Dukhan Bank Q.P.S.C. (DUBK) Earnings Call Transcript & Summary

Hello, and welcome to the Dukhan Bank conference call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Roy Thomas to begin the conference. Roy, over to you.

Thank you. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Dukhan Bank's First Quarter 2024 Financial Results Conference Call. On this call from Dukhan Bank, we have Ahmed Hashem, the Group Chief Executive Officer; Osama Abu Baker, the Group Chief Financial Officer; and Riaz Khan, the Head of Reporting, Budgeting, and IR. We will conduct this conference call with management first, reviewing the company's results, followed by Q&A. I will turn the call now over to Ahmed Hashem. Go ahead, Ahmed.

Assalamu alaikum, everyone. Thank you very much, Roy, and good afternoon. I appreciate all of you joining us today. As usual, I'll begin by briefly discussing the broader economic context before delving into our key updates for the first quarter of '24. Later on, the team will provide you with the updates from the financial performance of the group, followed by the usual Q&A session. Now let's start by addressing the global macroeconomic landscape where geopolitical tensions continue to impact the economic landscapes with implications for trade and investment flows. Inflation rates remained valid across regions with some countries experiencing slightly inflation than expectations. Financial markets exhibited volatility responding to economic data, geopolitical events, and central bank actions. Shifting our focus to the domestic market. We continue to note a resurgence in the momentum since the latter part of '23. All sectors of the economy exhibited growth. Furthermore, tailwinds from planned CapEx investments under the flagship [ NFE ] projects, coupled with related downstream project is also providing a boost to the overall economic growth. The ongoing diversifications efforts and structural reforms by the state are expected to further stimulate the economic activity and spending across various services and manufacturing sectors while ensuring alignment with Qatar's 2030 vision, with particular emphasis on the health care, education, travel, and tourism. Talking about Dukhan Bank's strategic approach, it revolves around the core values that define our business, placing a significant focus on digitalization and sustainability. While upholding these values, we have successfully retained our market share and remain dedicated to continuous digital innovation. Despite substantial changes in policy rates, we have sustained robust profitability and continue to reduce our cost of risk and achieved higher recovery rates. Now let's turn our attention to the group's financial performance for the first quarter of '24. I'm pleased to report that we have achieved a notable success. Our total income has grown by 243 million versus the same period of last year, reaching 1.7 billion. Consequently, our bottom line profitability for the 3 month period ended March '24, increased by 2% from last year and reached a net profit of QAR 423 million. Our liquidity remained robust and capital adequacy ratio was comfortably higher than the minimal requirement and currently standing at 18.2%. Now by ending here, I will let Riaz, to share the details of our annual performance for the first 3 months of the '24 followed by the usual Q&A. Thank you so much.

Thank you, Ahmed, and welcome, everyone. I will start my analysis with the group's balance sheet. Our total assets stands at QAR 113 billion, predominantly composed of financing assets, which stands at almost QAR 81 billion and they constitute 72% of our total assets. The investment portfolio follows closely and reaching almost QAR 17.2 billion and contributing 15% of the total assets. Our balance sheet is predominantly funded by customer deposits, representing about 80% of our total liabilities and totaling QAR 78.5 billion. This is followed by market funding, which contributed 18% and amounted to QAR 17.5 billion. We are maintaining a regulatory ratio for loans to deposits and which is close to 100% and currently stands at 101.7%. This distinguishes us amongst all the Qatari banks. Notably, our reliance on nonresident deposits has decreased to less than 2% as we continue to cultivate strategic and generational domestic relationships. In our commitment to safeguarding profit margins and managing our cost of funds, the net profit margins have been maintained at around 2.1%. Now we anticipate the conclusion of the rising cost of fund cycle, which is linked to Fed rate hikes and QCB benchmark rate increases as inflation showing signs of cooling off. This would reduce pressure on our cost of funds and lead to positive margin evolution. Examining the breakdown of group's total income, 2 primary contributors stand out: Financing and investment income, which rose by QAR 316 million or 25% compared to the previous year, reaching a total of QAR 1.6 billion. The second highest contribution comes from net fees and commission income, which amounts to QAR 49 million. Turning our attention to impairments, the net impairment charge after taking the impact of recoveries for the current period totaled QAR 37 million, marking a slight increase from QAR 30 million reported in the first quarter of 2023. The staging of financing activities aligns well with the industry standards with Stage 1 at 81%, Stage 2 at 14%, and Stage 3 NPLs at 5.1% with a decent coverage of 4.1% against Stage 2 accounts and 71.5% against Stage 3 accounts. Here important point to note that if we consider the eligible collateral benefit, the Stage 3 coverage ratio reaches approximately 90% against the NPLs. Our financing book also remained well diversified, encompassing all sectors, including government at 22%, real estate 28%, commercial lending at 9%, consumer lending at 8%, contracting business at 5%, industrial and manufacturing at 2%, and services and other sectors about 26%. Group's capital adequacy ratio at the end of the first quarter for 2024 stands at 18.2%, exceeding well above the minimum regulatory requirement of 14.33%. This positions us well to grow confidently in the future. Looking forward to the full year of 2024, we project a sustained growth trajectory, anticipating a mid-single-digit expansion in our balance sheet that aligns with the overall GDP growth targets for the country. This drive -- the drivers of this growth will predominantly be wholesale banking and private banking segments with our growth strategy emphasizing on quality over quantity. Regarding the bottom line profitability, we see a comparable mid-single-digit growth, mirroring the expansion anticipated in the overall balance sheet. While we anticipate no significant deterioration in the asset quality, our approach to provisioning remains conservative. We will continue to build adequate buffers to safeguard against unforeseen adversities. In summary, our focus will be on delivering another successful year while prioritizing NIM protections, robust liquidity, and maintain our current market share while fostering the growth of our balance sheet. Now we will open the floor for the Q&A session.

[Operator Instructions] Our first question comes from Ejayan Al-Ahbabi from Al Rayan Investment.

I've got a couple of questions. Firstly, could you tell us which sectors you saw growth in for your financing book? And how sustainable do you think this growth is for the remaining 9 months of this year? The second question is regarding the investment book. Considering the investment book, the current environment, the yields are very high, and it's -- you can have good returns on this asset class. Then why do you keep on reducing your investment book? I mean, it's come down to QAR 17 billion, and it's only like 15% of your, I think, book -- your total assets. I mean, whereas if you compare it to other banks, it's probably one of the lowest locally and probably in the regionally. Why do you think that is your strategy for your investment book? Also, what will be your average rating on your investment?

Thank you. So I'll start with the first question in terms of sectors and the financing. So we are seeing growth predominantly coming in from services sector, I would say, in the first quarter, but on holistically speaking, in the year ahead, in the rest of the 3 quarters, as we mentioned, like we are expecting a growth of somewhere mid-single digit. So that is the target, and that growth will be predominantly coming from the wholesale banking as well as private banking. So these 2 will be the key pillars, which will contribute towards the growth. And the overall target, it's a bit modest in mid-single-digit growth. And they like goes in tandem with the overall GDP growth expectations. So I hope I answered your first question. In terms of investments, investments currently, you are rightly saying, currently standing at almost QAR 17.5 billion. In the last year, we -- in the year-end, it was at somewhere QAR 19 billion, QAR 19.5 billion. We saw a reduction that is predominantly because certain maturities we saw in the Sukuk portfolio. I think it's a matter of like whether to grow the investment books or the loan book. From our perspective, as you would have seen, the yields for investments tends to be slightly lesser as compared to the loan book. So that's the first priority for us to improve our loan book. Investments predominantly plays a major part when we talk about the HQLAs and managing the regulatory ratios. So that is predominantly the idea, which -- where we are heading towards to manage the investment books. In terms of the ratings, ratings is, I think, almost 60% to almost 70% of our book is AA rated, and that is predominantly sovereign in nature. So hopefully I have answered all your questions.

What was your average yield on the investment book?

If you remember, in the last year financials when we were talking about the profit rate sensitivities, we mentioned it was 4.12% per annum or close to 4%. With recent maturities, like given they were very old Sukuk, our portfolio has slightly moved upwards and with the current repricing happening in the market. So it will be somewhere 430 bps.

So it will be around 4% to 4.5%, basically?

Yes, in between this range.

One last question. Your -- the expectation for this year was that probably we'll see some improvement in the net financing income margin. However, first quarter also, we saw contraction. Is it because your CASA levels have gone down or the general cost of funding has -- continues to go higher?

I'm not really sure on the margins, how you are calculating it. But the way we are calculating and we are seeing the numbers, it is -- it has improved. It has improved almost by 5 bps on an annualized basis. So yes, because I think your average balances, you take the spot average balances 2 data points. We take the actual average balance sheet, maybe that you will be seeing a bit of distortion. But from our perspective, we are seeing an improvement in the NIMs. On a month-on-month basis, actually, we are seeing an improvement. Cost of funds sequentially is going down slightly, getting stabilized, and towards tilting downwards, not like, I would say, heavily going downwards, but like tilting downwards, is -- on assets remaining stable quarter-over-quarter.

Our next question comes from the line of [ Mark Colombus ] from [ TFI ].

I just have a question about the recoveries. Could you talk a little bit more about how much recoveries you had over this quarter because obviously your cost of risk was very low? And then could you just talk a little bit about the trends within Stage 2, your Stage 2 loans, whether there's reason to believe that they might become performing again? Or whether -- what's the sort of whether some are trending towards Tier 3? Just some more elaboration on the Tier 2 loans, Stage 2 loans, rather.

Thank you, Mark. If you go on Page #15 of the financial statements, you will notice there is a recovery we are mentioning, so it's QAR 25 million. If you compare to Page #16, the last year recoveries, which were very, very high, so it was QAR 110 million. So presumably, this answers your recovery question. In terms of the overall cost of risk, we continue to anticipate in a range of 35 to 45 bps on annualized basis. Given these recoveries will be coming in the pipeline and will be flowing through. As far as your Stage 2 question is concerned, we have not seen any significant changes in terms of our Stage 2 portfolio when we compare to the December numbers. So as of now, we are pretty much quite stable on the Stage 2. Going forward, obviously, there will be some reclassifications moving upwards. That is the Stage 1 and some reclassifications, which are going to be moving downwards that is in stage 3. So that is -- it's too early to say how these will evolve. But as of now, we are talking as of March, they are pretty much stable and like has not even moved at all.

Our next question comes from [indiscernible].

I just had a couple of things. Maybe I missed what you were saying about the NIM. Could you just talk a little bit about NIM sensitivity? Obviously you haven't seen quite the dynamics that some other banks have seen in terms of NIM, but you've seen it on cost of funding. If and when rates actually begin to come down, what would you expect to see over the next, say, couple of years, like just to give me a sense of how the sensitivity works on the books, please?

Yes. So in terms of -- you're spot on, on the point that there is a lot of gray area on when the Feds will decide and how the rates -- the market or the benchmark rates will move. What we are -- like we are very conservative. And as we have told in the Q4 call that we expect almost 25 bps reduction in the latter part of the year. That is like in Q3, Q4, somewhere in Q3, Q4. And on a year-on-year basis, being very conservatively calculating and sensibly looking into the numbers. We expect a bump in our NIMs by almost 10 bps. So in the first quarter, on an annualized basis, we saw 4 to 5 bps going upwards. So that is like the correct direction we are moving towards. But again, there is a lot of things -- there's a lot of moving parts at the macro front, which can take things to a different direction. So starting in the year, in December call, we mentioned 10 bps with 25 bps reduction in the benchmark rates.

And then the second one, just to -- and I've asked this question before, but the cost of risk is incredibly low despite the fact that coverage is quite low. And then you mentioned that you sort of want to keep provisioning to, I think, I imply -- inferred from what you're saying to increase coverage and yet cost of risk guidance is sort of 35 to 40 bps. I mean, is there a target coverage that you actually want to get to by a certain point? Or is it a little bit more kind of random than that? Because even with collateral, I think you said coverage is only 90%, which I know you're going to tell me that it's different for you guys from every other bank in the world and that real estate is a big portion, and I don't understand, but it is a low coverage figure. So if you can just tell me the plan, please?

I think on the coverage front, it's -- again, we consider collaterals. So when we look into the collaterals, our coverage close to -- remains close to 90% in the medium term, not like tomorrow, not like day after tomorrow. In the medium term, the idea is to improve this to reaching towards 100% mark. And by the way, the coverage has slightly improved quarter-over-quarter. So last quarter, in December, it was 69.9%, we improved to 71.5%. So you might see slight improvements on that front. But like in the medium term, the idea is to reach to 100% with the impact of the collaterals.

And then just so -- just maybe just to finish on the NPL formation because, obviously, the NPL ratio went down, but the book sort of grew. So in terms of NPL formation, what's the kind of assumed sort of natural NPL formation going forwards?

I think the idea is to like we closed this year by close to 5% mark and/or that will be good to -- if we can less than 5% mark, but not significantly less. But again, it should be close to 5% in terms of the NPL ratio by the year-end.

But based on mid-single-digit growth. Okay.

Yes.

So not much change, yes. Okay. Sorry. And then just one final one. And I'm sorry, I've lost the page. OpEx growth. Could you just -- I mean, cost/income ratio is one metric, but just in terms of growth that you expect in expenses in OpEx over the next couple of years, what's the group sort of assuming or targeting on that front, please?

I think the theme or the idea for the management is to be as less as possible, don't be extravagant and be modest in terms of our spending. So that strategy will continue. You might see single-digit movement towards like positively, like going upwards. Key areas of spending could be spendings on the IT infrastructure, could be spending, certain spending. Sometimes you have certain marketing campaigns, which comes up. So those are -- at times, you might see some upward movement or like outliers, but the idea is to remain very much close to the inflation benchmarks, close to the historical numbers, and don't be extravagant on the overall spendings.

Our next question comes from the line of Lee Beswick from QNB.

On the NIM, in relation to your earlier comments, if the Fed raises by 25 bps at the end of the year, would that then slightly negatively affect the NIM maybe going into 2025, if you got a December rate rise.

No. What I mentioned earlier is we are budgeting a benchmark rate reduction of 25 bps. That is the fed rate reduction, which is to happen in the latter part of the year. And with that, we will get a NIM increase by 10 bps.

Exactly. So my question is, if the Fed raises rates, not cuts them, raises rates in the latter part of the year, will that have a symmetrical impact -- slightly negative impact on the net interest margin?

If the Fed increases the rate, obviously, my cost of funds will -- might go in tandem with that, but I did not model how my yield on assets will work. So this is something which is -- which I don't have any answer on at this point of time. But historically, in the last 2 years, we have seen the NIMs getting compressed or getting pressured predominantly because of very high cost of funds.

Our next question comes from the line of [indiscernible] Lesha Bank.

So almost all my questions are answered, actually, but I just want to point that how do bank perceive the loan growth for the year? And secondly, I want to ask is, what ROE the bank is targeting for the year?

Yes. So I think we mentioned during our speaker notes also, we are looking for a mid-single-digit growth on a year-on-year basis for the overall financing books. Key pillars of the growth or key segments of the growth should be wholesale banking and private banking. And that is pretty much aligned with the overall GDP growth expectations at the country level. In terms of your second question, sorry, I missed your second question.

What ROE bank is targeting for the year?

I think the current ROE is somewhere at 14%, slightly notching upward 14%. The best bid in ROE should be close to 13% being conservative. But that's something -- it's a function of so many moving parts. So I won't be able to give you exact guidance on that. But as far as like the best guesstimate or estimate should be somewhere close to 13%, that will be a good achievement for us.

Our next question comes from the line of Lee Beswick from QNB.

Apologies. Just a follow-up question on capital. Have you made an assessment of Basel 3.5 Basel IV, whatever you want to call it, and what impact that would make?

As of now, since last year, we were working on the new regulations, which Qatar Central Bank like trying to implement and announce those regulations. So 3.5 Basel and Basel IV, it's -- I'm not really sure we have anything to say at this point of time.

But that's going to be implemented in this quarter, is it, by June?

The QCB regulations, if they are incorporating these new regulations, which you are referring to, yes, that has already been implemented, and that has been implemented starting from 1st of January. So we did an exercise in line with the QCB's regulations, the new regulations, to calculate the capital adequacy ratio, and that has been implemented with some exceptions and with some delays are there, which QCB has asked us. And as of now, we are following what the QCB regulations are requesting us to do.

Okay. So you have implemented it within your accounts, your first [indiscernible] accounts?

Yes.

Our next question comes from the line of [indiscernible] from Bloomberg. It doesn't appear -- As we're getting no response, I will move on to the next question. Our next question comes from the line of Ejayan Al-Ahbabi from Al Rayan Investment.

This is Shabbir Kagalwala from Al Rayan Investment. I have a question on the expected tax implementation in Qatar. So what sort of tax rate do you anticipate to affect you? And how do you see to mitigate the risk of taxation in terms of improving profitability or maintaining profitability because of that? If you can just give some comments, please.

Shabbir, I think we are still awaiting exact regulations. So to say something on this front will be difficult from my part, like how much like the exact tax will get applied. If I see the Pillar 2 regulations, it says anybody or any MNC who has a revenue of more than EUR 750 million, they will be applicable for a 15% tax, but that is not like actually been implemented as of now. So I won't be able to comment on this one. And when this will be implemented, again, this is something a moving part or like I'm not really sure when exact regulations will get -- will become applicable.

Our next question comes from the line of [indiscernible] from Bloomberg.

I have a quick question on the cost of risk. So the 2023 level was annualized. I mean it was low significantly versus the historical average. Could you give us a bit more information or guidance? So what could be the 2024 level like? Shall we see the level of rebounding to the historical average? And could you comment on the real estate market developments that you have seen so far in 1Q?

The cost of risk question, I think we had this discussion before also. In the last quarter, this cost of risk should remain with a range of 35 to 45 bps on a gross basis. It will be difficult to determine on a net basis how the cost of risk will evolve in this year. In the first quarter, the gross -- on the basis of gross cost of risk, we reported 24 bps on an annualized basis. But going forward, we expect the year to close somewhere in the range of 35 to 45 bps of the cost of risk. As far as real estate market, in the first 90 days of the year, we haven't seen any unusual movements or any significant changes. So that is the status quo as compared to the December discussions we had on the real estate exposures.

And one question more about the operating expenses. I see the [indiscernible] costs in the first quarter. Are you going through any structural changes or could you explain that?

No, I think it's pretty much at times you have certain accruals to make. So those accruals, and on a given point of time, you make certain accruals and you don't make certain accruals. So I think this is pretty much -- it's a seasonal effect. Maybe in Q2, Q3, you might see those accruals flowing through. So this decline, it's a one-off, I would say.

There are no further questions at this time. I will now hand the call back over to Mr. Roy Thomas.

There are no further questions. We would like to thank Dukhan Bank's management for the results update and answering all the queries and look forward to speaking to you all for the second quarter 2024 results conference call. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.