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

Hello, everyone, and welcome to QNB Dukhan Bank Conference Call. Please note that this call is being recorded. I'd now like to hand over to Shahan. You may now begin.

Thank you, Ali. Hello, everyone. I want to welcome you to Dukhan Bank's fourth quarter and fiscal year 2024 financial results conference call. So on this call from management, we have the bank's acting CEO, Ahmed Hashem; Group CFO, Osama Abu Baker; and Riaz Khan, Head of Reporting and Budgeting and Head of Investor Relations. So as usual, we will conduct this call with, first, management reviewing the company's results followed by a Q&A session. I'll turn the call over now to Ahmed. Please go ahead.

Thank you, Shahan, so much. [Foreign Language], everyone, and good afternoon. I'll begin with a brief overview of the global domestic macroeconomic trends in the fourth quarter of 2024 before diving into our financial year '24 results. Afterward, the team will walk you through the group's performance, followed by the usual Q&A. On the domestic front, Qatar's outlook remains highly favorable. Stable oil and gas prices have continued to underpin robust physical and current account surpluses. The momentum is constructive, with many sectors showing resilience and significant potential for future growth. Worth mentioning that during this quarter, Qatar Central Bank also reduced the benchmark rate by 60 basis points, taking total rate cut for the year to 115 bps. Going forward, this should have a positive impact on the overall economy [ chunk ]. A standout example in the tourism sector where Qatar is set to record its highest ever tourist numbers this year, having welcomed nearly 3.6 million visitors in the first 9 months, that's a 26% increase compared to the same period of last year. This demonstrates a tangible progress of the nation's diversification strategy, bringing Qatar close up to its ambitious goal of attracting 6 million visitors annually by 2030. Moreover, the government's proactive initiatives to stimulate non-hydrocarbon activities are showing significant promise. These include support for start-ups, emerging businesses and reforms, such as a 90% reduction in the rental value of Ministry of Municipality Land in the industrial zone allocated for commercial use. Additionally, the launch of the real estate strategy in December further solidified Qatar's position as a premier investment destination. Another prime example of Qatar's diversification effort is that Qatar Air QAR 20 billion Simaisma tourism project, where the foundation for the Land of the Legends, a transformative development valued at $3 billion was laid. This project is a pivotal step in further strengthening Qatar's stature as a leading regional and global tourist destination. Looking ahead, Qatar's energy sector remains a critical driver of growth. The North Field expansion project and significant expansions in refining and petrochemical capacities are poised to support medium- to long-term GDP growth. Notably, much of the anticipated LNG output increase is already secured through long-term contracts, providing a stable foundation for sustained progress. Beyond energy, Qatar's focus on infrastructure, digital transformation and economic diversification aligns with its Vision 2030, stimulating growth across sectors like services and manufacturing. Now at Dukhan Bank, we take immense pride in our record-breaking performance this year. Despite external challenges, we have demonstrated resilience and innovation, solidifying our role as a key contributor to national progress. Despite external challenges, we have consistently upheld an institutional stability, further cementing our position. Now turning to the group's financial performance for the year '24. I'm pleased to report the record results as we reported highest ever net profit of QAR 1.34 billion in the bank's history, reflecting a 3% annual growth. Our return on tangible equity remained robust and increased to 11.1%, up from 11% last year. The group's total assets reached QAR 117.9 billion, remaining at historic levels. The bank achieved an impressive yearly growth of 11% in financing book. Our liquidity position remains robust. This was underscored by the successful issuance of our $800 million, 5-year senior unsecured Sukuk. This is by far the largest issuance by a Qatari Islamic bank since 2020. Our capital equity ratio is comfortably above regularity requirements standing at 17.3%. In recognition of this outstanding performance, the Board of Directors has proposed an additional cash dividend distribution of 8% of the nominal share value equivalent to QAR 0.08 per share. This is subject to the approval of course of the Central Bank and shareholders at the Annual General Assembly meeting. The proposed dividend, combined with the interim dividend, takes the total dividend distribution for the financial year '24 to 16% of nominal share value equivalent to QAR 0.16 per share. With that, I'll now hand over to Osama to provide further details on our financial performance in '24. Over to you, Osama.

Thank you, Ahmed, and welcome, everyone. I will start with the group balance sheet. Total assets currently stands at a record levels of QAR 117.9 billion, composed of financing assets of QAR 86.2 billion, 73% of our total assets. The investment portfolio follows closely, reaching almost QAR 19.9 billion, 17% of the total assets. During this year, the bank successfully expanded its financing assets, achieving an impressive 11% growth compared to the previous year. This growth mainly comes 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 mainly funded by customer deposits, representing about 81% of total liabilities and totaling QAR 83.4 billion. This is followed by market funding, including Sukuk issuances, contributing 17%. The group liquidity remained robust with regulatory loan-to-deposit ratio at 98.6% and LCR above 167%. 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%. There has been a 10 basis points growth noted in our NIM on a year-on-year basis, meeting our targeted NIM anticipated for 2024. Moving into profitability. The group financial performance during the year demonstrated the execution of our strategy, strengthening the platform for future growth. The bottom line growth and profitability was underpinned by 11% increase in net income from financing activities and a 14% rise in net income from existing activities, resulting in an overall rise in total income for the group, which grew by 12%. Gross and net income from financing activities reflected positive momentum in overall volumes, coupled with better yields. The group efforts to cross-sell, coupled with deepen client relationships, while leveraging -- deleveraging differentiated product strengths fostered consistent growth in both profit and nonprofit income sources. Now turning our attention to credit quality. The nonperforming loan ratio improved to 4.6%, decreasing from 5.4% last year. This improvement is largely attributed to the bank's effective recovery management, reflecting robust credit risk management practices. Additionally, the Stage 3 coverage ratio reached 73.1%. Here, it is important to point that if we consider eligible collateral benefits after taking the effect of QCB prescribed rate cuts, the Stage 3 coverage ratio would be approximately above 95% against the NPLs, reflecting the group's prudent approach towards managing nonperforming loans and the related provisioning. The staging of financing activities aligns well with the industry standards, where we managed to reduce Stage 2 prudential -- percentage to gross loans at 9.5% with a decent coverage of 5.3%. Our financing book remained well diversified across all sectors, including government at 20%; real state 24%; commercial 9%, consumer 9%; contracting 4%; industrial manufacturing 3%; services and others about 31%. The group capital adequacy ratio at the end of 2024 stands at 17.3%, exceeding well above the minimum regulatory requirement of 14.6%. Looking forward to the year 2025, we project a sustained growth trajectory, anticipating a mid-single-digit expansion in our balance sheet that aligns with the overall GDP growth 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 in the balance sheet. On the margins front, with the Fed and QCB announcing multiple rate cuts in the latter part of 2024, coupled with the inflation data showing consistent downward trend hinting at the possibility of further rate reductions, we anticipate relief in our cost of funds. This is expected to support a favorable margin evolution moving forward by 15 basis points. Asset quality, we anticipate no significant deterioration in asset quality, but our approach in provisioning remains conservative. We will continue to build adequate buffers to safeguard against unforeseen adversities and expect our cost of risk to be in the range of 50 to 60 basis points. In summary, we look to the future with confidence and ambition. We reaffirm our commitment to building on our strengths, pursuing new growth opportunities and expanding our market share, fostering innovation and delivering greater value to our stakeholders, while protecting our NIMs and maintaining robust liquidity. Now I would like to open the Q&A session. Thank you.

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

I've got 2 questions. Firstly, your fixed foreign exchange income has been more than QAR 100 million over the past 4, 5 years. But this year, it came down to about QAR 50 million. Could you tell us what changed that the foreign exchange income came down? And how do we see this going forward, this revenue item? My second question is on your guidance. So this year, your balance sheet has grown by 11%. You said your loans have grown by 11%. You're expecting any expansion of your NIM. Then don't you think the bottom line growth of mid-single digit is being very conservative?

Okay. Starting with the FX income, as you know, FX income is driven by trade business, LCs, et cetera, and that has witnessed a drop during the year due to several reasons. Secondly, the main currency where we generate FX income is the U.S. dollar. And as you know, there has been a cap by the Central Bank on the exchange that we can charge to our customers. That's -- these are the 2 main reasons for the FX drop during the year. Regarding the guidance, it could be conservative. But as I mentioned, we have to build our provisioning buffer. That's why we anticipate a mid-single-digit growth in our bottom line. That's the main reason because we will maintain a 50 to 60 basis points cost of risk.

The next question comes from Alessandra David from Ashmore Group.

I just had 3 questions. I think the first one, maybe following on from the last about asset quality. So you've had some quite good improvement in asset quality across Stage 3 and Stage 2 loans. Could you maybe talk a little bit more about the drivers behind it and what we can kind of expect in 2025, kind of just trying to marry together the remaining conservative on the cost of risk, yes, the improvement we've had thus far in the year? My next question is on your cost management. Your cost-to-income ratio has been flat versus 2023 with a bit of a pickup in OpEx in the last quarter. If you could maybe talk about what was behind this and what we could expect in 2025, that would be really helpful. And then last question is just on the NIM. If you could just remind me on your NIM sensitivity and maybe what you are and how sort of assuming on rate cuts in 2025.

Thank you for your questions. Starting with the asset quality, what has happened in Stage 2, if I understand your question correctly, we had some collections, and we have some reclassifications from Stage 2 to Stage 1. As you may know, once an asset is classified at Stage 2, it can be reclassified to Stage 1 after maintaining certain criteria. The most important one is the approval from the Central Bank where we put the asset for 2 years under monitoring, and we make sure that the reasons for moving at initially the Stage 2 has disappeared. So these are the main reasons for the improvement in Stage 2 asset quality. We anticipate the same trend next year, but with a less percentage. We anticipate Stage 2 to further decline, but not with the same pace that we have seen in this year. In terms of cost to income, yes, it has been flat during the year, while we have seen an increase in the cost base in the fourth quarter. This is mainly for 3 reasons. Number one, as you know, we closed our record firmly closed, it was in Q4 where we recalculate the end-of-service indemnities, the accruals, the bonus pools, et cetera, et cetera. That's why each and every year in the fourth quarter, you will find a little increase compared to the previous quarters. Plus, during the second part of the year, we have moved our offices to a new head office that's owned by the bank. So we have some increase in the costs relating to commissioning, testing, cleaning. Once you move to a new building, you incur some costs. These are the main reasons for the increase in the cost. Next year, I anticipate a decline in our cost to income, but it will be very marginal. So in order to be on the safe side, I expect it to be flat. The third question about the NIM, we have budgeted for -- or we anticipate a 50 basis points rate cut next year, and that will correspond to a 15 basis points improvement in our NIM.

Next question comes from Salome from Bloomberg Intelligence.

I have 2 questions. So the question number one on the funding side, how do you plan to fund the loan growth, whether you see any movements in the deposit base and given the interest rates will remain high within the first half of the year? And the second question is on the coverage. What is your target coverage for 2025 for the loan portfolio?

Thank you, Salome. In terms of the funding side, as you have noticed in this year, we have make sure that the loans to deposit ratio remain within the regulatory limits. That is 100% mark. So across the quarters, we have ensured either we remain very close or we are below the 100% mark. So I think that is an assurance for you that going forward even, we'll continue with the similar trends and with similar targets. So presumably, this answers your first question. In terms of liquidity, even the LCR has also improved this year compared to the last year that you might have noticed in the financial statement disclosures. So that is, again, a positive sign from the funding perspective. In terms of your second question on the coverages, I think we are doing -- we are going in the correct direction. We started the year with 70%, improved it to almost 73% on Stage 3, then also increased our coverage on Stage 2 portfolios. So even going forward, we will be continuing to build buffers conservatively for any unforeseen adversities. And I think the target, it should be somewhere in a range of 80% mark on the Stage 3. And on a medium term, not on the short term or next year, the Stage 2 coverage, we will try to improve it further also.

Your next question comes from Abhinav Sinha from Lesha Bank.

Actually, just wanted to confirm. So what's your guidance on the cost to income for 2025? And second, I have a question. If we look at your impairment for the year, so there was a big movement in the recovery because it moved from QAR 155 million to roughly QAR 400 million, but there was also a big jump in the charge for the year. So how shall we -- because recoveries are, again, they are not very certain to be fair. So how should we look at these numbers for 2025?

Yes. So I'll take your first -- I'll take your second question first, and then we can move to the first one. So in terms of recoveries, these are something which are unprecedented, which nobody can estimate or even guestimate or plan it because there are external factors linked to it. There are court cases around it. So as we mentioned, we -- in the budgets, when we do the projections, we don't assume any recoveries. And if something comes up, that can be easily translated back to the provisions by building buffers, as I mentioned in my previous answer. So going forward, as Osama mentioned, the target is somewhere 50 to 60 bps in terms of the cost of risk. So that target, we will continue it with an assumption of 0 recoveries. If any further recoveries comes, that can be translated back to the provisions. On your first question, if you can repeat your first question, please? Yes, the cost to income ratio, sorry, for that, cost to income ratio, as Osama mentioned, we expect -- or we would love to have a lower trend on the cost to income ratio, but that could be very minimal moves compared to -- on a year-on-year basis. But in medium terms, we will be very much closer to the 30%. But on the next year guidance, it could be flatter or slightly less.

Your next question comes from Haya Al Fulaij from NBK.

Congratulations on a strong performance this quarter. I was just wondering, what factors contribute to your Stage 2 loan. Would you be able to answer that?

Yes. So yes, I can hear you. So in terms of the Stage 2 composition, I think it's pretty much diversified. It's not heavily concentrated in one of the sectors. If I look into a bit more details, I see the largest contributor, which is very much close to 20% is the real estate, followed by consumers, which is another 20%, 25%. And the rest is pretty much in services, others, commercial, industry, contracting even in there. So it's very, very diversified in terms of the concentration of the Stage 2.

As of right now, we don't have any pending questions. I'd now like to hand back to the moderator, Shahan, for final remarks.

Okay. Great. So if there are no more questions, we can wrap up this call. I'd like to thank Dukhan Bank's management for giving us an update on the quarter and the year. And we can pick this up again next quarter. Bye-bye.

Thank you, Shahan. Bye-bye. See you guys.

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