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

Good morning. Good afternoon, everyone, and thank you for joining us today. This is Janany Vamadeva from Arqaam Capital. I'm pleased to welcome you to Doha Bank's Third Quarter Full Year 2023 Earnings Webcast. I have with me here today from Doha Bank Management, Sheikh Abdul Rahman bin Fahad bin Faisal Al Thani, the Group Chief Executive Officer; Sanjay Jain, the acting Chief Financial Officer; Taher Alagha, the acting Chief Risk Officer; and Hesham, the Head of Investor Relations. [Operator Instructions]. Without further ado, I'll now turn the call over to Doha Bank's Group CEO, over to you.

Thank you very much, everyone. Good afternoon everyone, and thank you for being part of this important investor call as we wrap up to 2023. It has been a journey of challenges and opportunities, and I am happy to share some key highlights with you. Let's just start by looking at our performance in the last quarter of 2023. After I have taken over as a group CEO, there is 6 points that I would like to highlight. Number one, we have witnessed a notable 5% growth in our total assets. Number two, our focus on the private sector has paid off with 2.8% increase in loans, reflecting our support of a new business -- for new business. Number three, we have seen remarkable growth and customer deposit by 13.8%. And this means that the customers start to trust the bank. Number four, we have successfully brought down our loan to deposit ratio to 104% from 117% in Q3, which is a significant achievement. Number five [Technical Difficulty] finally, and my effort to build a strong leadership team. Mr. Jody has taken over as a Chief Business Officer, overlooking Wholesale Banking group and Dr. Fawad is the new appointed as a Chief Treasury Investment Officer. Both of them are with me on the call. I want to also inform you that we've been working very close with our consultants, international consultants. We -- as I mentioned last time that our consultants working very closely with us. We finalized the assessment from last time. And today, I'm going to share part of the strategy. And we covered 360 degrees of the assessment for Doha Bank. There is 10 different dimensions that I want to share it as well. Number one, a credit investment portfolio; number two, risk liquidity and funding; number three, retail and private banking; number four, wholesale banking, number five, international business; number six, digital and IT; number seven, cost; number eight, critical process; number nine, organization and culture and number 10, [ government and sectors ]. As well, I would like to share that we have a lot of important things. We have a priority. We have 87 initiatives. There is four priority, I would like to share it with you. Priority number one, I want to have a clean access to the good client such as public sector and trade and the private banking. Priority number two, to have a strong digital banking app and mobile app. So I think this is the future of all banking sector. Priority number three, optimize our cost, which is very important for us for 2024 that we'd love to reduce the [indiscernible] million this year. Priority number four, overall health, liquidity and funding metrics. Now I'm going to hand the call with our team who are with me right now. Thank you, everyone.

Thank you, Sheikh, for your update, and thank you, participants. My name is Sanjay Jain. I will just brief you on the 2023 financial update. On the balance sheet side, our total assets stood at QAR 101.3 billion at the year-end, which is an increase of 3.7% year-on-year. And our loan sales and advances stood at QAR 58 billion, which is flattish year-on-year. But I would like to highlight and just to bring it to your attention that we have increased our private sector loan book by 5% year-on-year. And as we speak now, our government OD is nil as of 31 December 2023. Now guidance for 2024, we expect corporate syndication, high-quality private sector addition to grow our loan book by 5%. And on the investment book, we grew 21.7% year-on-year. and our deposit grew 2.9% year-on-year and stood at 51.6 -- so it's QAR 51.6 billion at the year-end. Now that resulted in our LDR reduction of 104%, improving from 117% of Q3 as Sheikh mentioned. Our guidance for LDR ratio for 2024 to improve and to be as near as possible [ to 100% ]. Now as Sheikh mentioned, while NPL increased this year to 7.36%, increased from last year's ratio of 6.43%. The increase was due to NPL formation more than the write-off which we had of QAR 924 million write-off we did in the 2023. The guidance for 2024, I think NPL to remain at the similar level of around 7%. The more guidance to follow in the following quarters as we move forward, and we'll keep you updated more on the quarterly call as this is our key priority inventory '24. Our specific provision coverage stood at 59% as compared to 61% last year. Now we are committed to improve our coverage ratio in the coming year to 65%. Now our capital adequacy ratio stood strong at 19.25% compared to last year, 19.94%. And approximately 13% core equity versus last year of 13.32% last year. Now given our asset growth in the next year, we expect our total capital adequacy ratio to be around 18.5%. Now moving on to the profit and loss account. Our bank achieved a profit of QAR 769 million for the year as compared to QAR 765 million last year, showing a marginal increase of 0.5%. Our net interest income declined 7.9% year-on-year, and our NIM stood at 221 basis points at the end of the year, which is in line with what guidance we gave in our Q3 call. Our guidance for NIM for 2024 to be around 220 basis points, which may see some attrition, 5 to 10 basis points in the coming year. Now our fees and commission grew 1.5% as compared to last year, and we expect a double-digit growth in fees and commission in 2024. Now our income from investment grew significantly more than 3x than last year, though we do not expect a similar level of income in 2024. Our total cost increased 5.8% year-on-year and our cost-to-income ratio stood at 33.4%. Now as a guidance, we see a pickup in the cost, 3% to 5% in 2024 and the guidance for cost-to-income ratio to keep it below 35%. Just now Sheikh mentioned that the [indiscernible] million, yes. But that saving, we will be spending in the right -- bringing in the efficiency which we'll see in the future and then with the key initiatives, we will keep it in mind. Our net loan loss impairment of QAR 892 million versus last year of QAR 970 million which is a decrease of 8%. And our cost of risk is 154 basis points versus 161 basis points last year. Now the guidance for 2024 is to remain at the similar level or say around circa 150 basis points. That's it from my side, and we can go now to Q&A, if you have any questions.

[Operator Instructions] I think we have a first question from Waleed.

A couple of questions, please. So Sanjay, you shared the guidance for cost of risk at the end of the call, and you're seeing similar levels to that, which you saw in 2023. So question is that when will we start seeing a proper improvement in credit losses? I mean, what's keeping credit losses so high? What steps is the bank taking to bring it down? And related to this, I mean, we've been hearing that there could be some support from the government. So are we -- I mean, are we at such a stage where there are some proposals from the government or the authorities to solve the issue with stage 2 loans? So that's my first question. So if you could help us on the asset quality side, that would be great. Second, I just wanted to understand the growth opportunities for the bank. And you mentioned they want to bring the loan to deposit ratio as close as possible to 100%. I would imagine there will be a significant cost attached to that as you go and start collecting deposits. So if you could just help us understand the growth opportunity and how you would go about funding that growth opportunity and at the same time, bringing that loan-to-deposit ratio down to 100%? And then -- sorry, one other question would be on the tax. If you could confirm what you've heard regarding the corporate tax for 2025 or 2024?

Okay. Let me take the last question first. On the tax side, I think we -- the tax under UAE is going through that global minimum tax. We are hiring the consultant in UAE side. But here, we still don't have much of the clarity in the guidance as of now. So we'll keep it for probably -- a discussion for probably next -- after Q3 or something maybe next year. As far as the growth portion is concerned, as Sheikh just mentioned that we are very committed to build up the right balance sheet and the right mix of the deposit. If you look at, the deposit grew significantly in Q4, which is 13.8%, which is quite significant increase, as Sheikh mentioned, in the call, which really costed us and that increased our cost of fund in Q4, right? So we are almost there, now 104% and going [ to 100% ], and it will cost us something, but I think that's a strategy which we are going to maintain and keep our LDR ration maintained and despite we grew our asset, as I say, high-quality asset and corporate syndication, we will manage that liquidity and the growth. On the cost of risk side, Taher will answer.

Cost of risk, the bank has taken a strategic plan for 2024 mainly to consider only on the low and medium risk base customers based on the economic condition and to emphasize on stability of those portfolios. In terms of asset quality, as highlighted by His Excellency, we have -- the bank has also taken as part of the strategic plan of 2024. We have taken steps on that on 3 themes: number one, that the bank has created a new remediation unit to take care of all the critical accounts and remedied accounts where a prompt decision can be taken to expedite the remediation and recovery whenever applicable. Focus on the growth on the booking of the asset side -- the asset of the bank on low-risk category customers. Additionally, I would like to highlight that the bank has built up a sufficient provision reserves for certain accounts where we believe that these are critical accounts and in case of deterioration, it can be written off. So these are the -- this is from my side.

And adding to that Taher that while we are just given a guidance of 150 basis points, we need to build up our provisions, right? Our coverage is around 59%, correct. So to build up our coverage up, we need to take provision, right? So we will monitor those. As I said just now that our cost of risk, write-off and NPL quarter-on-quarter, we'll give you update on the guidance and that's one of the key strategy which our group CEO is looking into it.

And just a comment on the...

Yes, Waleed, if you'll allow me -- we can't speak on behalf of what the government may or may not do. We're not in that business. We're here to protect the bank and do right by the bank. If and when the government makes such decision, we can't comment right now.

Your next question comes from Chiro.

This is Chiro Ghosh from SICO Bahrain. So I have 2 questions. The first one is, I see our slightly longer-term loan growth guidance is around 3% to 5%. I just want to get a context like what is the Qatari loan growth expectation you have? I just wanted to get a sense whether you're looking to gather market share? Or do you intend to grow at Qatari banking sectors loan growth so that would be my understanding about -- I want to get a better understanding of the loan growth. Similarly, on the capital adequacy side, so I see that you have a plan to reduce it towards 17% zone. So do you intend to do this through giving out higher dividends or it is aimed by growing your balance sheet at a faster pace. So this is my 2 questions. And the third one is in continuation to the previous one. So if you're shifting to lower risk assets, which is like public sector loan or other lower risk loan book, wouldn't it impact your net interest margins? Because I see that you expect a much higher net interest margin expansion, like [ 2.21 ] to 2.5 zone. And on the other side, you are shifting towards a lower risk -- lower leverage balance sheet, which is our loan-to-deposit ratio -- slightly lower loan-to-deposit so how are you seeing the margin expanding to 2.5, is that my question.

Chiro, thanks for your questions. If you'll allow me, I'm going to introduce Mr. Jody Sanderson, as the Sheikh has already introduced. He joined us as Chief Business Officer and he's overlooking the Wholesale Banking Group.

Good afternoon, everyone, and thanks for taking the time. Number of questions there. I think all relating to the same thing in terms of how we're focusing our growth on the asset side. In terms of where our focus is, the Qatar market is going to be relatively subdued this year in the private sector. There will be growth as part of the national development strategy. I think we see that kick in more in the second half of the year versus the first half. Now what we've been doing at the bank is investing in the quality of our team in terms of pursuing opportunities in the public sector, the GRE, space corporate syndications, working with top-tier regional, global and local banks in terms of doing proper due diligence with high-quality corporates to increase the overall quality of our book. What we're seeing based on our pipeline and what we booked even in the fourth quarter is given our cost of funding and the opportunities that we are selectively pursuing, we are forecasting growth and profitable growth in relation to those situations. Now as you can imagine, this isn't necessarily funding the Ministry of Finance in Qatar because our cost of funding wouldn't warrant that. This is across the broader range of corporate syndications, the FI syndications and frankly, some really good opportunities we're seeing coming through our international network where we've got natural connections that ties into our home markets. So I think in short, I'm quite optimistic over the course of 2024 based on some of the new hires that we've put in place, our focus and the quality of the team. And I think that will drive the majority of the growth. I do expect over the coming 2 years, the private sector will see an uptick here. We're well positioned for that. Our client base is exceptionally strong in the private sector, but we can grow outside of that in 2024.

Yes. Chiro, as far as your question on the capital adequacy ratio, this guidance was 17%, but we have said is the minimum ever we'll go. The moment we reach 17%, we will go for the capital raise. We're not going to achieve 17% through paying higher dividends. And if you see last 2 to 3 years, you have seen our payout ratio is around 40% in line with the market. And we are maintaining our capital adequacy ratio through our internal [ generation ]. So we do not see reaching 17% in -- at least short term 2 to 3 years from now and keep maintaining our loan growth.

The last one related to the margin is [indiscernible] 2.2 to 2.5.

Jody has said, yes, we're looking at growing our book. As I said, in Q4, what has happened, you're rightly said when we grew our book -- loan book, we grew our deposit, and we had some margin accretion in Q4, right? And that's the reason I'm saying in the coming year, a 5 to 10 basis point attrition. Just because of that, we are high-quality loan book, and we maintain, try and go nearer to 100% earlier ratio.

And if I could add one important comment here, the private sector in Qatar is actually highly competitive, given that there's been growth for over a decade, and it was quite subdued over the past year on the asset side. So margins have been compressed in that business. There's actually more attractive margins in what are often higher quality credit situations through the syndications desk right now, which I think, again, can allow us to maintain that spread compared to what you have historically seen in particular, in 2023.

I have a few questions on the chat box. Let me read it one by one. So from -- I have about 4 questions from Citigroup. The first one is which loan sectors are facing the highest proportion of nonperforming loans?

It's a contracting sector, is the most -- the highly better sector.

And the second question is, what will be the trend of NPL amount or ratio looking forward -- the outlook?

We have given the guidance for around 7%. As we said, this is the focus and the guidance, probably, we'll revisit each and every quarter. So for the time being, it looks like in the range of 7%, but I think as and when we move forward in Q1 and Q2, Q3, we'll give you more update on the NPLs formation, write-offs as well as the cost of risk.

The next question is, please provide the overall and -- overall outlook of Qatari real estate and contractor or contract financing sector?

I guess that's 1 for me. Listen, the real estate market saw a significant growth up to FIFA 2022, which is natural. And 2023 saw a year of more muted activity and there is a supply and demand imbalance in the real estate sector today, which is no secret to anyone. We do expect as a result of the national development strategy, the third, that as we head into the latter part of 2024 and beyond, there will be new economic activity that I think will start to correct this over time. Now it's not a 2024 fix, but this clearly given the means of the sovereign to invest and their well-defined plan, I'm optimistic over the coming years that the current imbalance can improve in the real estate sector. When it comes to contractors, there's not been a lot of new activity over the past year. So in terms of new situations where there have been challenges, we really can't say that we've seen that. There have been certain initiatives taken by the sovereign to assist with contractor payments, which I think has been positive. And I think the situation is improving, not deteriorating from where it was 12 months ago. So in general, I think the most difficult times are behind us on the contractor side, albeit it has been a difficult period, I think, for the contractors and for the banks as a whole in that sector.

Thank you for a detailed response. And the last question from him is please provide 2024 targets for loan growth, NPL ratio and NPL coverage.

Loan growth, we see private sector 5% and NPL ratio, just now we answered that question number two. And what's the -- what are the other thing?

The NPL coverage ratio and...

NPL coverage ratio, we will try and improve. That's what the Chiro was asking question that 150 basis points is high. But yes, to improve our coverage, we try and improve employ our coverage from 60% to 65%. And this is all depending on how we go over in Q1, Q2 and Q3.

Janany, if you allow me, please, the participants can review the investor presentation slide 7. We have our performance scorecard and our guidance for 2024.

Sure Hesham. So we have another question from [ Essa ]. Can you provide more details related to the litigation losses booked during the quarter?

The litigation losses from...

Yes, there was litigation expense but -- in Q4.

Yes. That's one of expenses we had. That's not -- for nonrecurring in nature and yes, that's one of legal expense we had to pay. And there's no further liability to pay on that, and there's -- it's nonrecurring, and we do not see any more pipeline of such incidents in future.

I have another question from [ Andy Prudinal ]. Could you please expand on your aspirations for noninterest income in terms of growth as a percentage of total income and what are the write-offs.

So noninterest income, as I said in the guidance that our fees and commission, we are focusing on it now, which I gave a guidance of 10% increase in the fees and commission and it could be more. But yes, that's one of the key priorities that we have. And looking at the investment income, as I said, there was some good income happen. This year, if you look at we're building our investment book quite significantly. If you look at, there's a quite significant investment book we grew and that helped and probably now given the reversing curve of interest income going down, there could be some opportunity over there to have a gain on that. I will just hand it over to Dr. Fawad to give further answer to that.

Sure. Happy to add here, and thank you very much, everyone, for joining this call. I think the key things I want to highlight is that we currently have a very high-quality liquid portfolio of QAR 30 billion. QAR 16 billion of that is unencumbered. So we have that as a liquidity buffer. We have increased the investment book significantly because we have been able to generate a decent return by repoing it. So it's a self-funded part of the growth. And that's what you see due to the banks, which is mainly the repo growth against increasing of high-quality assets. We also have been able to generate income on back of using our AFS book where we utilize the market movements to book some profits. 92% of the book is hedged, so we don't expect any volatility in that, but we will be selectively taking profits as we see the curve sort of getting steeper. So I think all of that will add both on the NIM side, our ability to expand those margins as well as to be able to contribute from an asset side on the investment book.

Thank you, Sanjay and Dr. Fawad. The next question from [ Hussain ].

So I have 2 questions. One is, can you provide the net interest income sensitivity to rate cuts next year? And also, the second question is what are the drivers of the OpEx growth in 2023?

Can you restate that first question, please?

Yes, yes, of course. So what is the net interest income sensitivity to rate cuts next year? Can you hear me?

Sure. Let me take the impact on our net interest income due to rates. So what we are seeing is that according to our in-house view, we are expecting about 3 rate cuts in 2024 and about 6 in 2025. I think the impact on us is given that we have most of our liabilities on the short end of the curve. So this helps improve our cost of funding on the short end, where we have most of the liabilities out there. Our assets naturally on the longer end of the curve and we are sort of measuring the curve as well, both the flat sort of move as well as the change in terms of steepness of the curve. So for us, 2 impacts very clearly that we are managing through gaps, is that our liabilities will become cheaper as the rate cuts come in and we will try to lock in the longer-term assets to benefit from booking high yields on the investment side. As I said, most of the risk on the book is neutralized through interest rate [ stops ].

On the OpEx side, yes, there will be some pickup in the OpEx expenditure in 2024. This is part of our overall strategy of improving our efficiency, though we will be saving some costs at the same time, we will be sort of, you can say, recycling that cost to towards efficiency and improving people, process and technology. So initially, yes, there will be some pickup in the cost. But in short term to medium term, you will see the effect of that cost coming through, and we'll see improving in our cost-to-income ratio in the coming years.

But I just want to understand the drivers in 2023 of the OpEx growth.

Okay, there are various areas -- I mean we -- there are some technology, there are some legal costs, there are some very serious, and the cost has gone through. And there are some -- to be very frank to you, there are some -- not significant but there are some one-off costs also went through.

As we wait for more questions, could I ask a couple of questions, if I may. So the first one is like -- when you give the medium-term strategy, it's from 2023 to 2027. So I'm just wondering whether, well, cleanup will be completed by 2027? And can we take 2028 as a normalized year for Doha Bank? If you could add any color on that, that would be helpful.

Janany, yes, so what you've stated is correct. So we do have a 5-year strategy that was adopted by the Board last year and headed down. We do benchmark ourselves towards progressing in that direction. With regards to normalization, it will really depend on what the new management being able to execute and how fast we're able to clean this up during the transformation phase.

I want to add a couple of point. As we promised from last Q3 calls, we were mentioning that we are working with one of the most popular consultant international. We worked very hard to ensure that we took to finalize a 360 assessment. We delivered within 8 weeks, which is also maybe a record number for us. And right now, we started our implementation. So, yes, it's 5 years our last strategy, but to implement everything, we will ensure that it's going to be less than 2 years. It is hard work from everyone here. We hired a team to transformation to be with us next period and that's when all the chiefs, the new leadership who joined us recently and who will continue with us for the future. They're working very close with the transformation. Weekly basis, we are looking at each topic, especially the priority that I mentioned previously, which is the technology [indiscernible] because from I understand that is priority for the banking sector and it will change a lot as well the retail banking. It's also important that to increase the numbers of clients here internally in Doha. And by reducing a lot of cost, if we close a lot of [ branches ], especially if we implement the mobile app, the more advanced as well, we implement the digital. So we are working very hard, and we start to implement it now. We will make a record as well to ensure this is going to be less than 2 years to finalize full implementation. And this part of our strategy year-by-year or quarter-by-quarter, we will find out that -- the developments there.

Thank you for the detailed explanation. I have one more question in the chat box from [ Kareem Shadab ]. Are there any plans or guidance to increase the LCR and how?

I'll take that. So right now, we are working in terms of our funding plans, and currently, we are going to be compliant hopefully in terms of most of these ratios. LCR already, we have been compliant. We're actually creating enough of liquidity buffer. As I said, we have the ability to get unencumbered asset of QAR 16 billion. So that's a liquidity buffer we keep for the LCR ratio. We'll keep it pretty healthy as we are looking at both the asset side and liability side. And the plan is to focus on retail as our group CEO has mentioned very clearly because CASA is the important part of that liability generation for us, and that helps in terms of your shorter and LCR ratios. So I think it is pretty healthy right now. We are keeping a bit very close eye. There's a particular task force specifically meant for looking at these ratios to be compliant in 2024 as we are guiding and to keep these ratios healthy.

For December, we had [indiscernible] which is more than 100%.

I have another question from Lee Beswick. He's asking to tally the LTD ratio that you've disclosed. I think it says that LTD is 104 that you mentioned, just want to tally like the loan and deposit numbers that you've used for the calculation.

It's LDR ratio, not LTD. So it's the LDR ratio. What happens is that customer deposit and some long-term deposit, and that is allowed by Central Bank to calculate. If it is more than couple of years, you take [ 30% ]. If more than 1 year, you take [ 50% ]. There's some formula to calculate the LDR ratio. So we take advantage of the longer-term deposits.

Janany, we're our calculation that we disclosed in the investor presentation, is based on the QCB 9 circular of 2022 that was issued March 1, and that is the computation that we do. We do not do the straight plain vanilla that they find on Bloomberg. We just divide gross loans to deposits. We overlook and encompass all our debt and long-term deposits in there.

One more question from [indiscernible]. Any plans to come to the Eurobond market this year?

Yes. So we are -- as we're looking at the funding plan overall, we have the EMTN program refreshed so we have the ability to come to the market at any point in time that we see it being supportive at the right levels. We also, naturally, along with that, have a bilateral and syndication plan in place. So I think what will help the whole market is that there's already appetite for the risk, but the recent Moody's upgrade, I think, will be significant in terms of one-notch upgrade which then helps in terms of us being in the capital markets and using the best sort of trade-off between the size and price.

Thank you, Sanjay. I think that's all we have in terms of questions in the chat box, and I can't see anyone raise the hand as well. So Hesham and team, back to you for any concluding remarks. So I think -- yes.

Thank you very much for the attendance. And we're looking forward for the next call -- quarter 1 -- end of quarter 1, and we'll be shared more information.

Thank you very much. Thank you, everyone.