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

Hello, and welcome to Dukhan Bank. Please note that this call is being recorded. [Operator Instructions]. I would like to hand over the call to our moderator Shahan. Please go ahead. Thank you.

Thank you. Hello, everyone. I want to welcome you to Dukhan Bank's First Quarter 2025 Financial Results Conference Call. So on this call from management, we have the bank's Group CEO, Ahmed Hashem; 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, sir.

[Foreign Language] Thank you very much, Shahan. Good afternoon, everyone, and thank you for all joining us today. I'll begin with a brief overview of the macroeconomic trends for the first quarter of '25 before we dive into our Q1 performance. Afterwards, the team will walk you through the group's financial results, followed by the usual Q&A. Qatar's economic outlook remains strong and relatively insulated from global uncertainties despite recent changes in U.S. trade policies and import tariffs that have increased market volatility and trade tensions. While the overall momentum within the country remains constructive, key domestic sectors continue to demonstrate resilience and strong growth prospects. One of the standout performers has been the tourism sector with international visitors numbers exceeding 5 million for the first time in '24, marking a 25% year-on-year increase. This sustained strength in visitor numbers since 2022 continues to bolster Qatar's ambition to welcoming 6 million visitors annually by 2030. In addition, government-led initiatives aimed at boosting non-hydrocarbon sectors are showing meaningful progress. Support for start-ups, emerging enterprises and structural reforms are laying the groundwork for a more diversified and innovative economy. Looking ahead, the energy sector remains cornerstone of growth. Major undertakings like the North Field expansion project and increase in refining and petrochemical capacities are expected to fuel Qatar's GDP growth over the medium and to long term. Importantly, much of the expected increase in energy production has already been secured through long-term contracts, ensuring a stable and predictable revenue stream. Beyond energy, Qatar's focus on infrastructure development, digital transformation and economic diversification is in clear alignment with Vision 2030. These efforts are driving expansion across various sectors, including services and manufacturing. Now turning to Dukhan Bank's performance. We delivered a solid start to the year, building on the strategic progress and momentum we've established in recent years. Despite ongoing external headwinds, our continued resilience and innovative approach have strengthened our role as a key enabler of national economic growth. On the group's financial performance for the first quarter of '25, I'm pleased to report that our bottom line profitability grew by 3% with a net profit of QAR 437 million for the first quarter of '25. The group's total assets reached QAR 117.7 billion, remaining at historic levels. Our liquidity position remained robust as the group remained comfortably above the related regularity threshold throughout the quarter. Likewise, our capital adequacy ratio stood at 17.9%. which is well above the required minimum reflecting our sound financial foundation. Now with that, I'll hand it over to Osama, who will walk you through the financial details of the first quarter performance. Thank you, and over to you, Osama.

Thank you, Ahmed, and welcome, everyone. Let me begin with an overview of the group's balance sheet. As of the end of Q1 '25, our total assets reached QAR 117.7 billion. Our asset base continues to be primarily driven by financing assets, which stood at QAR 86.6 billion, representing 74% (sic) [ 73% ] of total assets. Investment securities contributed QAR 19.6 billion or 17% of the total. During the period, the group maintained its financing portfolio at QAR 86.6 billion. This aligns well with the group's strategic objective of steadily increasing market share while maintaining discipline and efficient resource deployment. The focus remains on achieving our diversified portfolio focusing on asset quality over volume growth to manage risk effectively. On the funding front, we continue to strengthen and diversify our base, leveraging long-standing client relationships and maintaining a sound maturity profile. These efforts supported our resilient liquidity position with our regulatory loan-to-deposit ratio at 100%. Both liquidity coverage ratio and net stable funding ratio remained above regulatory thresholds, underscoring our strong liquidity management. Our exposure to nonresident deposits is limited to just 1.9%, reflecting our strategic focus on domestic relationships. We also remain committed to protecting our margins and managing the cost of funds efficiently. Our net interest margin has been maintained at approximately 2%. Now turning to profitability. Our Q1 performance reflects continued delivery on our strategy and a solid foundation for future growth. We noted a 3% growth in the bottom line on the back of a 5% increase in net banking income. This uplift in net banking income was driven by the group's ongoing efforts to diversify revenue and strengthen noninterest income streams. Additionally, prudent management of funding costs provided further support despite external challenges. Operational efficiency continues to be a priority. Our focus on optimization and cost discipline has contributed meaningfully to profitability, highlighting our agility and resilience in a dynamic environment. On credit quality, our nonperforming loan ratio improved to 4.5% as of March '25, down from 5.1% in March '24 and 4.6% in December '24. This improvement is a result of robust credit management practices and risk controls. Our Stage 3 coverage ratio stood at 74.5%. Importantly, when factoring in eligible collateral, i.e., after applying QCB prescribed haircuts, the effective coverage against NPLs will exceed 90%, reflecting our conservative stance and prudent provisioning. Our Stage 2 loans represent 9.7% of the gross loans, which is among the lowest in the domestic banking sector with a solid coverage of 5.3%. Our financing book remained well diversified across all sectors, including Government at 21%, Real Estate at 22%, Commercial 9%, Consumer 10%, Contracting 4%, Industry & Manufacturing at 3%, Services & Others about 31%. GRE exposures accounted for 16% of the total financing book as at the end of the first quarter, consistent with the year 2024 end. These exposures are currently reported within their respective sector classifications mentioned earlier. The group's capital adequacy ratio at the end of the first quarter stands at 17.9%, exceeding well above the minimum regulatory requirement of 14.6% providing solid foundations to support the future growth. Looking forward to the full year of 2025, we anticipate a sustained growth trajectory with a mid-single-digit expansion in our balance sheet that aligns with the overall GDP growth of Qatar for the year 2025. The drivers of this growth will be the wholesale banking and private banking segments with our growth strategy emphasizing quality over quantity. For the bottom line profitability, we expect a growth rate in line with the balance sheet expansion, reflecting stable performance. On the margins front, we anticipate that NIMs will remain stable at the current level around 2% as funding costs continue to be persistent, while asset yields have already absorbed most of the adjustments from the rate cuts that took place in the latter part of the year 2024. Due to the complexities of the global macroeconomic factors, it is not practical or accurate to make any definitive predictions about the benchmark rate cuts. However, should the benchmark rates be reduced later in the year, it would positively impact our NIMs. Though the precise timing of the improvement will depend on the constructed realization in our funding costs. In terms of asset quality, we do not anticipate significant deteriorations. However, we will maintain a conservative provisioning approach throughout the year continuing to build buffers to guard against unexpected risks. We expect the cost of risk to remain in the 50 to 60 basis points range. In line with the global minimum taxation initiative, Qatar introduced a 15% minimum tax in the first quarter of 2025, applicable to multinational groups in accordance with the Pillar 2 model framework. The registration also indicated that executive regulations will be issued in due course, detailing the key provisions required to meet the state's obligations under the international framework. As of now, these regulations have not been published. We have conducted an initial assessment in collaboration with our tax experts and advisers, we evaluate -- to evaluate the potential impact of the Pillar 2 charge on the group's future financial performance. Based on this analysis, we do not anticipate the group to be subject to the Pillar 2 charge. However, a definitive conclusion cannot be reached until the executive regulations are released. We will continue to monitor developments closely and provide updates as new information becomes available. In summary, we remain confident in our outlook for the year. We will continue building on our strength seeking new opportunities, expanding market share and enhancing value creation for all stakeholders. At the same time, we remain focused on protecting margin, maintaining robust liquidity and pursuing sustainable growth. With that, I would like to open the floor for your questions. Thank you.

[Operator Instructions] Your first question comes from the line of Zohaib Pervez with Al Rayan Investment.

So I've got three questions. Firstly, could you tell us -- give us more information on your fee income growth and foreign exchange growth -- income growth. I mean, your loan growth was kind of stable for the quarter, but the fee income has shown significant growth. So could you give us some color on that? And similarly for the foreign exchange. The other question is on investment income. So investment income is lower year-over-year compared to last year, while your portfolio has been -- is higher. So this is -- could you give us some information on why -- how come the security -- your book is higher while the income is lower? Is it because you have got lower-yielding assets? If so, could you give us -- could you let us know what is the difference between the yield that you were -- that was in first quarter of '24? and what are the real yields of your investment portfolio currently. Thank you.

Thank you Zohaib. This is Riaz here. So I'll take the first question in terms of fee income. As you have seen historically, in certain quarters, there is a surge in the fee income. So maybe because of certain one-offs, which gets realized in certain quarters. So I think this was one of the quarter where we saw certain one-off deals, which were in the pipeline in the previous years or in the previous quarters, which got realized in this year and in this quarter. So almost in terms of one-offs, if I try to take inventory of that, it will be close to QAR 30 million, which is basically the one-offs. So if you exclude those items from the overall number, this will be very much close enough with the previous quarters. And I think as what Osama guided going forward on a year-on-year basis, we expect the profitability to grow in mid-single-digit terms. So I think this is going to continue, except for these certain quarters where you see certain jumps. Now coming on to the ForEx income. I am seeing the ForEx income quite in a similar range. Currently, in Q1 of '25, we reported almost QAR 31 million versus QAR 30 million in the first quarter of 2024. So I cannot see any significant increase in the ForEx income. And again, we would love to have these increases. But as of now, what I'm seeing in the numbers, there is no specific like significant growth there. Investment income, yes, there has been a decline. And I think it's more of a function of the placement volumes. If you will notice the placement balances or, let's say, the due from banks, they have like almost reduced by 50%, close to 50%. And that is one of the main ingredient in terms of the decline in the investment income. However, as far as our overall investment portfolio and the yields are concerned, they have remained quite stable. And I think we saw almost a 5 bp rise in the investment income. Obviously, since you are unable to see the breakdown of that in the financial statements between the allocation towards the investment income or the coupon income versus the placement income, so you are unable to see it, but that's what I can confirm you here. I hope I answered you both your questions.

So on the yield, what is your yield that you have on your current investment portfolio?

If you will notice the last year-end financials, we reported almost 430 bps. So as I mentioned, 5 bps upwards, we saw a rise in the yields. So it's close to 435 bps.

Your next question comes from the line of Alessandra David with Ashmore Group.

Maybe following up on the last question. If maybe you could give me some indication of your cost of funds between sort of your deposits and your cost of borrowings, that would be really helpful. Secondly, maybe if you could just give a little bit more commentary around the shrinking balance sheet over the quarter? And maybe what we can expect going forward, how much of that's one-off or sort of seasonality timing issues? And then lastly, maybe if we could touch on sort of your confidence going in -- your confidence given the discussions going on with the Pillar 2 change in the tax and sort of how confident you are that you will not be subject to that tax. Maybe if there's any sort of time line you can give us as to when we can expect further communications. That would be really helpful.

Yes, this is Osama here. I'll start with the first question. As you know, last year, we have seen the rate cuts in the last quarter of the year. Unfortunately, due to the structure of the big depositors in Qatar, those deposits at the end of last year were revolved or rebooked at a longer tenure. So we didn't see the decline from the first 2 months. We started to see the decline in March. So assume that there is no rate cuts in the future, no change in the liquidity position in the local market, we expect the cost of funds to go lower in the second and third quarter. Regarding your question about the shrink in the balance sheet. Actually, this is due to the liquidity management. It mainly comes from the interbank. Treasury manages the liquidity on an efficient basis and our aim is not to inflate the balance sheet. But if you look at the loan book and the investments, it is stable compared to previous year. And as we said, we expect it to grow in mid-single digits during this year. Regarding taxation, as you are well aware that there is a draft of the detailed laws that might be applied in the near future. Those drafts have been circulated to the tax advisers in the country by the tax authorities. And according to the draft that we have seen, 99%, we will not be subject to taxation if the law is implemented as per those drafts. The time line, we expect that to be official and final in the second quarter, but definitely, I'm not the right person to confirm it. That's what we have heard from the advisers. I hope I answered your three questions.

That was very clear on the tax. If I can maybe just follow up going back to your loans and deposits. So your loans were broadly flat in the quarter and deposits declined 2% quarter-on-quarter. Was there any seasonality on this? Because I know you've given the guidance of the mid-single digits. So maybe if you could just help me understand the run rate for the remaining 3 quarters.

I expect the loans to grow by 3% to 5% normally. If we don't get any special bulky deals. Definitely, any bank is -- always we have those special bulky deals in the pipeline. But unfortunately, they take time to materialize. If you remember in the last quarter of last year, we had a big jump in Q4. I don't guarantee that the same is going to happen this year. But if it happens, that's definitely something we are working on. But the time if it materialized this year or next year, I'm not sure. On the deposits, yes, there was a decline in deposits as part of the liquidity management. We have been always, in Dukhan Bank, avoiding price wars for deposits. We avoid [ wind ] addressing our balance sheet, and we are not happy to engage in any price wars. This decline was temporary and we are building our deposits again in order to maintain the deposits in a healthy manner and our liquidity is always robust. It's worth mentioning that our loans-to-deposits regulatory ratio is at 100%. That's what really counts because, as you know, last year, we have issued the $800 million Sukuk, which help us to afford letting go some of the deposits at the year-end or early this year to avoid paying high rates on those.

That's very clear. Just last follow-up was just on your cost of funds. Are you able to give me a breakdown between the cost of borrowings versus your deposits maybe on a blended basis.

I think it's almost a gap of 70 to 80 bps, I would say, between the interbank borrowings, the ones which are mostly maturing within 1 month time versus the time deposits. So it's almost 70 to 80 bps gap between these 2.

The absolute level?

Sorry?

Your next question comes from the line of Abhinav Sinha with Lesha Bank.

I just have one question because you said that on the QAR 94 million of net fees and commission income, you had QAR 30 million one-off. So for the rest of the year, how should we think about the fee and commission income? And second thing is that given that your cost of funding would be better in 2Q and 3Q, as you said. So are we looking at a higher NIM than 2% for the remaining year? Or is that very close to 2%?

Yes. Regarding the first question, if you exclude the QAR 30 million, we expect the same trend to continue. And we are targeting a 3% to 5% from last year growth, excluding the one-offs. Regarding the cost of funds and NIM, hopefully, we -- our cost of funds will go down, as I mentioned, depending on the situation. If things stay as it is today, yes, we expect cost of funds to decline. And that will lead to an improvement in the NIM. I don't expect the NIMs to go below 2%, and we are targeting to keep it between 2% and [ 2.05% ].

Thank you so much, everyone, and that concludes our Q&A session for today. I will now turn the call back over to our moderator, Shahan. Thank you.

Okay. If there are no more questions, we can wrap up this call, and I would like to thank management for giving us an update on the quarter, and we'll pick this up again next quarter. Thank you.

Thank you, Shahan. Thank you, everyone, for attending us.

Thank you, everyone. That concludes today's call. You may now all disconnect. Thank you for joining, and have a nice day ahead.