cup. It's a fair question. The World Cup is only 112 days away. Now Qatar has come a long way since its wanted bid for the cost way, way back in 2010 when the population was only around 12.7 million. Since then, investments in infrastructure and preparation for the tournament have amounted to probably around [ 250 billion ]. So that is something. But it doesn't stop that. And the way I see it from an economic perspective is that the World Cup isn't kind of the goal itself, if I can say, so it's not a final destination, but it's rather a major landmark on a much, much longer journey. And the blueprint of that journey is the Qatar National Vision 2030, which is the way the country is aimed to change into a sustainable developed economy. Now that will mean going forward a significant amount of -- a continuous amount of infrastructure and government spending. And the key for that to be properly executed are the government finances. And as you can see now, they are stronger than ever with increase in gas production in the pipeline and also with elevated gas prices in the market as it is. So we're going to be seeing a lot of activity happening after World Cup just to name few tangible points which are not in the so-distant future. Following the World Cup, there will be Horticultural Expo in October 2023. A major event that will last for 180 days and is expected to attract some 3 million visitors. It's also going to be expansion on some developments here locally. The Pearl our neighborhood here in the north has a major expansion plan taking plate in 2024. There is expansion happening at the port, in the airport, in the metro, et cetera, et cetera. And just a couple of weeks ago, the Qatar announced its bid to host the AFC Asian Cup next summer when China has fallen out on that way. So we'll see how that happens. So all in a lot of activities. And also, I think what is important, and you still underestimate is the strategic location of Qatar being kind of a gateway between East and West. If we look at Qatar right now, it's 160 destination, which we have direct flights to, 15 million passengers will be coming into Hamad Airport annually. And that gives a tremendous amount of potential prospects here in the country. But the pipeline is not only permit -- only limited to hospitality, tourism or infrastructure -- there are also a lot of things happening here, which probably haven't been mentioned as frequently as the others. Qatar is making environmental issues now a priority. As you -- some of you might know, this is going to be the first carbon-neutral World Cup ever. And last year, the country announced its national climate change plan, which is going to mean a 25% reduction in greenhouse gas emissions by 2030. So all these diversification on the energy front will encourage new spending on construction-related projects, into sustainable energy and related infrastructure. This is something we're seeing as a great diversification play for Qatar. If I look at the -- look further afield, then IMF has just last week changed its global economic outlook, downwards by close to 0.5%. So when we look at the economic challenges further afield, we see record high inflation. We see cost and rate increases, dropped build production and even talks about possible recession. So keeping that in mind, I think the way I want to conclude on is that Qatar is in a very comfortable economic position compared to the wider world. Now going into the actual financials, just before I hand it over to the active CFO, a couple of things I want to highlight. And that is some of the things we have been working on quite busily this year. Now as you know, the rates are changing, and that is something I already mentioned, we've been tackling that on various fronts. So year-to-date deposits have grown quite healthy, close to 7%. We have also done -- 6.6% to be precise. We've also made a huge effort in terms of increasing our low-cost CASA or current act deposits which are roughly up to date just by 7%. Next the fee commission income up 22% from previous year. This is something that I'm very happy to see. Now this part of the income stream accounts for almost 40% of our profit. And we'd like to see this trend of non loan-driven revenues increasing going forward. And one thing I also want to highlight is the loan growth. In Q2, we saw a loan growth of 1.2%. Just in that quarter, which shows that we are finally making the turnaround that we expected increasing the size of the balance sheet as we have now talked about in some quarters. Not only is this happening in the loan book, but also on the investment book, which has grown year-to-date by some QAR 800 million. Now this is something we are -- we're going to be doing more of in the second half of the year. The markets are now prone for buyers. We've seen both credit spreads and rates increase, and we are definitely taking advantage of that in the market and go from being, let's call it, the net seller in to be a net buyer. So these are just the couple of highlights that I saw on my radar. But I think to go into details. I will hand it over to my colleague, Sanjay Jain.

Hi, good morning, all. Coming to the financial performance for the first half. I'll just give you just a brief on that. We are able to achieve profit of QAR 665 million for the first half as compared to QAR 640 million last year's first half, showing an increase of 8.2%. As Goodness, our fees and commission has been strong at QAR 175 million for the first half versus QAR 143 million which is up by 22.6% to be precise as compared to the first half of the last year. Our net impairment loss on loans is QAR 436 million versus last year QAR 532 million, which is 18% improvement. Our cost-to-income ratio is standing at 29.7%. Going on to the balance sheet. Our total assets stood at QAR 99 billion as compared to the last year QAR 109 billion. Our net loans and advances is at now QAR 60.7 billion as compared to last year's QAR 72.2 million. As Gudni mentioned, just now that our net loans and advances has improved by 1.2% in second quarter this year, which is an improvement. Deposit has grown from on a YTD basis, 6.6% coming from QAR 50.4 billion at December 2021 level now at QAR 53.7 billion. NPLs are stable at 5.95%. Our provision coverage on NPLs have improved to 63% as compared to 53% last year. And our capital adequacy ratio as of 30 June stood at 19.23%, which is strong and core equity is at 12.56%. So that's a brief on the financials. And I think we can take on the question, Hesham [indiscernible]

Over to you, Janany.

Before we open the floor to Q&A, I have a couple of questions, if I may. My first question is on net interest margin. So far, the Qatari banks that we've seen that have reported, have benefited from improving cost of fund, which has actually helped the net interest margin trend. But when we look at the sequential NIM trend for Doha Bank, that's a compression of about 18 bps. So I'm just trying to understand like what's different here? Like are you seeing more competition on the deposit side? Or is it more that you are unable to reprice on the asset side. If you could give us some color around that? And also like how this will impact the trend going into H2 given in the context of the recent rate hike as well?

So Rowan, perhaps want to answer that question?

Yes, sure. It's Rowan Luke here. I'm the Head of Treasury. So I think I'll address a couple of those points. Firstly, you have deposits and other liabilities. They tend to move based on market interest rates, such as software and bond yields. What you've seen over the past 6 months is that these rates have increased at a far faster pace than the Fed or the QCB has. So you tend to see that interest expense move up as where most of the loans tend to be priced off official cash rates, which are lagging the market but are now starting to catch up. With regards to going forward, look, the bank maintains a very strong liquidity profile. This is evidenced by an LCR, we have of 155% at 30 June. This excess liquidity can be utilized by secured borrowing to keep our cost of funding low without compromising any of our key liquidity metrics. I think the other point to note is that at the moment, the bank maintains the lowest cost of funds for all banks based in Qatar and has done so for a considerable period of time.

Just to add to that, Janany, if you look at Slide #12 in the presentation deck, you can see how the NIM has been developing over the last 2 years. And exactly, as Rowan was saying, is that liabilities, they repriced quicker than the assets. But now with the final change in the -- not final, but the third change in the Central Bank rate, which happened last week. We're now seeing that really the asset being repriced again, which is we, of course, welcome, but we, in most cases, we cannot really change the complete asset pricing unless the Central Bank gives us the change in the rate underlying rate. So that is not happening. And you can see that there is an improvement in the net interest margin in the recent months. And I think that is going to continue now that this catch-up is finally happening.

My next question is on cost of risk. Just wondering what you've completed the provisioning exercise under the QCB requirements for deferred loans. And in the context of like your legacy loans, how will this impact your Stage 2 and 3 loan formation in H2 be and the impact on cost of risk is low for the rest of the quarters? That would be helpful.

So I'll hand it over to my colleague Tahir in just a minute to give it a bit of introduction to that. So yes, we have -- we are in the final stages of submitting our proposal to the Central Bank, mindful of this exercise going on with other banks where we've been as to look into our Stage 2 loan portfolio. and to see which counts are really viable and which one needs to be downgraded. So we'll, of course, have a better picture of what's going to come out of that. In due course, I would say, September around that. But I am hopeful that this is going to be a very positive exercise for us. As you know, stage 2 loans in Doha Bank are high. And I hope once you've done that exercise and the right amount of cooling period, which is required by IFRS 9 that a good part of the stage 2 will then be upgraded to stage 1. So this is where we are, I think. Tahir do you want to add anything there?

Thank you, Mr. Gudni. We have completed the entire review of those accounts. And those accounts has been submitted to our external auditor for review perusing for central bank approval and the exercise should have been completed by 31st August 2022. and we don't see any deterioration, and we can see a stability in our Stage 2 customers. We don't see any drop in that. And this shows our healthy portfolio in that regard.

My last question is actually. Could you be able to share any update on the forward progress? It's very much appreciated.

Say again.

I'm sorry. Yes, the FOL progress like we haven't -- yes.

Foreign Ownership Limit?

Yes, yes, Foreign Ownership Limit.

Yes. So the Council Ministers approved us less than 30 days ago. We are one formality away from having the revision made at the QCSD, and I do anticipate that to be done soon.

Jordan, do you think we can open the floor to Q&A?

[Operator Instructions] Our first question comes from Waleed Mohsin of Goldman Sachs.

A couple of questions from my side. First, in terms of -- if you could remind us of your targets for this year and maybe for the medium term as well. And linked to this, if you can talk about some of the progress the bank has made, I know these are still early days, but you've made some progress, for example. When we look at your Stage 2 and Stage 3 coverage. They've all been boosted during the quarter. So if you could please talk about your targets for this year next year and perhaps also provide a little bit of a progress road map and what's been achieved so far. That would be very helpful, especially with focus on the Stage 2 and Stage 3 coverage, which has been augmented.

Good questions. Yes, in the Q1 call, we gave guidance on a few key parameters. And these parameters are something we manage almost on a day to day basis. So this is not something we pull out every now and then, but they are effectively the guiding light that we manage bank accordingly. So the first one was the cad ratio. We said that we will maintain that ratio between 18% and 18.5%. That is still where we aim at things. We don't see any need for capital raising in the next couple of years. So that target is the same when the growth will take place. And again, with the most of the growth happening probably 2024 and onwards. 17% is probably the right number to be sure that the capital is working efficiently. And now we also talked about the NIM. Our guidance in Q1 was 2.4%. We stick to that number. It's now 2.53%. So I would say we stick to that number, 2.4%, 2.5% is still our guidance. NPL is same guidance. We're going to be below 6%. That is what we're aiming at. cost of risk in this quarter is close to 1.5%. We expect the end of this year to be around this 1.4%, 1.5%. But under normal circumstances or let's say, when we look further afield, that number should be around 90 to 100 basis points custom income. Our guidance was to maintain that on to 30%. It depends, of course, on the income stream, but that is still where we are at things. It is now just slightly below 30%, 29.7%, but we're going to be aiming to maintain the ratio at the end of the year below 30%. And that is probably going to be the customer oration in the next couple of years. ROE targets still the same 7% to 8%. And of course, depending on the QCB exercise outcome later in the year, but I'm confident that we will stick to that. And in longer term, let's call it '24 -- '23, '24 onwards, the ROE of the bank should be in excess of 10%. Now in terms of the improved coverage ratios, Sanjay, do you want to go through that?

Yes. We have improved our coverage ratio to 63% versus last year's 53%. Our guidance for the coverage for the year end is around 60% because we see some NPL formation and there will be some write-offs will be there. So 60% specific provision coverage. And going forward, probably next year, it should be 65%. And then -- I mean, to be very frank we ideally -- our coverage, 80% is quite healthy at any given point of time, which will take, I think, a couple of years more to reach at that level. Why I'm saying 80% because our there certain loans which we have downgraded and then we do not require the 100% provision because of the high collateral, it has happened prior also. So I think, yes, this year, I think we should be able to achieve 60% coverage next year, 65% and then going forward, probably in '24, '25, we should be aiming towards that 80% approximately.

That's very helpful. Just one small follow-up. The NPL formation that you expect during the latter part of the year, which sectors is that coming from?

Tahir?

We expect that the real estate sector might have some impact due to cash flow impact on those customers.

Our next question comes from Chiro Ghosh of SICO.

I'm Chiro Ghosh from SICO Bahrain. I have 2 questions. The first one is your peers, other Qatari banks, we have seen that they are witnessing some loan growth pressure because of high liquidity with the -- or like higher revenue stream for the Qatari government. So in your zone of lending, are you witnessing something? Do you expect -- are you also expecting loan pressure on your loan book growth? That is one. And the second 1 is your cost-to-income ratio, I want to get a sense that does your cost also involve some kind of marketing expense related to the World Cup, which might not happen next year? These are my 2 questions.

You want to take the loan question first?

Yes. So in terms of the loan growth, we gave our guidance in the Q1 call for growth on our private book about 5% this year. We still stick to that number. You're absolutely right. We've seen in the -- heard in the calls of other banks that they have revised their guidance for this year, most of them. In our case, I think we're not going to do that because I would say we were quite conservative in Q1. So I don't see any reason to really revise that. Our pipeline of deals looks very healthy. So I think we should be able to reach that target. Now you mentioned the government over the government lending. It has come down from last year, and that is mostly visible in our interest income. And that is one of the major drivers there. I don't foresee the government over trucked to decrease from where it was at the end of last quarter. Now the second question?

On the cost-income ratio, yes, we have forecasted there will be some expenditure related to work up. We'll be participating certain promotions and certain expenditure direct interact will be there. And then guidance still remains 70% on the cost income ratio.

So would it be fair to assume from next year onwards 2023 onwards, the cost-to-income ratio would come down?

I wouldn't really promise you that. But if you look at the marketing expenses, yes, they are substantial in many ways, but they are outweighed by the other cost items. Keep in mind, we run quite a substantial amount, a number of branches. And as I said in the previous call, we have no immediate plans to close these branches down. We're more thinking about how we can utilize them moving from a service unit into a profit-generating sales units. So -- but while that is taking place, the cost is still there. So I'm not going to promise you that ratio is going to come down after the World Cup, no.

And one quick follow-up on my first question. So I see a lot of the other banks, they are planning to shift more of their loan books towards the public sector. Doha Bank has any such plans? Or will it stick to your current strategy of we can diversify?

Well, lended to the government, of course, is only that all the banks have been prospering towards a few things in there. In order to make money out of lend to the government, you need to have a very low cost of funding. And so we always make sure that we are positioned to be able to do that and still make decent revenues of it. So that is what we have aimed for and position ourselves quite well. Now in terms of growing with the public sector, yes, that is something we want to do. The government overdraft is, of course, moving up and down depending on gas prices, but there's definitely more to be done. Our market share government lending is very low, less than 2%. So there's definitely room for us to grow there without trying to steal too much from the bigger part of the cake. So -- this is kind of where we see it. Now in terms of other growth sectors, as we pointed out in the presentation, there are things like trade and services, which we want to grow. We have been decreasing our exposure in real estate and we have been decreasing our exposure in contracting. And we see these things, hospitality, service and trade as the areas which we want to grow. And also there were not growing from a very huge pace. So we think the opportunities are definitely there to be had.

Our next question comes from [ Wade Chao ] of QIC.

Can you hear me?

Yes, go ahead.

This is [ Bijouy ] from Epicore Investments. My question is on the write-offs that you plan to take. So what is the -- how much of this Stage 2 loans is what your guess is basically it's going to transfer back to Stage 3? And what is the plan on the write-off going forward for this year? And just we want to get a sense as to how your plan -- how -- what is the larger plan for the loan portfolio in terms of NPLs? And how should we think about the Stage 2 provisioning because your Stage 2 is 1 of the largest in the sector, but it's around 30% of the overall portfolio. So just we want to get a sense as to how those provisioning for Stage 2 will move going forward?

As Tahir -- Sanjay here. As Tahir has said that the exercise is going on with the Central Bank and auditors, we are progressing very well. We are -- we will be completing this exercise by this month. And as we have given the guidance of 5. -- the guidance of NPL below 6%. And there will be some NPL formation. I mean, all will depend on how the access has moved forward. And Gudni also clarified that there could be some -- Stage 2 loan may move to low stage 1, of course, some will move from Stage 2, Stage 3. But I think as the exercise will help us moving after a cooling period, moving from Stage 2 to Stage 1. So yes, I mean, if you look at last 3 years, we have done quite a huge, I would say, significant NPL formation and write-off. But this year, we do not see that magnitude of that kind of NPL formation and the write-offs.

Okay. Understood. And just to follow up on this. As the real estate market is improving, do you see less of a pressure in terms of maybe you can -- the collateral can be reset at a higher value? Is it something which is part of the exercise?

Well, to be frankly, there was a drop in the real estate or in the collateral against real estate. But now we can see some improvement in that sector, which is -- I think it is picking up. We expect, especially with the World Cup and as Mr. Gudni said, there are a lot of activities happening. We expect a good -- not better growth in this sector. So we are optimistic on that part. And just going back to your earlier point with regards to Stage 2, as you said, maybe we are the highest in the Stage 2 accounts. We are conducting, as you see, and as everybody sees, that we maintain our stability in terms of maintaining our Stage 2 level at a stable -- with a proper stability. We are conducting a full review, as you know, that there is a cooling period that has to be met. Based on the review, we will definitely approach QCB for upgrading certain accounts, which I believe next quarter or by year-end, some development will be visible to everybody.

Our next question comes from Mohamed Adel of AFII.

So my question, I'll take you back again to the cost-to-income ratio. So you were saying that the reason for the high cost income ratio, the bank run a large number of branches. So my questions are on the international branches. In these branches, international, profitable before provisioning? This is my first question. And then I will have a follow-up.

So just to get more clarity on the cost-to-income ratio. Yes, you're right. Part of the cost structure is the inherent set about the bank running these 25 branches here in Qatar. Now when you look at the foreign branches, namely India, Kuwait and UAE, where we have been doing a bit of restructuring or regeneration of the business model there. They're all profitable. They're all generating profit to the overall consolidated financial statement both post and prior to provisioning.

Okay. So if we can select what is the cost-to-income ratio for Qatar only?

That is actually a number that I ...

Actually, it's spread across the same level as compared with all this. See what happens is the operation, which we have in UAE, Kuwait and in that they're very pretty small, like 5% of our book is in overseas. So it's more or less the same on average.

Yes. So if I would have to look at the drivers on the cost-to-income ratio in the next, let's call it, 18 to 24 months. it would not be the cost side of things. It would rather be the denominator that we'll be focusing on. And as Rowan mentioned, the repricing of the loan portfolio has now taken place. We've done 3 exercises already there. And we expect then to the income side, the net interest income to improve going forward, which then is going to impact how the cost-to-income ratio is going to pan out in the next quarters. Keep it in mind that banks usually prising rate environment usually benefits banks in the long run.

Yes. But if I looked on cost-to-ratio of Doha Bank for the last 16 quarters or 15 quarters the banks still run a cost-to-income ratio significantly above the market here in Qatar, especially that Qatar is a small market. I mean, geographically, the size of the country is small. So you say basically that you have 35 branch here in Qatar, and we see other of your competitors have less number of branches and still they managed to squeeze more profit out of these branches. So does this effect like -- I mean, most of the banks here for Qatar ...

Yes. I mean it's a good observation. Yes, we run 25 branches here in Qatar. And some would say this is Achilles heel not a benefit. I have a different view. I think when we look at the transformation that is happening in banking currently. Banks will be less prominent in payment services. Banks will be more visible and higher-margin products being SME lending, being high net individual services, insurance, et cetera, et cetera. In order to have these services successfully executed, you need attachment with your clients. So therefore, we see the network of branches we have locally, we see that as a competitive advantage, not a cost sector. Right now, yes, we see a lot of servicing happening there. Checks being cleared, et cetera, et cetera. But we want to see that move into an area where actually these branches become profit center, where we have our private banking services, where we have sales units. And -- so this is going to go from being more of a liability to more of a profit. And I think that's the -- and perhaps in other countries, you wouldn't need so many branches, but the way that this market works in a way that we look at how we interact with our clients. They still want to have a face-to-face communication. And in order for us to sell these high-margin products, we need to help those facilities. So I look at this branch -- branch network as integrated part of the service that we provide.

Okay. So just sticking to the second question. So basically, you said there is still no plan to -- you said, okay, there is no plan to shut down any branches, but you were saying that you will turn them around. But yes, you didn't give any time line for this when we start seeing the cost-to-income ratio coming down because basically, you run cost-to-income ratio at 30% where most of the sector here in Qatar run at like, I mean, early 20s. So this is -- is the management waiting to hire a new COO to put the plan or the current management will take this role, and they will put the plan? And when we can be lessened to a plan from the current management on revamping this branches? Because I think this is one of the major problem in Doha Bank, to be honest with you.

Yes. Okay. I understand where you're coming from. Now I would say what we said in the beginning was that our customer income ratio guidance is about 30%, and we stick to that number. trying to feel like every other bank is not a strategy that we think is very useful for Doha Bank. Again, we'd rather not see the branch natural to be turned into a sales unit. I'm not ruling out there will be some pruning amongst the branches that we move from one area to another, absolutely. That is something we look into. But looking at the franchise we have now, we need those branches. And hence, we think the strategy is more to move them into support-divided strategy, which includes a higher focus or more focus on private banking. So this is where we're coming from.

Our last question comes from Ankit Mittal of HSBC.

Just one question on cost of risk. So historically, I mean, for the last 4 and 5 years, we have seen Q4 cost of risk to be significantly higher than the first 9 months. But going by this year's guidance, like earlier in the call, you mentioned cost of risk of 1.4% to 1.5% and first half cost of risk is like nearly 1.4%. So can we expect second half cost of risk to be similar and not expect any major negative surprises in the second half like given that we already have this asset quality review exercise, which is ongoing? So I just want to take some color on cost of risk for the second half.

Yes. Thank you for the question. We stick to the same guidance 1.4%, 1.5%. Keep in mind that this exercise, the Central Bank is doing with all the banks is to -- not to accelerate the downgrades of the provisioning, but rather to see if there are ways to keep accounts in Stage 2, even moving into Stage 1. So this exercise should be looked at as a positive venture. But of course, how much positive is going to be remains to be seen. But all in all, yes, we stick to the same guidance as I said, 1.4%, 1.5% for this year.

We have no further questions on the phone line, so I'll hand back for any closing remarks.

Thank you, Jordan. I would like to thank all the speakers for today's presentation and also addressing the questions. And thank you to all the participants for attending today's call. Thank you very much.

Thank you. Thank you, Janany. Thank you, everybody.

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