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

This is AyBek Islamov from Emerging EMEA Financials, Equity Research Analyst at HSBC. I'm very pleased to host you today at Doha Bank's Third Quarter 2024 Earnings Results Call. With us today, we have the entire senior management suite representing Doha Bank. With no further ado, I'd like to hand over the call to Deputy CEO, Mr. Dimitrios. Please go ahead.

Okay. Hello to everyone, and good afternoon, and thank you for joining the Doha Bank Q3 2024 results investor call. I'm Dimitrios Kokosioulis. I'm the Deputy CEO of the bank. And on behalf of Sheikh Abdul Rahman, our Group CEO, I would like to present you the results. I will be discussing with you about the Himma transformation, which was launched at the beginning of the year under the leadership of our Group CEO. And as we have mentioned actually in other calls, the bank had completed a deep dive review, and we were able to identify more than 80 initiatives. And during the 9 months of 2024, 14 initiatives have been completed. Going into year-end, our focus will be on high-impact initiatives that will include improved consumer and corporate banking propositions with emphasis on digital innovation, digitization and automation of identified critical processes that will have a positive impact on our customer experience and productivity. Some good tangible results in the first 9 months. Strengthening the financial inclusion proposition is another key pillar initiative throughout going through year-end, and enhancement of noncredit risk management and risk appetite. Now in terms of highlights, this year for the banking transformation, I would like to mention that there was -- there has been a much-needed improvement to governance and culture. Our group CEO has onboarded a complete C-suite of recruitments. And I'm happy that with me today, we have the newly joined Chief Financial Officer, Mr. Aman; and our new Chief Strategy & Transformation Officer, Mr. Baiju, and both joined the bank in September. So, this completes the full -- the new C-suite that were onboarded. We have automated and reengineered the internal processes -- key internal processes to drive service improvement. There is an improvement in the overall brand health as the bank has signed a high-profile sponsorship and launched a strategic alliance with GORD, who is leading the bank on its ESG transformation. And during Q1 -- Q3, actually, Doha Bank launched a new ESG governance structure. Now another key pillar is cost efficiency. So, we are actually continuing to drive cost efficiencies. Our cost reduction initiatives have resulted in the identification of close to QAR 100 million recurring annual impact, out of which QAR 59 million impact was already captured. However, over the medium term, these cost savings will be passed on to other areas of the bank. And as we have mentioned in other calls, we are investing in our technology capabilities, in people, and that's why we will be actually passing over some of these cost savings to actually some other areas of the bank to be able to build the bank sustainable for the future, a bank that will be able to address all the challenges. Now the transformation is helping us to strengthen the bank's retail proposition, which we have seen over the past 2 quarters, as we have signed a major partnership with Mastercard. This is one of the largest in the country and in the region. And we have actually been driving the footprint optimization of branches and ATMs. We have merged and closed and relocated 4 local branches. So, from 21 we had last year, we are down to 16. And we are actually building, as I said before, the transformation capabilities. Digital transformation is a key critical pillar of the retail transformation. We have built and we have launched our mobile banking first strategy. More than 15 features have been added. We have seen that financial transactions through mobile banking and volumes have increased by more than 18%. New subscriptions have increased by more than 44%. And until recently, we have processed from May, when we did the facelift and we started our mobile-first strategy, more than QAR 4 billion in financial transactions have been processed through our mobile banking. Now in closing, it's important to note that, of course, as in any transformation and change management restructuring journey, there are also some risks and challenges. The bank acknowledges that we have to go through this complex journey and to address this complexity and the risk of unknown, we are making sure that our leadership team is fully engaged and committed. Towards that, we have already established a transformation office with a solid and strong governance. And this office is responsible for the governance of the transformation. And also, we have set up multiple forums where we present the status of the transformation journeys and why we continue overcoming the day-to-day challenges of the transformation. Without further ado, I would like to now hand it over to our new Chief Financial Officer, Mr. Aman, who will actually take us through the financial highlights. And then we'll switch it over to a Q&A session. So, Aman, please go ahead.

Okay. Thank you very much, Dimitrios. And as noted, my name is Aman Ullah Khan, and I joined the bank as Chief Financial Officer last month on 15th of September. And I look forward to meeting and engaging with you all. So, I'll just take a couple of minutes and discuss the financial highlights. Let's first start with the balance sheet. The total assets grew by around 14.1% year-on-year and around 8.6% year-to-date. This growth came from a combination of growth in investment book as well as the loans. Year-to-date, the loan growth is around 5.4%. That is pretty evenly distributed between the public and private sector growth. We believe that the year-end growth target will be in the range of 6% to 7%, slightly higher than the earlier projected number of 5%. Year-to-date, the investment growth is around 17.7% and around 30.8% year-on-year. The growth in investments is primarily coming from investment in high-quality liquid assets. The customer deposits grew by around 14.5% year-on-year and it's around flattish 0.6% year-to-date. The loan-to-deposit ratio for Q3 closed at around 98.34%, which is within the regulatory limit of 100%. The capital ratios remain healthy. Bank's CET1 and the total CAR sit at around 13.52% and 19.74%, respectively. Given the expected asset growth, the guidance for year-end for the total capital adequacy ratio is to be around 19.25% to 19.5%. Now moving on to the income statement. The bank achieved a total net profit of around QAR 690 million, which is around 10.9% growth year-on-year. The net interest income has slightly declined by 0.2 -- sorry, 2.5% year-on-year. NIM stood at around 1.99%, which is flattish as compared to Q2 2024. And the guidance for NIM for year-end is to be around 195 bps plus/minus 5 bps. The bank's total cost has increased by 6.5% year-on-year and the cost-to-income ratio stands at around 36.4%. The bank's guidance is to be -- is marginally higher than the projected 35%, circa 36%. The loan loss impairment for the first 9 months stands at around QAR 583 million as compared to QAR 769 million for the same period of last year, indicating around 24% decline. The cost of risk stands at around 131 basis points versus 179 basis points for the same period last year. This is a positive development. And with the loan loss review expected during Q4, we are maintaining a guidance of cost of risk to be in the range of 140 bps to 150 bps. The NPLs were at 7.43%, which is flat as compared to Q2 and has marginally increased from 7.36% level at year-end. The bank is maintaining a guidance of around 7% to 7.5% for the year-end. The specific provision coverage stood at around 67% compared to 59.2% at the year-end 2023. Guidance for coverage is to be around -- the NPL coverage is to be around 70% at the year-end. And as we have communicated earlier, the guidance for coverage over the next couple of years is around to be 80% to 85%. The bank now opens the floor to question and answers. I'll hand back over to you, Aybek.

Yes. Thank you very much for the presentation. Apologies for small pause. [Operator Instructions] So, we'll begin our Q&A session with Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. I have a couple of questions. The first one is, of course, related to the operating expense, which went up, which I understand why it went up. So, the initiative which you have taken, the guidance which you have given is less than 25% from 35% right now. So, would you be -- just want to get a sense how realistic it is to achieve this within the next couple of years? And if I understood you right, you are saying QAR 100 million of initiatives -- out of this QAR 100 million, QAR 59 million has already been taken. If you can just clarify that point. I just want to get a sense that how soon do you expect this 25% target to be reached? That's my first question. Second one is purely on the deposit side. So, I get a sense that the deposits have actually moved from government sector to the corporate and retail. So, just want to get a sense of what is the strategic angle behind it, because intuitively, we'll think that it might be easier or it will be cheaper to stick to government deposits. That's my second question. And third one also very quickly, the shift from trading loan book towards the GRE loan book, would we expect to see a more suppressed net interest margin going forward? Yes, these are my 3 questions.

Thank you, Chiro. So, I'll start with the first one, the cost-to-income ratio. The earlier guidance was 25%. As Dimitrios was explaining to you earlier that most of the cost-saving initiatives have been redirected towards the transformation initiative. And as we see and we work on the revised guidance, we would see some -- that the cost-to-income ratio will remain elevated for the next couple of years, but we will come back with a revised guidance during Q4, okay? This is the first thing. Second thing, you asked about the deposit shift from corporate to GRE and retail. So, as we speak, our deposit base has been flat as compared to last year. But we have been working on initiative, not just on the GRE front, we're also working on some big corporate deposits as well. We are working on initiatives to bring deposits from various segments, not just targeted to GRE. We have corporate, even retail side, we have initiatives to raise deposits on all fronts. Okay?

Sir, just a follow-up on this point. So, your loan-to-deposit is already very close to 100%. So, you think it might impact your deposit inflow -- would, of course, be very important for you to grow your loan book. So, would you believe there would be pressure because of that?

See, our loan-to-deposit ratio was in average last year. So because of the initiatives that I earlier mentioned, we have been able to bring it down within the regulatory limit. Yes, there will be pressure, but this is something that we discuss regularly and meet regularly for. The third one, you asked about shifting from trading to more of GRE entity when it comes to deposits -- sorry, when it comes to the loan book. Our loan growth, as earlier explained, has been evenly distributed between the corporate sector as well as the government sector. The margins, as we speak, we are targeting quality as well as pricing. So, this is as part of our strategy. We're just not targeting quality, but we're also targeting the pricing. So, in terms of NIMs, we, of course, want to target or pursue those customers or those clients, good quality at a good price as well. So it will be a mix of both.

Just quickly, so let's assume there is a contractor, which is government-backed, basically, they have guaranteed it. It will go in the GRE category or will it go into the contracting category if you lend to [ U.S. ] contractors?

Let me take that one. So, this is Salman Siddiqui. I'm the Chief Risk Officer. Now if a contractor, the guarantee is provided by the government, you cannot actually treat it as a sovereign exposure. Although, if that lending is directly to the government entity itself, if we are funding the project rather than the contractor, then only can we categorize it as a sovereign exposure or -- but this one would surely be categorized as a contracting exposure.

We'll move on to our next question from Abhinav Sinha. Abhinav, can you announce your company name, please?

This is Abhinav from Lesha Bank. I have a question on your net interest. So if I see your net interest income is down 2.5% for the 9 months. But if I look at the third quarter, it's down a bit more than that. So, my question is, is it because you are focusing more on high-quality lending, which is like relatively lower margin? Or is it because of intense competition in the industry?

So, in terms of the NIMs, the net interest -- I'll talk about both NIMs and NII because they're both similar. See the contraction in NIM has come primarily because of the fact that the cost of funding has gradually increased, whereas when it comes to the yields, yields have not gone up. There is a reason for that. When the last rate hike came last year, the loan books or the asset side of things was repriced almost immediately, whereas there is a lag effect when it comes to the cost of funding. So, most of those deposits, because the average life of deposits around 6 months to 9 months, they were getting repriced during the course of the current year. So, what happened, it resulted in contraction -- elevated cost of funding and contracted NIM. So, that is the reason our NIMs are lower as compared to last quarter as well as same period last year.

And when do we see it normalizing to like a more reasonable levels like…

Yes. So now a flip side to it. Now the rates have just recently reduced, right? So, a similar situation. The asset side of things will be repriced immediately, whereas when it comes to the deposits, the repricing will come gradually with time. As we speak, when those -- since [Technical Difficulty] deposit based on their maturities. So, the next 3 to 6 months, we expect that there will be, again, a NIM contraction.

And then, of course, like as the deposits reprice, you will see it normalizing, right? That's the way to…

So, we don't have any further questions. I don't see -- okay. We've got the next question from Jagadishwar Pasunoori. Jagadishwar, please announce your company name.

So, just philosophical question and what do you think your optimal target Stage 2 ratios, and when would you like to achieve that? And how would you like to achieve it? Can you elaborate on this more, please?

Yes, sure. So, Jagadishwar, this is Salman Siddiqui again, the Chief Risk Officer. We are currently at around 6.54% Stage 2 coverage. We're targeting to achieve approximately 7%, let's say, by Q1, Q2 2025. And we'll provide -- continue to provide further guidance towards it by the end of the year. Our full year-end results when we'll announce, we'll provide further guidance towards achieving those targets. More importantly, and when you refer to how do we plan on doing it, we have certain accounts that are now also -- where we see signs of curing getting completed. They were in the bucket, completing their curing periods. So, you will see some accounts with the approval of the Central Bank, of course, getting back into the Stage 1 bucket, which would actually positively contribute towards increase in the Stage 1 coverage in any case. On top of that, since the number in Stage 2 would start to move, we will see that number -- that coverage automatically getting improved upon. On top of that, there's a plan that the bank has in terms of how do we compare with our past averages and how do we want to achieve those percentages. So the bank is actively working on that plan, and you will see that plan yielding its results in the coming quarters, as I already mentioned.

So, that's on the coverage side. And the absolute, as a percentage of Stage 2 loans, as a percentage of overall loans is around -- is slightly above 31%. Where will you be comfortable? And what will be your medium- to long-term Stage 2 percentage? Which and where it would be? What are you thinking?

Sure. I mean, comfortable, I would say the lower the better is a comfortable region. However, if I were to chalk out a strategy, which we already have, I would certainly say that we are working very actively at lowering this number, but obviously, it's not going to happen overnight. These are some of the names that we have there or some of the exposures that we have there are, I would say, industry-wide right now. And we're not the only bank that is exposed to those names or those sectors. A lot of that is also a timing issue in terms of post-World Cup cooling off and those particular sectors feeling the post-World Cup cooling effects. However, the government is now taking a very, I would say, close view of those particular exposures. And the Central Bank is also holding very concentrated discussions with banks individually and collectively. And we see that there's going to be very marked traction in terms of resolutions and I would say, improvements in those names in the coming quarters. So, we're really optimistic that these numbers would definitely see a downward trend. Our comfortable zone, obviously, would be somewhere around -- I won't say -- I wouldn't give a very far-fetched optimistic kind of a number, but surely, something around 25%, given our current number would be a good number to achieve in the coming quarters.

So you are optimistic that the government is trying to help your customers to get this resolved and the Central Bank is willing to speak with the banks and then get the whole thing resolved?

See, as a risk person, I would take a very conservative view. I would not comment and commit on behalf of the government that, okay, the government is going to interfere and the government is taking this measure. What we can see is that there is a very -- the government and the Central Bank are cognizant of this. They are looking at the situation. Things are getting discussed. We are yet to see something being announced in black and white. So I would not go to the lens of committing something or commenting something upon that. Yes, on behalf of the government or the Central Bank. But certainly, it's an industry-wide, I would say, an industry-wide issue, and that needs to be addressed on an industry-wide level as well.

We'll move on to the next question. This is from the line of Andy Brudenell. Andy please announce your company name.

So thank you for that stuff on asset quality. That's -- yes, very, very interesting. I assume the guidance you're giving on cost of risk, given you're essentially reporting around those sorts of levels already, is kind of like a net figure. So could you talk a bit about what sort of recoveries you've seen so far this year? Like are there encouraging signs in that sense? And is there some figures you could give us and maybe some sectors, please? That would be interesting.

Okay. So, thanks, Andy, for the question. Yes, we do see signs of recoveries coming through in the portfolio. And we have seen certain resolutions that you will see reflecting in the Q4 subject to the regulatory approvals, I would say. The sectors where we've seen recovery is generally the real estate sector, where we were able to, I would say, resolve certain exposures in the bank's favor. And that would reflect in the numbers in the upcoming quarters. We are actively working on a pipeline of such resolutions. They're being looked upon in their individual capacity on the merits of such resolutions, how well do they pan out in the larger scheme of things? Do they align with the bank's strategic intent? And then we are taking a call on those exposures with the concurrence, of course, of the Central Bank. So yes, there are encouraging signs, and we see it translating into encouraging numbers in the future.

And maybe just on the Central Bank. So, is the Central Bank becoming more amenable then to the idea of performing second -- performing loans in Stage 2 actually being allowed to be moved back to Stage 1, because there was a period of time where several banks were saying that they had performing loans in that space for more than 12 months, but the Central Bank wasn't really interested in moving them back to Stage 1. Are those conversations now moving forward more positively?

I mean, the Central Bank is very amenable. They're very conducive to talk. They're very conducive to look at each case at its merits. Of course, the regulatory pronouncements ought to be respected and the regulatory guidelines ought to be followed. So, we are no different. And that is why I said that whatever resolutions we are looking at, that is subject to the Central Bank's concurrence. As far as move -- completion of curing period and then moving the exposures to Stage 1, for sure, the -- once a certain exposure completes its curing period, it is sent to the Central Bank with the justification as to why the bank feels a certain way about it and why the bank feels very strongly that it should be put back into the performing bucket. So far, we've seen a very positive and a very, I would say, amenable attitude from the Central Bank. And I think that is very indicative of the fact that the Central Bank is taking a very, very, I would say, able and a knowledgeable view of the entire situation across the banking industry.

I'm still not sure if that's a yes or a no, but I'm going to assume that, yes, some have moved from Stage 2 to Stage 1?

Like I said, everything is subject to the Central Bank's concurrence. So, me saying a yes, may be before time and me saying a no may also be before time. So, that's why I qualified it with a subject to the Central Bank's approval.

That now sounds more like a no.

Well, you can interpret it my friend, but I kept it neutral.

We have one question from the -- in the Q&A box. Let me read it out for you. So are there any plans to go for an interim dividend? And have you changed your Articles of Associations or not yet?

So as for now, as per we don't have any plan right now to go for the interim dividend. Anyways, we are approaching the year-end, and the bank has a history of paying dividends. So for the year-end, we can somehow safely say that we're going to be distributing dividend. But when it comes to the interim, that is something we're going to be revisiting, and then we will be updating markets on the same.

Well, I think we're coming at the top of the hour. At the moment, there are no further questions that I can see here online. I guess if we have space for one more question, which came through the Q&A box. And the question is around the asset quality. So, your NPL continues to rise, while the provision coverage remains within the 70% zone. So, yes. I mean, I don't quite understand the -- what the question is about, right? I think, yes, it's about provision coverage, NPLs increasing. So it's not fully explained here. Yes. So, while we clarify this question, there is one question from the line of Mujib Moosa. Mujib, would you like to announce your company name and ask your question?

This is Mujib Moosa from Commercial Bank. I have 2 questions. One is, since you're heading towards interest rate cut regime into the next 1 year, I'm looking at the Slide 10, where you have given a guidance on the NIM margin. And CFO also mentioned that there will be a spread pressure seen. So, that NIM guidance that you have set of 2.5% for the next 2 years, does it look like achievable? That's one question. And related to that is, assuming a 50 to 100 basis cut into the next, say, 3, 4 quarters, what is the NIM margin sensitivity for Doha Bank quarter, knowing that your NIM margin has steadied around 2% for the last 3 quarters, what is the sensitivity of the NIM margin? That's my first question. And the second question also, if I may ask here is on the cost of risk, or rather the Stage 3 coverage. Now looking at the conventional bank space, some of the banks are already operating at 95%, 100% coverage. For Doha Bank, the Stage 3 coverage has related to other banks being subpar below 70%. I did hear -- I'm not sure whether I heard the number, 80% Stage 3 coverage, you are guiding towards the number. Are you looking at that 80% Stage 3 coverage towards the year-end or over the next 2 quarters? These are my 2 questions.

Okay. Thank you, Mujib. Aman here. So I'm going to answer the -- let me start by answering the first part. The NIM you're saying, like I explained earlier, there will be pressure on NIMs in the short term. So we are expecting further contraction in NIM. But in the long run of things, once our -- the rate -- because it's a rate, there is no [indiscernible] rate cutting regime. When the interest rate cuts and our deposits are repriced lower, then in that case, there will be a widening in NIMs, and we expect NIMs to wide further because if you go 3, 4 years back, our NIM used to be in the range of 2.7-ish percentage. So we will try to achieve that band also again after 2, 3 years -- in the next 2, 3 years' time. Second, you have another question on the NIM part, like the sensitivity of NIM to the further rate cuts. Now as we speak, we have already factored that into our next year planning. And we are expecting the rates to further -- as part of our plan, we are expecting another 1% to 1.5% rate cut for next year, and they have all been part of our plan. But yes, as I explained earlier, when the rates cut, we expect short-term contraction due to the nature of our portfolio with a long-term widening of NIMs, okay? Now the second part of your question was around Stage 3 coverage. So, as we speak today, our Stage 3 coverage is around 67%, and we expect for it to be somewhere around 70%-ish by the end of the year. And the long-term guidance is to increase it further in the range of 80% to 85%, and we are well on course.

Just I lost the connection, but I just want to catch up on that number. My question specific was assuming 100 bps cut on the Fed rate over the next 1 year, specific to the NIM margin, what is the sensitive of the NIM margin? Is it 15, 20 basis points? Because some of the banks have given a guidance on where they see the specific number. What's the margin? Did I lose out something on the information because I lost the connection?

No. So specifically, it will be around that 15 to 20 bps.

Well, I think we definitely came to the end of the Q&A session. I would like to thank all the participants and the management team of Doha Bank for conducting this call. And for any closing remarks, Mr. Dimitrios or anyone from the management team, please over to you. Thank you.

No, I think I would like to thank all of you who participated in this call. I think it's obvious that we are heading -- we are going ahead with our transformation, full speed ahead. We have the entire management team and the new chiefs that have onboarded, and we are very positive into looking into the future, addressing the challenges and going through our implementation and the transformation as planned. So, we are positive, and we are going to be giving you updates if there is any further update on any interim dividend, et cetera. So, we are fully bullish going through the new year as well. And I would like to once again thank you on behalf of Sheikh Abdul Rahman, who is actually attending the IMF and couldn't be with us and look forward to actually discussing with you in the next full year-end discussion we have. So, thank you very much for attending.

Thank you all. If you need anything, please reach out to me. I'm always here for you. Appreciate it, Aybek and the HSBC team for hosting the call.

Thank you, and this completes today's call. Thank you, everyone.

Thank you so much. START START