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

Hello, and welcome to the Doha Bank's Third Quarter 2022 Earnings Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Elena Sanchez to begin today's conference. Thank you.

Thank you, Caroline. Good afternoon, everyone. This is Elena Sanchez. On behalf of EFG Hermes, I would like to welcome you all to Doha Bank's Q3 2022 results call. We have with us in the call as speakers from Doha Bank, Mr. Gudni Stiholt Adalsteinsson, Acting CEO; Mr. Sanjay Jain, Acting CFO; and Mr. Hesham Kalla, Head of Investor Relations. The call will begin with a brief presentation from management on the key operational highlights of Q3 2022, and then we can move on to the Q&A. At this point, I would like to hand over the call to Mr. Gudni. Please go ahead.

Thank you, Elena, and good afternoon to all, and welcome to this call. So before we dive into the financial highlights, I want to take a minute to update you on the progress we made on some of the key initiatives I introduced to the call in Q1. So I want to go through the areas which I think we made satisfactory progress, but also touch base on the things that more work is needed. And also during the call, we noted on the performance scorecard it was an important time and also some forward guidance. So in terms of our strategy, we are not backing on our 11-point action plan. That plan incorporates many of the initiatives I mentioned in our previous calls, such as the streamlining of our domestic and international branches, and this is all taking place as we speak. We've already closed one of our branches in India and merged that business with the remaining branches. We are exiting all mass retail business in all of these countries, relocating premises, redefining business models, et cetera, et cetera. So this will all contribute to a lower cost and increased revenues. And I'm happy to report that all the foreign branches now have a positive operating income. In Q1, also mentioned the local operating model, which we are now redefining into a narrower yet more profitable customer segment. This means different needs and utilization for our branch network going forward. And this work is already taking place as we speak and will going forward contribute to a lower operating cost. I have high hopes for this 11-point action plan. This is going to be implemented over a period of 3 years. And it's effectively has 3 components to it: organization changes, new business development and changes in our processes. All in all, we believe that this could generate or contribute close to QAR 1 billion to the bottom line over the next 5 years. So now to the financial highlights. Again, I'm referring to Q1 as a reference point. I think that is a good discipline to keep. In Q1, I mentioned that one of our biggest -- one of the biggest themes or external factors this year would be the change in the interest rate environment. And I think that was not an overstatement and we can see that in our Q3 results. In terms of our interest income, I think we can look at our year as -- well, as a game of 2 halves. You notice that both our interest income and the fact our operating income in Q3 show an improvement from the previous quarter, but a decline year-on-year. There are a few drivers behind this development. Now the main reason is what took place in the first 2 quarters this year. And more -- or I would say, especially in the second quarter when we had a drop in our net interest income. Now this happened as our liabilities, they repriced much quicker and earlier than our assets. Keep in mind that our assets are mainly linked to the official Central Bank rate, and hence, they can only reprice once that rate is changed by the Central Bank, and that happened later in the year. Secondly, we saw the official rate for deposits and loans not moving parallel. In fact, the first -- official lending rate increased by 2%, whereas the deposit rate increased by 2.75%. So this is a 75% difference, which, of course, impacts our books. Finally, I think it's worth mentioning that earlier this year we amended our liability strategy. We thought it was necessary to rely less on foreign funding. This is something that the Central Bank and the rating agencies have mentioned before. And hence, we have decreased our non-res funding from 40% -- 46% of our funding now down to 26% in this quarter. As local funding is more expensive than offshore funding, this has impacted our cost of funds. But as I said, I believe this is a game of 2 halves, as in Q3, we saw this trend reserve, both the net interest income and op income improved from previous quarter. And the numbers I'm seeing now for October confirm the same trend at accelerated pace. So again, it's a game of 2 halves. And one thing I want to add to that is that our cost of funding still remains one of the lowest amongst Qatari banks. There are other things that were happening in -- that happened during Q3. One of the things I'm extremely proud of is the progress we made on fee and commission income, which is up 23% year-on-year or 4% quarter-on-quarter. This is something that we had been anticipating; in a way that we anticipated that loan growth might surprise us on the negative side this year, so we put a lot of emphasis earlier this year to increase fee income, non-lending income. This is not about trying to charge more -- I mean, after all, we are in a highly competitive environment -- but rather to increase transaction volumes. And with the right product offerings, especially around in our credit card business, we have managed to break all records in that area, and the results are there on the -- in the numbers there. Now again, Q1 and Q2 guidance relays only so much what's going to happen about loan growth. If you look at the results, you see that long-term advances are down 10% year-to-date. And we have included some additional breakdown in the investor presentation for further clarification, what we left on. The biggest contributor to the headline number is the drop in government lending or the overdraft, so to say, which is down QAR 6.1 billion or close to 70%. The private sector loan growth has been lower than we anticipated in our previous calls. There's no doubt about that. But I see the same holds true for most of the other banks. So year-to-date, the private sector loan book is flat or down 0.6%. We have tightened our underwriting criteria during this year, but I think the main reason lies elsewhere. It seems that during COVID there was a buildup of loan settlements, which then subsequently happened during this year, something we -- I think nobody expected. So in spite of us booking over QAR 5 billion of new business, this year, the net outcome so far has been -- again, been flat. However, this quarter, we seem to be off to a very good start. And so, hopefully, we'll be seeing a flat or slight improvement in our loans advances before year end. Provisioning, this is something that we are focusing quite heavily on. The provision coverage is now 64%, which is up from 57% same time last year. This will continue. We have a path for this metric going forward. And first is to highlight, we have now launched the ESG Bond Committee, which is in the process of authorizing to implement our framework, which then is going to lead to our first green bond probably in the next year to come. Now over to the performance scorecard, which I promised I would give you an update on every quarter. Let's start with the capital ratios. At the beginning of the year, we -- in the call that we talked about that we would for this year have a capital ratio of 18% to 18.5%. That is unchanged. We continued this year of probably 19.5%. We'll see what happens. But it's definitely higher than our target. But looking ahead, I think we will aim at maintaining a cap ratio of 70% at minimum. NIM, we saw improvement quarter-on-quarter. It's now 2.57% versus 2.53% in Q2. Between now and year end, same number, slightly increased. So let's call it 2.5%, 2.6%. But going forward, I think our long-term guidance is more around 2.5% as we expect more pickup in the semi government sector, which, of course, has a premium margin attached to it. But still 2.5% I think is a decent return on the business. NPL, our guidance remains the same. We are going to try to stay below 6%. But again, of course, we have to look at that in relation to the denominator. Right now, that number is 5.95%. Cost of risk, our guidance in the Q1 call was around 1.5%. In respect to this year, it's going to be slightly a higher number. I think we're going to end up perhaps 1.6%, 1.65%, as we're seeing some formation from our real estate sector, again, also depending on the volumes that we have. But going forward, looking ahead, 120 to 130 basis points is where we should be at. Cost-to-income ratio, the number remains the same, 30% is where we are right now. But one of the initiatives or one of the ingredients in this 5-year plan I talked about is a strategic plan to lower our cost-to-income ratio, where we have a target of 35% at the end of that period. So that is something we are working on quite closely. ROE, we are right now at 10%. We think we're going to be lower than that, in single digits this year, let's call it, 7%, 7.5%. But of course, going forward, it's going to be above 10%. And again, in our strategic plan, the target is to gradually double the ROE over this 5-year period. Now I think I've covered the main highlights of the Q3 results. And I think now we open for Q&A.

Thank you, Mr. Gudni for the presentation and the comments on Q3 results. Perhaps a couple of questions from me before we move on to the Q&A. Just I was wondering if you could share some comments on the loan review by the Qatar Central Bank, which I think ended in August this year. I don't know if you can share some thoughts about the implications of such review, whether we could expect either downgrades of Stage 2 loans to NPLs or potentially write-offs. If you could comment on that, that would be great. And also, if there are some implications from that QCB loan review, is that going to be reflected in the Q4 2022 numbers? Or it can also spill over to 2023?

Yes. This is Tahir. With regards to your question with regards to loan loss review, it is in progress. It has not been completed as of now. And once completed, definitely, it will be reflected in the fourth quarter figures. And there -- I cannot give a comment -- any comment on a figure. That has been -- has to be taken -- will -- it is subject to the discussion with Central Bank -- ourself and Central Bank and the auditors, of course. So that will take a little time. And we will definitely update all the stakeholders in the next meeting.

I think generally, the outcome of that plan is supposed to be a positive one. This is not a one -- an exercise to downgrade more than we would usually do on the IFRS 9, preferably the opposite. So hopefully, what we see on this -- well, we'll have more clarity at the end of the year, beginning of next year. But hopefully, with this restructuring, 12 months after that, we should be seeing some of these accounts migrating up to Stage 1.

All right. Caroline, if we can move on now to the Q&A, please?

[Operator Instructions] We will take the first question from line, Waleed Mohsin from Goldman Sachs.

A couple of questions, more kind of sector level, which I wanted to get your thoughts on. So number one, I mean, one of the risks that I see to your ROE aspirations is weaker than expected loan growth. And I was wondering -- I mean, given that there is enough liquidity at the government level, do you see the risk that over the next year as well we will continue to see a contraction in loan book and the benefit of, let's say, balance sheet growth, et cetera, will not come through and that will continue to weigh on your profitability profile. So that's the first one. If we could talk about basically what projects do you see or what signs do you see that loan growth will actually materialize next year? And then secondly, on liquidity. I mean, this time, it seems that broadly across the Gulf despite high energy prices, liquidity in the banking system continues to be relatively tight. And with the changes in the Central Bank regulation around how they look at the NSFR ratio, banks have to effectively pay up for resident deposits. So if you could also give us a mark-to-market on what's happening on the liquidity situation locally and how it would impact your margins going forward? That would be much appreciated.

Now in terms of the loan growth, I think the reductions that you are saying could be happening -- I would say, it has already happened. I mean, we're down 70% in terms of the core government lending year-to-date and not much left to gain. So I don't see that as a major threat. The target groups or the target segments we are going to be focusing on are going to be the government-related entities, the quasi government-related entities, which most -- which have lending requirements, so borrowing requirements, so to say. How to start planning to a growth traction or strategy for Doha Bank, the answer is quite simple. We have a very low market share in that market. It's less than 2%, whereas most of the other banks are ranging, well, at least top of that. So just by focusing on that segment -- we have done the necessary preparation to be eligible and have a piece of that pie, so to say, just by taking that market share from this less than 2% up to 4%, which is definitely where we should be at -- actually, we should be higher. That will give us enough loan growth for next year. So that is kind of the biggest tunnel, I would say, of growth next year. Just like the other banks have probably said on their calls, we are expecting growth next year, especially the second half of that year. But I'll say, most of this growth we see probably coming from the government-related equities. Now in terms of liquidity, we have not really seen anything that I would call a liquidity constraint. There's ample liquidity -- much more liquidity than we needed in Qatar riyals, of course, less in dollars, but that is just because of the foreign currency. Now with dollars coming into the semi-government companies probably like never before, we're seeing that come topping up also amongst the banks. So we don't really see a tight liquidity situation, so to say. It is, however, what I've just said, that now that we switched from a lot of international funding, offshore funding to local funding, it has impacted our cost of funding. The offshore funding is on average 1% cheaper than local funding. And this year, we have moved close to QAR 10 billion of funding from offshore to onshore. So you can just imagine the impact that has had. But we have done that. We did that and know what we're doing. This is a one-off thing, realigning our strategy. And now the cost implication and things have already been taken into account in our results. Does that answer your question?

Yes. Yes, it does. I mean just on the first point, playing devil's advocate. So next year, let's say --I mean, what I'm wondering is that despite private sector to be the driver or some of the GREs to be the driver, what if the government spending continues to be slow domestically and the -- let's say, the hydrocarbon liquidity keeps getting channeled outside. Would that not pose a threat to local private sector activity as well, because -- I mean, when we think about the underlying projects, there are a few. But relative to the size of the banking system, they still seem to be relatively small. Are we missing something?

No, I think if you look at what the government is trying to do, is to utilize the windfall gain they are now receiving on the oil and gas to establish other sectors in Qatar. And they have done quite a lot in that area. So I think there is enough -- let's say, there is enough money to go around and the government makes sure that this is going to be incentivized in various business sectors. So not overly worried about that. People are saying there will be -- and I'm hearing this from other calls, there will be a bit of a slow Q1. That might happen. But there's plenty of projects that are waiting to take place later next year and the years to come. And these are quite -- if you look at them, they are -- they value quite a lot in terms of the sectors that will be impacted, positively impacted that is. So I'm not overly worried about that.

We will take the next question from line, [ Nikhil ] from [ VP ].

Yes. Maybe I misunderstood, but I wanted to understand -- we can understand, you're saying the first quarter could be lower in terms of loan growth. But hence -- after that, maybe from -- maybe mid-2023, you could be seeing loans maybe from LNG and other projects which could be helping it out. But I just wanted to know on your existing loans in terms of real estate. I mean given the fact that in comparison to other peer group, it is quite high still. Do you see any -- in terms of provisions from there increasing? Similarly, likewise for contract financing, especially in the light of SMEs for the government, social obligations which could be there, and QCB hardening the rules for the fourth quarter likely, auditing could be taking place and which could increase your provision on that particular segment. Can you throw some light on this, sir?

This is [ Tahir ]. Well, as I said earlier, the review has been going on between us and the auditors and Central Bank, which will be completed by -- could be by this -- next month. And I don't see there will be a dramatic change or a big impact on that. That will be disclosed based on after finalization of our review with Central Bank and the auditors.

So in terms of our kind of lending strategy and asset allocation, we have reviewed the historical data, and we can see that the real estate loans, well, almost by definition, have a lesser likelihood or propensity to end up in bad loans. I mean there is always this intrinsic value of the underlying asset that can be utilized. This is not the case, of course, with contract financing and other areas. So therefore, we have been consciously aware of that and trying to pick a spot. We say real estate is definitely not the worst sector to be exposed to.

We will take the next question from the line, [ Jero ] from [ Seco ].

The first one is related to the fees income. So the fees income has gone up quite well. So how sustainable is this? If you can throw some light. And I don't know whether I missed this or not. From the OpEx side, so do you believe there are more potential for you to lower it? Or like -- basically lower your cost-to-income ratio?

Yes. In terms of the commission income, yes, it is -- this is not a windfall gain, one-off item, not at all. This is based on various business units. Most of it, I would say, is coming from retail franchise, product development that is happening there. More is yet to come. We have much to gain, I was going to say, lead position in this market as volumes have significantly increased year-on-year due to the products that are out there. And so I don't see this as -- the growth might not be as robust as it is now. But I don't see this as a onetime event, so I think it's going to continue. And we really must like this part of our income. This is compensating for, as you know, perhaps less loan growth as we would like to see. So we need to find the other alternative guarantee to make up for that shortfall, which we're definitely doing. And the [indiscernible] is to, going forward, to contribute proportionally more to the bottom line than it is now. So I believe this is -- we are committed to continue along those lines. Now cost-to-income ratio, our expenses quarter-on-quarter are flat. Staff cost is down slightly, 4%, I think, quarter-on-quarter. Now this 5-year plan that I keep on bringing to the picture, it has a target of 25% cost-to-income ratio. And this is something we are acutely aware of. We are aware of what our competitors are doing and we are also aware of our current situation. So we will have to take the cost-to-income ratio down to a different number. That we're going to do with 2 means: strict cost control, rationalization of the operations that we have, as I already mentioned. I mentioned the local branch network, also the foreign branches. But also growth in revenues. So definitely, we are aiming for a lower cost-to-income ratio.

We will take the next question from line, [ Riaz ] from [ Indigo ].

I just had one question regarding the QCB review. And I just want to understand -- I know you cannot comment on that, but given the Stage 2 assets and [indiscernible] clearly there will be some shift there at least. The question is...

Sorry. We are unable to hear the question. Can you repeat again, please?

Can you hear me now?

This is better. Yes, please go ahead.

Yes. I just want to ask about the QCB review and the Stage 2 assets. I just want to ask how comfortable are you in terms of the capital base? Because you assume like, let's say, 10% of Stage 2 assets is shifted to Stage 2 or 3, then you'll have a sizable basically impact on your capital? So are you comfortable with your capital base?

Yes. We are comfortable with our capital base. If you look at the cap, it's close to 90%. So we are very well stacked for where we plan to be going forward. So I wouldn't worry about that. Again, the purpose of this restructuring exercise called Circular 15, Stage 2 is for the borrowers in Qatar to have more time to come out of the COVID. So we effectively see this as a positive exercise for the banks. And as I said, we expect some of these accounts after the necessary cooling period according to IFRS 9 that they will then emerge from Stage 2 into Stage 1. So I definitely see this as a positive exercise, not an exercise to accelerate provisioning or downgrades or write-offs. Anything you want to add, [ Tahir ], to that?

I think I -- I certainly agree with Mr. Gudni's statement. A major part of the restructuring accounts under Circular 15 are under Stage 2. And as he just advised, we have a cooling period, which will take 1 year from the restructuring time. And later, I believe that the Stage 2 accounts can be improved in a better way.

Okay. Now I understand some of them will be upgraded. But also given -- 30% of your gross loans are Stage 2. So how -- what's your -- based on your assessment, how much of this will be downgraded as well? And do you have enough sufficient cushion for that?

Yes. I mean. No. So actually, if you look at this, we don't have -- so let's move it this way. If we believe accounts will be downgraded, we would downgrade it now. We only put clients into this pipeline if we believe that this client is viable and can be resurrected. So this is not a way to delay semi-default clients, to be clear. That would not say to IFRS 9. If that was the case, our orders would say is need to be provided for downgraded and written off. So absolutely to be clear that this is not a factor in a negative manner. How much of these clients will successfully complete the viability exercise, it's very difficult to say. They will give them ample oxygen and time to do that, and we would only put them on this track if we believe they have a reasonable chance of improving, also coming up with more collateral against the liabilities, et cetera, et cetera. So this is in the favor of the borrowers, not the other way around. How much of them will endorse at the other end of the pipe healthy and jumping, it's very difficult to say at this point in time. This is something we will only see at later stages.

We will take the next question from the line Aybek from HSBC.

Yes. I had a couple of questions. One is on your net interest income in the third quarter. So I mean, your asset yield or interest income has done well, I think, in the context of a lower loan book and I think, yes, lower balance sheet basically, right? So are there any one-offs just to understand the direction of your interest income and NII, any one-offs in the interest income, like reversal of provision substance? Is there anything on recurring? That's my first question. I think secondly, obviously, you're getting a lot of questions about the asset quality. I want to ask you about the Stage 3 coverage. I understand that the Central Bank specifically monitors the coverage of Stage 3 loans by Stage 3 reserves. Are there any particular targets? For example, I'm looking at QNB that are over provisioned on Stage 3, they are over 100%. If QNB seen as a role model, if I put that question that way, what should we think of Stage 3 coverage for Doha Bank?

So I'll take the first question. In terms of our net interest income, there is no warning that type events or windfall games that in there. As I said in the presentation, I believe we have turned a corner at I believe this rise in the cost of funding that happened has already taken place. It happened earlier than the repricing of the loan portfolio. And hence, now we have turned a corner. And again, we've seen in the Q4 numbers that we have now this first month is that this is definitely taking place. So no, these numbers should not be anyway taped by one-off events. Now in terms of the Stage 3 coverage, I think I hand it over to Mr. Sanjay, our Acting CFO.

Yes. Just to answer on the Stage 3 coverage, I think if you look at historically also, I think the ideal coverage for Stage 3 is between 80% to 85%, because we don't provide 100% because there are some collectors also there. So we will not be reaching very -- I mean, let's say, next year coverage by next year, 85%. But yes, gradually, we aim to reach that -- coverage has shown probably 2 to 3 years' time.

And can I ask you about your net stable funding ratio. I looked at your investor presentation. I don't think you mentioned it in there. Some banks do disclose. But in your case, what's the net stable funding ratio in the third quarter?

We haven't hasn't disclosed the net stable funding ratio. We do disclose the LCR ratio, which is above 100% on time, but we haven't not necessarily included the NSFR.

Okay. But is it above 100% or below, if you can comment?

That's -- yes, as I said, we don't disclose it. And we have time to it, but we're going to be following the samples of other banks. And so if the bank says in Qatar start to report NSFR, we will do the same. In the meantime, I don't think it's prudent of me to disclose that on our call, it is not in our accounts.

Understood. And I think -- I mean I'm just curious what's the reason why Qatari banks do not publish [ QR3 ] reports? It's not -- is it not a mandatory exposure. It looks like it's not. I mean [ QR3 ] reports, they are quite common across other geographies, which follow IFRS.

Sorry, which report you're saying not being disclosed?

Yes. [ QR3 ] reports, which talked about the risk exposures, capital ratios, balance sheet leverage as well as funding ratios. Is there a plan to start publishing the QR3 reports, does Central Bank planning or maybe like banks themselves plan to start producing these kind of reports.

The capital ratios are being shared, the NPL ratios, et cetera, et cetera. I'm not aware of any further disclosures coming up from the Central Bank.

[Operator Instructions] We currently have no questions coming through. Thank you.

Thank you, Caroline. If there are no further -- sorry, please go ahead.

I just thank you all for joining the call. Most appreciate it.

Thank you very much for your time. Thanks. Have a good day.