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

Hello, everyone, and welcome to the Dukhan Bank conference call. Please note that this call is being recorded. I'd now like to hand over to our moderator for today, Shahan, you may now begin.

Thank you. Hello, everyone. I want to welcome you to Dukhan Bank's Third Quarter 2024 and 9 Months Financial Results Conference Call. So on this call from management, we have Ahmed Hashem, the acting CEO; Osama Abu Baker, Group CFO; and Riaz Khan, Head of Reporting and Budgeting and Investor Relations Officer. So as usual, we will conduct this call with first management reviewing the company's results followed by Q&A session. I will now turn the call over to Ahmed. Please go ahead.

Salam Alaikum and thank you so much, Shahan. Good afternoon, everyone, and thank you for joining us today. As always, I'll begin with this call by briefly touching on the broader macroeconomic environment. Before we dive into the key updates for the first 9 months of '24. Following that, the team will walk you through the group's financial performance, followed by the usual Q&A session. Looking first at the global landscape, geopolitical tensions continue to weigh on the global macroeconomic environment, however, inflation has finally started to subside and many central banks begin to lower rates. During this quarter, Qatar Central Bank has reduced the benchmark rate by 55 basis points. Going forward, this should have a positive impact from the overall economy. Domestically, the outlook remains strong, supported by elevated oil and gas prices, leading to a solid physical and current account surplus. The momentum is clear with many factors showing resilience and significant potential for future growth. A prime example is the tourism sector, where Qatar is set to record its highest ever tourist number this year having welcomed nearly 3.3 million visitors in the first 8 months. That's a 26% increase compared to the same period last year. Similarly, the government's initiatives and efforts to promote nonhydrocarbon activities including support for startup and emerging businesses and reforming the real estate law are expected to provide tailwinds for businesses across Qatar. Additionally, the decision to reduce the service fees by up to 90% for the commerce industry, business development and consumer sectors in July '24 has spurred the surge in demand. Looking to the future, a ramp up in the North Field expansion project, along with notable expansions in refining, downstream, including petrochemical catastrophes, contributing to the economic growth. Much of the expected increase in annual LNG output is already secured through long-term contracts. All of this is laying foundations for a sustained GDP growth over the medium to long term. Beyond energy, Qatar's focus on economic diversification through tourism, infrastructure development and digital transformation is vital to driving further growth. These efforts are expected to stimulate activity across various sectors, particularly services and manufacturing, while ensuring alignment with Qatar's 2030 vision. At Dukhan Bank, our customer-centric approach and commitment to digital transformation have been key to our strong performance despite global challenges. Our focus on continuous product innovation aimed at enhancing customer experience has allowed us to remain resilient and consistently expand. We have maintained our market share and remain really committed to advancing our digital initiatives. Now turning to the group's financial performance for the first 9 months of '24. I'm pleased to report strong results. Our net profit for the 9 months period ended 30th September rose by 3% compared to the same period last year, reaching QAR 1.14 billion. Our return on tangible equity increased to 12.6%, up from 11% last year. The group's total assets reached QAR 116.7 billion, which is the highest level to date with our loan book growing by an impressive 9%. Our liquidity position remains robust, and our capital adequacy ratio is comfortably above regulatory requirements standing at 17.4%. With that, I will now hand over to Osama to provide further details on our financial performance for the first 9 months. Over to you, Osama.

Thank you, Ahmed, and welcome, everyone. I'll start the financial analysis with the group's balance sheet. Total assets stand at more than QAR 116 billion mainly composed of financing assets of QAR 84.9 billion, 73% of our total assets. The investment portfolio follows closely reaching almost QAR 17.3 billion, contributing 15% of the total assets. During this year, the bank successfully expanded its financing assets, achieving an impressive 9% growth compared to the previous year. This growth mainly came from wholesale and private banking sectors. Such growth underscores the bank's strategic intent to increase its market share while ensuring efficient and balanced resource allocation. Our balance sheet is funded by customer deposits, representing about 81% of total liabilities and totaling to QAR 82.3 billion. This is followed by market funding at 17% and amounting to QAR 17.4 billion. The group's liquidity remains robust with loan-to-deposit ratio of 101.2%. Our reliance on nonresident deposits is limited to 2.3%. As we continue to cultivate strategic and generation of domestic relationships, we remain committed to safeguard our profit margins and to efficiently manage the cost of funds. In this regard, net profit margin has been maintained at around 2.1%. Now since there are more fix rate cuts and QCB benchmark rates decline expected, this would aid in reducing pressure on our cost of funds and lead up to a positive margin evolution in the near future. Moving on to the profitability. The group's financial performance during the 9 months demonstrated the execution of our strategy and strengthened platform for growth. The growth in the bottom line was underpinned by a 17% increase in net income from financing activities, 33% rise in net income from investing activities, resulting in an overall rise in total income by 16%. Gross and net income from financing activities reflected positive momentum in overall volumes, coupled with better yields. The group's efforts across sell, coupled with deepened client relationships while leveraging differential product strengths fostered consistent growth in both profit and nonprofit income sources. Now turning our attention to credit quality. The nonperforming loans ratio improved, decreasing to 4.7% as of September '24, from 5.4% at the end of 2023. This improvement is largely attributed to the bank's effort of effective recovery management, reflecting the high quality of our loan portfolio and robust credit risk management practices. Additionally, the Stage 3 coverage ratio reached 69% reflecting the group's prudent approach towards managing nonperforming loans. Here, it is important to point that if we consider eligible collateral benefits, the Stage 3 coverage ratio would approximately be above 90% level. The staging of financing activities aligns well with the industry standards, where we managed to reduce Stage 2 to 12.8% with a decent coverage of 3.4%. Our financing book remained well diversified across all the sectors, government is at 21%; real estate at 27%; commercial 10%; consumer 8%; contracting at 4%; industrial manufacturing at 2%; and finally, services and others about 28%. Capital adequacy ratio at the end of the 9 months stands at 17.4%, exceeding well above the minimum regulatory requirement of 14.3%. This positions the bank to grow in the future without any pressure on the capital needs. Here, important to note that the impact of interim dividends declared as part of June '24 numbers has already been embedded in the group capital adequacy ratio reported. Looking forward to full year of 2024, we project a sustained growth trajectory, anticipating a single-digit expansion in our balance sheet that aligns with the overall GDP growth target for the country. The drivers of this growth will be wholesale banking and 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 asset quality, our approach to provisioning remains conservative. We will continue to build adequate buffer to safeguard against any unforeseen adversities. In summary, our focus will be on delivering another successful year while protecting our NIMs, focusing on robust liquidity and maintaining our current market share while fostering the growth of our balance sheet. Thank you very much, and I would like to open the floor for the Q&A session.

[Operator Instructions] Our first question comes from Zohaib Pervez from Al Rayan Investment.

This is Zohaib Pervez from Al Rayan Investment. I've got 2 questions. Firstly, what will be -- what would be your sensitivity to 100 bps decline in the QCB rate? What will be the sensitivity of your net finance income margin to 100 bps decline of the QCB rate? The second question is, recently, it was announced by the government that the COVID-related loans will be repaid or settled. What information do you have on that? And how will that impact your balance sheet.

Hi Zohaib, I'll take the first question. So in terms of the sensitivities, if we take like we recently had a 55 bps rate cut and then if we add another 50 bps there by the year-end, so on an annualized basis, we expect the NIM to expand in a region of somewhere 12 to 15 bps. So this is the answer to your first question. And maybe, Osama, you want to contribute something on the second question.

Yes. Actually, the COVID-related announcement came to the news and we cannot add more than what you have seen in the news because we don't have any of those loans in our books. So I have no comments to add to the news.

Okay. So you have no loans related to the COVID, the COVID time or something, the program that is going on...

This program was booked by the Qatar Development Bank and some of the banks has some exposure, but it was guaranteed already by the QDB. So it has no effect the quality of the loans or the cash flows whatsoever.

And our next question comes from Salome Skhirtladze from Bloomberg Intelligence.

So I have a few questions. The first on the fee income, which is lower versus past year. Could you explain the drivers and how we could assume the growth in the next quarter or beyond? And second, could you reiterate the guidance for the cost of risk and coverage for this quarter and next year, if possible? And on the deposit side, the sector deposit -- private sector deposits are in a declining amount in the past few months. Could you give us a bit more insight on this? And how do you foresee going forward the deposit growth? And what is your strategy in case there is some risk of outflows from private sector deposits basically?

Okay. Starting with the fee income. It is true that during the year, we have seen a drop. This is mainly due to the less activities in the construction sector where we generate a good fee income from issuing the bank guarantees. And overall, the trading business has shown a slowdown in the first half of the year. That's why the fee income has dropped. We have seen in the last few days of Q3, a good pickup. We have managed to finance or to provide facilities to a couple of good projects in the North Field. The income will be reflected in the fourth quarter. And we are actually seeking such new projects in the North Field and the infrastructure. So hopefully, by next year, we will go back to the 2023 fee income levels. Regarding the cost of risk and coverage, as I mentioned, we continue our conservative approach. Currently, the coverage for Stage 3 is around 70% without including the collateral benefit. If we include it, it will be around 90%. So hopefully, we are targeting 100% coverage ratio next year. And definitely, we aim to take more provisions in the third quarter of this year. And our target is to reach the 100% coverage ratio and 12-month period. The last question I'll refer to Riaz, please.

So in terms of private sector deposits, if you see the overall size of the deposit base for the bank that has not changed in terms of contributions from the private sector. So that has remained quite stable. You might see here and there in certain quarters, this number slightly moving because sometimes some maturities for the deposits arrive and those maturities takes time, a bit of administrative, let's say, time period, which requires them to be renewed. So it's not like something like the bank level, I can say there is any unusual movements we are seeing from the private sector deposits. So on an overall basis, the deposit base has remained very healthy for the bank and including the ratio between the CASA accounts and the term deposits. So currently, CASA is remaining very healthy at 29%. So this is what I can mention to you or like say about the private sector deposits.

Question comes from Abhinav Sinha from Lesha Bank.

Yes. So one question on NPL. I see that it has come down from 5.4% to 4.7% in 9 months. So how shall we see that for the full year because I think there will be more provisions in the final quarter. So does that impact it? And secondly, you said that for every 100 basis points, the NIM expansion is 10 to 15 basis points. So could you break down that -- how much do you benefit from the deposits? Or is it more of an yield enhancement that you see -- that you come up with the 10, 15 basis points?

Yes, the NPL ratio would be at almost the same level from now to the year-end, the provisions that we will take will enhance or improve the coverage ratio. It will have a slight effect on the coverage ratio. We are targeting a 70% coverage ratio. The NPL ratio, I doubt it will move from here. The other question about the NIM expansion. It's a mix actually between the reduction in cost of funds, maintaining the yield on the loan book because, as you know, many facilities have certain floors. So actually, it is a mix. I cannot give you now the breakdown of the split and the NIM improvement, how come attributes to the deposits and how much attributes to the loan book. But in summary, it's around 15 basis points expansion.

[Operator Instructions] As right now, we don't have any pending questions. I'd now like to hand back over to Shahan for further remarks.

Okay. If there are no more questions, we can wrap this up. I'd like to thank Dukhan Bank's management for giving us an update and their views, and we will pick this up again next quarter. Thank you.

Thank you, Shahan, so much. Thank you, everyone, for attending.

Thank you, everyone, for attending today's call. We hope you found it useful. Have a wonderful day, and you may now disconnect.