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

Hello, everyone. Welcome to Dukhan Bank. I'd like to hand over to our moderator for today, Shahan. Please go ahead.

Thank you very much. Hello, everyone. I want to welcome you to Dukhan Bank's Second Quarter and 6 Months 2024 Financial Results Conference Call. So on this call from management, we have Ahmed Hashem, Acting CEO; Osama Abu Baker, Group CFO; and Riaz Khan, Head of Reporting and Budgeting and IR Officer. So as usual, we will conduct this call with first management reviewing the company's results followed by a Q&A session. I will turn the call over now to Ahmed. Please go ahead.

Assalamu alaikum, everyone, and good afternoon. I appreciate all of you joining us today. As usual, I will begin by briefly discussing the broader economic context before discussing key updates for the first half of '24. Later on, the team will provide you with updates on the financial performance of the group followed by the usual questions and answers. Now let's start by addressing the global macroeconomics landscape, where geopolitical tensions continue to impact the economic landscapes with implications for trade and investment flows. Inflation rates remain valid across regions with some countries show declining trends. Financial markets exhibited volatility responding to economic data, geopolitical events, upcoming U.S. elections and Central Bank's actions. Now shifting our focus on the domestic markets. We continue to note formidable in the momentum since the latter part of the 2023. Most of the sectors of the economy exhibited the resilience and future potential. Furthermore, tailwinds from planned CapEx investments under the flagship NFE project, coupled with related downstream projects, is also providing a boost to the overall economic growth. The ongoing diversification efforts and structural reforms by the state are expected to further stimulate economic activity and spending across various services and manufacturing sectors, while ensuring alignment with Qatar's 2030 vision, of course, with particular emphasis on health care, education, travel and tourism. Now talking about Dukhan Bank's strategic approach which 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 during the past 2 years, we have sustained robust profitability and continue to control our cost of risk and achieve high recovery rates. Now let's turn on attention to the group's financial performance for the first 6 months '24. I'm pleased to report that we have achieved notable success. Our bottom line profitability for the 6-month period ended June '24, increased by 3% from last year's same period and reached a net profit of QAR 784 million. On similar lines, we saw growth in our balance sheet, where loans book grew by 7%, our liquidity remained robust and capital adequacy ratio was comfortably higher than the minimal requirement and currently standing at 17.8%. In a significant move, the Board of Directors has declared the bank's first interim dividends of 8%, equivalent to AED 8 per share, the proposed dividend is subject to regulatory approvals. The decision reflects our strong confidence in the bank's future prospects and its commitment to providing value to shareholders. By ending here, I'll let Osama to share details on our financial performance for the first 6 months period '24, followed by the question and answer, over to Osama.

Thank you, Ahmed, and welcome, everyone. I will start the financial analysis with the group's balance sheet. Our total assets stands at more than QAR 114 billion, mainly composed of financing assets of QAR 84.6 billion, or 72% of the total assets. The investment portfolio follows closely reaching almost QAR 16.7 billion or 15% of the total assets. Majority of our balance sheet is funded by customer deposits, representing about 85% of total liabilities and totaling to QAR 84.6 billion. This is followed by market funding, which is 13% and amounted to QAR 12.6 billion. We remain successful in maintaining our regulatory loan-to-deposit ratio below the 100% mark, which currently stands at 96.1% distinguishing us among other peers. Notably, our reliance on nonresident deposits has decreased to 2.2% as we continue to cultivate strategic and generational domestic relationships. We remain committed to safeguard our profit margins and manage the cost of funds. In this regard, net profit margin has been maintained around 2.1%. Now we anticipate the conclusion of the rising cost of fund cycle linked to Fed and QCP benchmark rate increases. As inflation shows signs of cooling off, this would reduce pressure on our cost of funds and lead to positive margin evolution in the coming future. Examining the breakdown of the group's total income, 2 primary contributors stands out. First, financing and investment income, which rose by QAR 527 million or 25% compared to the previous year same period and reaching QAR 3.1 billion. The second highest contribution comes from the net fee and commission income amounting to QAR 108 million. Turning our attention to impairments. The net impairment charge after taking the impact of recoveries for the current period amounted to QAR 91 million marking an increase of QAR 19 million from QAR 72 million reported for the first 6 months of 2023. On a quarter-over-quarter basis, the net impairment charges increased by 45% from QAR 37 million to QAR 54 million, this was impacted due to higher impairment provisions, which increased by 209% from QAR 62 million to QAR 192 million, being partially offset by higher recoveries, which increased by 453% from QAR 25 million to QAR 138 million. When looking into the impairments on a gross basis, on a year-on-year basis, the impairments increased by QAR 56 million or 28% increase from the QAR 198 million to QAR 255 million on a quarter-on-quarter basis, the gross impairments increased by QAR 130 million or 209% from QAR 62 million to QAR 192 million. The staging of financing activities align well with the industry standards. The Stage 1 is at 81.5%, Stage 2 at 13.3% and the Stage 3 accounts are at 5.2% with a decent coverage of 3.8% against Stage 2 accounts and 65.6% against the Stage 3 accounts. It is important to point that if we consider the eligible collaterals benefit, the Stage 3 coverage ratio will reach about 90% for the NPLs. Our financing book remains well diversified, including all sectors, government at 22%, real estate at 29%, commercial 8%, consumer 8%, contracting 4%, industrial and manufacturing at 2% and services and others about 27%. The group's capital adequacy ratio at the end of the first 6 months of the year stands at 17.8%, exceeding well above the minimum regulatory requirement of 14.3%. This positions us well to grow confidently in the future. Here, important to note that the impact of the interim dividends declared as part of the first half results has already been embedded in the reported chart. Looking forward to 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. The drivers of this growth will be wholesale banking, private banking segments with our growth strategy emphasizing quality over quantity. Regarding our bottom line profitability, we foresee a comparable mid-single-digit growth, mirroring the expansion anticipated in the overall balance sheet. While we anticipate no significant deterioration in the assets quality, our approach to provisioning remains conservative. We will continue to build adequate buffers to safeguard against unforeseen adversities. In summary, while we focus on delivering another successful year, our priorities are NIM protection, robust liquidity and maintaining our current market share while fostering the growth of the balance sheet. Now I would like to open the floor for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from [ Adrian Abibi from Al Rayan ].

This is Zohaib from Al Rayan Investment. I have 2 questions. Firstly, which sectors or segments saw growth in the loan book for the first half? And do you believe these lendings that were done for the first half, are they more like a longer-term loans or they are like more working capital requirement loans? My second question is on your investment book. Again, I think last time also -- last quarter also, I asked the question that why -- what is the strategy for the bank to reduce your investment book at a time when you have some very high yields in the market and plus, you yourself said that probably the interest rate cycle is coming down, which is always very good for the Sukuk segment. So why would you be on a path of reducing your investment book and not locking in these high yields at the current level?

Thank you, Zohaib. In terms of the loan growth, predominantly the loan book grew at the wholesale banking level, followed by the private banking deals. In terms of the tenure of those deals, they are mid- to long-term deals and predominantly at good yields. In terms of your second question on the investment book, I think investment book, it's -- I should say it's more secondary rather than the primary objective for the bank to build the balance sheet using the financing assets, that's the first priority. Moving on to like investments and locking in for -- with higher yields, obviously, we look into the opportunities, but that really depends on asset liability management, that really depends on matching your liquidity profiles as well as the yields. So it's -- I cannot directly say it's because of like the yields are high, I will be locking in more money or more allocation on the investments front. So that also, again, depends on the issuances, how many issuances are available in the market. So it is a mix, like there are multiple line items or multiple objectives, which we need to achieve at the same time. So it's not really based on if the yields are high, we will be putting a lot of money or allocation on the investments front. I hope I answered your questions.

Yes. Riaz, just a follow-up to that. So is it fair to say that your cost of funding is higher than the yields that you can expect on your investment book, and that's why you are probably reducing your investment book to pay up some of your liabilities?

I think it's -- the cost of fund question is more on like we are proactively managing our cost of funds, and we have been quite successful in last 6 months to hold that trajectory, which was on a very, very higher side or which was going upwards quite significantly in last 2 years. So that has -- that we have achieved it. And it's like not really you can say that the spread between the actual cost of fund versus the investments but it's a mix and match. Investments predominantly link to ALM, HQLAs, those kind of themes, which we look for from the investments front.

Question comes from Rob Skepper from Ashmore.

Yes. I guess following on from that theme a little bit, just on kind of where the NIM has been for these first 2 quarters. I guess it looks a little bit soft. And I think the guidance for the year was kind of plus 10 basis points assuming a rate cut? Like is that still doable for this year?

Yes, completely right. The guidance is still applicable, and we maintain the same 10 basis points up. And currently, we are focusing on quality assets. That's why the improvement quarter-on-quarter was minimum. But hopefully, by year-end, we will achieve the target of -- that we have told you earlier of 10 basis points.

Yes. Okay. Got it. And then just to understand, just on NFI, on fees and commissions, they were very weak like what's happening there?

Those are really seasonal and cyclically quarter-on-quarter depends on the LCs, the LGs, the overall trading activity, the number of contracts in the market. So overall, we are doing good compared to the last year. But quarter-on-quarter, as I mentioned, it all depends on the current activities and the current bidding process for the new contracts, et cetera, et cetera. But the core business, the fee income is still positive. It looks good, and we anticipate a good pipeline to materialize hopefully in the third and fourth quarter of this year.

Okay. Got it. Got it. And then just on costs. So costs are up quite a lot, and a lot of it's through the other expenses line. I just wondered if you could kind of share any granularity on that?

Yes. So in terms of the cost on the other expenses on a year-on-year basis, we saw almost doubling up the numbers, at least up by 57%. So this was -- there were 2, 3 key points there. The first one is the rental cost has increased, and the question should be the why the rental cost increased, is actually we moved to the head office building very recently 2, 3 weeks ago. So for last 6 months, there were certain buildings, which we were contracting or which we were renting them or we were doing the rental contracts on short-term basis. So because of the IFRS classifications, previously, we were classifying them as part of our depreciation as well as certain portions goes to finance cost. Now since these contracts were on short-term basis, we had to classify those rental costs within the other expenses. So that was item #1. Over and above, there has been -- as we've always been highlighting that there has been a digitization drive in the bank to digitalize and spend more on the IT front. So we saw some increase on the IT expenses. Over and above, last but not the least, our LP charges has also -- like this was not the case in the last year because last year, we got listed in the end of Feb somewhere. So the impact of LP charges was on a very lower side as compared to a full year impact, which we had in this year. So again, it was like there was a comparability which was not there. So pretty much these are the 2, 3 key points, which makes up this rise in the other expenses.

So I would like to add to that point. Yes, there -- maybe if you go into line by line, you will notice an increase and especially in the other cost line. But in reality, majority is coming from the reclassification from depreciation and finance expense to the G&A. But if you look at the cost to income overall, compared to 6 months to the full year of last year, you will find it's healthy going down from, I believe, 33% to 30% plus. So yes, there has been reclassification, but the overall trend is positive to the bottom line.

Yes. Got it. Got it. Okay. And anything...

Seems like the Q&A has been disconnected. Please give me 1 moment while I try to call up the representative or the analyst.

Okay. We'll be waiting. If you can connect him back, please.

Mr. Skepper, your line is now open again.

Yes, I just wanted to ask just 1 last question was just on the interim dividend, like how should we kind of interpret that? Like is there any signal for what it means for like the full year in total dividends? Is it something that you're going to be looking to do going forward now?

As you know, the interim dividend is something new to the country, and we are the second bank to announce that. It is a very common practice, international practice. The Board of Directors decided to distribute this semiannual dividend. We were looking to having it quarterly in the future, depends on the market how the reaction by investors, how easy is it? But at the first stage, it is semiannual. And definitely, it is something encouraged by the regulators, something is favorable for the investors. So definitely, it is something we will make it on a regular basis going forward.

The next question comes from Salome Skhirtladze from Bloomberg Intelligence.

Could you give us information on cost of risk guidance, so whether it still remains within the limits from the last year, 50 basis points, if I remember correctly? And on the coverage of Stage 3 loans, it has weakened in the first half of the year. Do you have any strategy, any plan or any internal limit for this coverage [ of NPL ]?

Yes, sure. Yes, the guidance we gave earlier this year about the cost of risk on a gross basis will be in the range of 50, 55 basis points. That didn't change. Your memory is strong. Yes, it is 50 to 55. And regarding the coverage, it's very tricky. We have to see here the movement during the period where -- certain accounts where we have moved to off-balance sheet or written off. Certain accounts were collected. So those -- the coverage of those accounts when we get them out of the books, definitely will influence the overall coverage, plus that we have transferred certain accounts from Stage 2 to Stage 3 now, and we started to increase the provision for those accounts. It is important to note that since our lending strategy is a bit conservative, where we always obtain good securities and mortgages against all the loans that we give to our customers, we benefit from those securities and mortgages when we calculate provisioning. So as I mentioned in my note earlier, if we include the benefit for those securities, we will cover almost above 90% of the exposures. And our intention is always to maintain a high coverage. And as you have seen during the year, although we have recoveries, but directly, we have increased our charge in order to increase the coverage. This is something we'll continue doing. We expect a few recoveries in the next -- over the coming 5 to 6 months. And definitely, we'll utilize that in order to build a better provisioning and coverage for the NPL.

Our next question comes from Abhinav Sinha from Lesha Bank.

So just on the impairment on the P&L. So if I look at the 1H number, it stands at around QAR 68 million and last year, for the full year, it was a QAR 300-odd million. So how shall we think about it for this year? Shall we expect it to remain around QAR 300 million with more impairment coming in the second half, like how the historical trend has been? Or is it something we should be -- else we should be knowing there?

I think the numbers which you are looking is on the net basis. Predominantly, recoveries is something which is sometimes at times is unknown when we'll realize those recoveries because there is recoveries in the pipeline, obviously, at any point of time. But when they will get realized, that really depends on the case. So as and when the cushion gets available or like there is more cushion available, we became more conservative and that's how always been the strategy. But on overall basis, as Osama guided, the cost of risk could remain in the range of almost 50 bps, so that's what was we guided and that's what we are targeting towards on gross basis.

Comes from [indiscernible].

During the call of the Qatar National Bank, there has been discussions around like the potential of a 15% corporate tax being implemented in Qatar, just like the OECD minimum tax rate. Given that Dukhan Bank is very Qatar-focused bank, do you think that if some development like this occurs, Dukhan Bank will also be likely charge the 15% corporate tax? Or do you think there is like the -- there's a caveat to that and then you will be different. So what's your opinion on that?

Unfortunately, I didn't attend the QNB call, but now I'm interested to hear what exactly was discussed. I'm not aware of this intention, it is still under discussion at the decision-making offices, let's say, or Ministry. Dukhan Bank is not going to be subject to this global tax because we are operating out of Qatar and only Qatar, so we cannot be compared to other peers in the market who has operations outside Qatar. And so far, we have not got any guidance if there will be a minimum corporate tax. This is something that is not yet discussed in public and even not discussed with us on a confidential basis. So, so far we are confident that we will not be subject to the global taxation and we are not aware of any local minimum corporate taxation.

And also on a separate like what's your target like the loan loss coverage levels?

Coverage, loan loss coverage...

You mean for Stage 3?

Yes, NPL coverage, yes.

Yes. The NPL coverage currently, it is almost 70%, with the securities, it's around 90%. So we target to reach 100% with the securities at these bank ratios.

Okay. Yes. I think there has been discussions around like I heard about it, maybe just like at the rumor stage that they are contemplating, like the Qatar Central Bank is contemplating to asking the banks to top up their loan loss coverage to above 100% levels without investments and without collaterals just to be kind of on the safe side in terms of like the regulatory framework. Have you heard about any such developments as well? Or is it like the...

Not really, I struggle to be honest with you how these rumors comes out because in Qatar, we are very conservative, and we have very detailed guidelines where the Central Bank applied certain haircuts to the securities that we obtained. And also, we are mandated to maintain a 2.5% of our loan book as risk reserve. So I cannot understand why would the Central Bank will increase the coverage above 100% provided that we have those haircuts and the risk reserves. So definitely, those are rumors and I would say no, nobody discussed that with us, and I don't think they will materialize because we are already heavily regulated, and we are on the safe side. And the way the Central Bank applies the provisioning is full of buffers and haircuts, as I mentioned earlier.

Right now, we don't have any raised hands or questions as of at the moment. And I'd like to hand back over to the management for their final remarks.

Thank you from Dukhan Bank's side, and we'll catch up for the next results call. Thank you very much.

Thank you.

Thank you all for attending today's call. You may now disconnect. Have a wonderful day.