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

Hello, and welcome to the Dukhan Bank conference call. Please note that this call is being recorded. I would now like to hand the call over to our moderator, Shahan Keushgerian. You may begin, sir.

Thank you, and hello, everyone. I want to welcome you to Dukhan Bank's Second Quarter 2025 Financial Results Conference Call. So on this call from management, we have acting CEO, Ahmed Hashem; Group CFO, Osama Abu Baker; and Riaz Khan, Head of Reporting and Budgeting and IRO. 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.

[Foreign Language] Thank you, Shahan. Good afternoon, everyone, and thank you for joining us today. I'll begin with a brief overview of the macroeconomic landscape for the first half of '25. Following my remarks, the team will walk you through the -- our initial results, and we will open the floor for the usual Q&A. Despite a challenging and volatile global and regional environment, Qatar's economy continues to demonstrate resilience and positive momentum. According to the National Planning Council, real GDP grew by 3.7% in the first quarter of '25. This growth reflects Qatar's steadfast commitment to sustainable development and economic diversification as outlined in the Qatar National Vision 2030. The non-hydrocarbon sector was a key driver of this expansion, where manufacturing grew by 5.6%, supported by industrial upgrades and enhanced domestic production. Construction rose by 4.4%, driven by the ongoing infrastructure and urban developments. Real estate saw a strong 7% growth, fueled by the demand across residential and commercial developments. Wholesale and retail trade surged by 14.6%, reflecting higher consumer activity and confidence. Qatar's economy remains relatively insulated from the global volatility even amid rising geopolitical tensions and trade disruptions. Core domestic sectors continue to show resilience and sustained growth. Notably, tourism remains a bright spot with a 1.5 million visitors in the first quarter alone, reinforcing the nation's target of welcoming 6 million annual visitors by 2030. The government-led initiatives and start-ups, SME support and regulatory reform are further laying the foundation for a more innovative and diversified economy. Looking ahead, the energy sector remains pivotal. Strategic projects, like the North Field, expansion and enhancements within the downstream sector is poised to drive GDP growth over the medium to long term. Crucially, much of the upcoming LNG production has already been secured through long-term contracts, ensuring a stable revenue outlook. In parallel, ongoing investments in infrastructure, digital transformation and economic diversification aligns securely -- aligns squarely with Qatar National Vision 2030, reinforcing long-term growth narrative. With that, I will now hand over to Osama and Riaz, who will take you through the details of the financial results for the first half of the year. Thank you. Over to you, Osama.

Thank you, Ahmed, and good afternoon, everyone. We have delivered a solid mid-year performance, building on the strategic progress achieved in recent years. Despite external pressures, our resilience and client-focused innovative -- innovation have positioned us as a trusted partner in national economic advancement. For the 6 months -- for the first 6 months of the year, our net profit reached QAR 811 million, representing a 3.5% year-on-year increase. Our total assets reached a record of QAR 118.3 billion, underscoring continued growth across our portfolio. Liquidity remains strong with ratios above regulatory thresholds. Our capital adequacy ratio stood at 18.3%, well above the minimum requirements. In line with the practice established last year, the Board of Directors has approved an interim dividend of 8% of the nominal share value, i.e., QAR 0.08 per share, subject to regulatory approvals. This reflects the Board's confidence in our performance and commitment to delivering long-term value to our shareholders. Looking ahead to the remainder of 2025, we expect mid-single-digit balance sheet growth aligned with the country's GDP trajectory, led by wholesale and private banking. Profitability growth is expected to mirror this trend, supported by stable NIMs in a range of 2.1%. If benchmark rates are reduced later in the year, it may support further margin expansion, although this will depend on corresponding improvements in funding costs. Asset quality is expected to remain stable with cost of risk guided at 50 to 60 basis points. We will maintain a conservative provisioning approach continuing to build buffers. I will now turn it to Riaz for a detailed overview of our numbers. Go ahead, Riaz.

Thank you, Osama. Let me begin with a brief overview of group's balance sheet performance for the first half of 2025. Our total assets reached QAR 118.3 billion, underpinned primarily by financing assets of QAR 85.8 billion, representing 73% of total assets. Investment securities contributed QAR 23.2 billion or 20% of the total assets. We achieved 3.8% year-on-year growth in our financing portfolio, reflecting our disciplined approach to capital deployment and market share expansion. The focus remains on building a diversified high-quality portfolio, prioritizing prudent risk management over volumes. On the funding side, we continued our efforts to diversify while leveraging long-standing client relationships and maintaining a balanced maturity profile. As a result, we maintained a regulatory loan-to-deposit ratio of less than 100% with both the LCR and NSFR comfortably above the regulatory thresholds, demonstrating bank's sound liquidity management. Also, nonresident deposits remained minimal at just 2% of the total deposit. This is also in line with our strategy to focus on stable domestic funding sources. Now turning to profitability. Our first half results reflect solid delivery against our strategy with net profit rising 3.5% to reach QAR 811.3 million, supported by a 6% growth in our net banking income. This growth was driven by our continued revenue diversification efforts with stronger contributions noted from nonprofit income streams. Additionally, despite challenging external conditions, prudent management of funding costs provided further support to the group's net banking income. We remain committed to protecting our margins and managing the cost of funds efficiently. Our NIMs slightly inched higher to reach 2.1%. Operational efficiency also remained a key strategic focus with continued optimization efforts enhancing the overall profitability. These results highlight the group's resilience and its ability to sustain growth in an evolving operating environment. On credit quality, which improved during the period, NPL ratio declined to 4.5%. Stage 3 coverage ratio stood at 74.3%. The coverage ratio rises to over 90% when including the effect of eligible collaterals. Stage 2 represented 9.6% of the gross loans with solid coverage of 6.2%. Our financing book remained well diversified, encompassing all sectors, including government, 21%; real estate, 23%; commercial lending, 9%; consumer financing, 9%; contracting, 4%; industrial and manufacturing, 3%; and services and other sectors, about 31%. GRE exposures accounted for 16% of the total financing book as at the end of June 2025. This remains consistent with last December. GRE exposures are currently reported within their respective sector classes. Our capital adequacy ratio stood at 18.3%, well above the regulatory minimum requirements of 14.6%. Notably, the impact of interim dividends has already been factored into the reported CAR. Regarding developments on the topic of global minimum tax, Qatar introduced a 15% minimum tax for multinational groups in line with Pillar 2 framework during Q1 of 2025. While enabling the executive -- while the enabling executive regulations are pending, we have conducted an initial assessment. And based on the same, we do not anticipate the group to be subject to Pillar 2 charge. We will continue to closely monitor any developments in this regard and update the markets accordingly. In summary, our first half performance reflects the strength of our fundamentals, strategic clarity, prudent financial management. We remain focused on our sustained growth, margin preservation and long-term value creation for our stakeholders. With that, we now open the floor for the questions. Thank you very much.

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

I'll start off with 2 questions. So if I look at your balance sheet, your loans in the first 6 months are actually lower year-to-date, so is your deposits. So this means -- this -- I mean, to me, it seems you're not seeing much opportunities in the banking area or in your core part of your business. I mean, most of the growth has been seen in investments. So how do you see the business currently considering you are kind of in a contraction mode? My second question is on your asset quality. Your NPL ratio has reduced. Is it because of write-offs? Or is that because of recoveries?

Okay. Regarding the first question, it's true that we have a flat loan book from the previous quarter. That reflects our approach for being selective. We don't go aggressive and compete for the loans just for the purpose of growing the balance sheet. Any deal we enter into has to make commercial and economical value. The risk has to be acceptable according to our risk appetite. That doesn't mean there is no pipeline. As you know, we operate out of Qatar, which is full of opportunities. But properties and good deals needs time to materialize. I would like to remind you of the last quarter of 2024, where we had around 14% increase in the last quarter in the loan book. So to answer this question, there are a lot of opportunities in the pipeline. When it will materialize, that depends on the client pace and the legal and risk pace as well. So we don't expect this contraction to continue in the rear-end. NPL barely moved by 10 basis points, I believe. And it's not relating to recoveries. It is relating to normal course of business.

Sounds good. Just a follow-up on that. Which sectors do you -- are you looking -- do you see there is opportunities at the moment?

Well, oil and gas definitely is a promising sector. Telecommunication is another sector. GREs in general, without specifying which sector those GREs, is always a focus for the bank.

Our next question comes from the line of [ Andy Rubino ] from Ashmore.

Yes. Just one more follow-up from the prior question. I mean, I guess it's good that you're being prudent and sensible about when to offer credit. But you also gave a presentation at the beginning talking about the opportunity at Qatar and there's lots of opportunities and a strong growth, and the North Field expansion is a big part of that. And we're hearing from your peers that this is beginning to trickle down into credit demand. So are you saying that you are seeing it, but you don't like the look of it, it looks too risky or you're not seeing it or it doesn't really make sense to me that in the last 18 months, given the improvements we've seen in the market, that your book is only up, like, I think, it's up, 2.5% in 18 months. In terms of interest-earning assets, that doesn't sound like a particularly dynamic market. And I wonder if you're being overprudent or maybe if you could just add a little bit more color, please.

Thank you, Andy. Actually, we are not being over prudent. We are not turning opportunities because we don't like them and that's it. When I said that we are prudent and when I said that we don't book assets just for the purpose of growth, I meant we work on certain opportunities, certain risk profiles, and those need time to materialize. There is a big pipeline. There is a good amount of deals that we are working on right now, which takes time. As I mentioned earlier, last year, in the fourth quarter, we had above 10% growth in 1 quarter. So I'm expecting the same this year, but it depends, third or fourth quarter, depending on the finalization of those deals. The economy, yes, it is resilient. It is growing. The Oil and Gas sector is growing, the North field. But for example, when you mentioned the North Field, most of the facilities for the North Field are on the off-balance sheet, which is LCs and letters of credit, letters of guarantee, not in the term loans or long-term loans. And if the companies who work in the North Field needs liquidity, usually, it is on a short-term basis, month-to-month management. So in summary, there is a good pipeline. I expect the balance sheet, as I mentioned in the beginning, to grow by 5% to 6%, and that will reflect in the loan book for the 12-month period ending December 2025, [Foreign Language].

Okay. Great. Yes. No, that's useful color. Just one second question on the non-funded income side of things, it has been actually pretty good. I wonder -- and there was some -- there's been some moves around what those numbers were. I think in the first quarter, you mentioned that there were a little bit of one-offs in that number. But it looks like with the second quarter [indiscernible] cleaner recurring kind of level of fee income. And what should we sort of expect? Because it's been very lumpy. It had some very big growth years, and then, last year was flat and then some really -- et cetera, et cetera. So if you just give us a sense of what's really going on there? What are the drivers? What should we expect? And what are you hoping for growth-wise on non-funded income growth, the fees in particular?

Thank you, Andy. This is Riaz here. So I'll continue where Osama mentioned about the North Field expansion, the LC/LGs business that basically the trade finance volumes picking up. So we have seen a surge on that front. And I think one of the major contributor other than the one-off, which we mentioned in the first quarter call, major contributor has been the LC/LG volumes, and that gets translated into basically the fee business. So going forward, I think the Q2 numbers could be a good proposition for you to take them forward and build the models based on the Q2 because there is no one-offs included here. Other than that, if there is any -- some deals get materialized at the -- with the passage of time or some gets preponed or what we budgeted gets booked earlier than that, so in those cases, obviously, we help the market to understand whenever these one-offs arises. So other than that, we see a similar trajectory what we are seeing in Q2, and we will end up closing the year somewhere in the mid-single-digit growth in terms of fees and the commissions.

Okay. Sorry. And just one final follow-up, and then, I'll let someone else have a go. On the sort of other income generation, I mean, FX has been pretty good. It's been 2 consistent quarters. Is that sort of the right level to think about as well on that space? Because again, that's quite a volatile number.

I think a similar trajectory on the FX, you can see or you can expect in the going quarters. There could be a one-off dips, the seasonal impact when -- or the dips or the rise in the fee income from the FX when there is -- summer travel impact comes into play. But other than that, I don't see any significant jumps or any surprises on that front.

Our next question comes from the line of Salome Skhirtladze from Bloomberg.

I have 2 follow-up questions. The first one on the NIM sensitivity. Given the structural change of your balance sheet in Q1, Q2, more investments in the securities portfolio, had your NIM profile changed over that period, if you could quantify that part? And the second question is on the liquidity. So you have seen some increase in the CASA deposits and current accounts. Could you quantify what was the part of the government share from that movement on the deposit accounts?

Thank you for your questions. I'll start off with basically the question on the CASA, the current accounts increase. So predominantly, it was a mixed plate, but the major outlier was some private banking clients, which came into play and which placed the funds. Yes. So this is on the CASA. But I think going forward, the targeted range should be in somewhere close to 30% mark, 28% to 30% mark. That could be a good number for projecting into the future quarters. As far as the NIMs are concerned and its related sensitivity, so first 2 quarters, if you see the numbers precisely, I can tell you, we added almost somewhere 3 to 5 bps in the NIMs. So that is basically the organic moves, organic moves in terms of the lowering of the cost of funds as well as stabilizing yields. Going forward, I think we should expect the NIMs to be close to 2.1% by the year-end. As far as the sensitivity is concerned, as you remember, even in the last call, we mentioned that it's quite difficult to determine the sensitivity given the outlook of the Fed and the outlook of the market or benchmark rates. It's quite difficult to determine at this point of time. However, we just give a very high-level guidance in terms of a hypothetical scenario. If we apply a hypothetical scenario of 25 bps rise in the benchmark rates -- dip in the benchmark rates starting from 1st of January, given the size or the way the balance sheet is moving and the sensitivity gaps are prevailing, on the balance sheet, we expect an uplift in the NIMs by close to 7 to 8 bps. But again, this is very hypothetical. There could be timing differences. There could be movement. The real movement in terms of market -- in terms of the cost of funds, affordability of other banks in terms of deposits at that point of time. So there are multiple things which can affect these moves. But if you put it on the Excel sheet on a hypothetical ground, you should expect an uplift of 7 to 8 bps with a 25 bps rate cut.

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

I have one question. So if I look at your net interest income, it increased around 7.5% in 2Q, but the flow-through to the EPS was a little lower as EPS grew 3%, 4%. And it's -- I see it's mainly because of depreciation. So if you can just clarify like what's flowing there? And second thing is, you said that the balance sheet guidance is still 5% in the -- for full year 2025. So that means you are expecting to add another QAR 5 billion of assets. So could you please throw some color? Like do you expect it entirely from the loan book or there is some contribution from investment side as well?

Thank you for your questions. I'll take the last one first, and then, we'll move to the first question. So in terms of the balance sheet growth, predominantly, it should come from the loan book growth. So in next 2 quarters, as Osama mentioned, there is multiple deals going on. There's multiple work in the background going on. So we still assume or we still target a 5% growth in terms of the loan book as well as the bottom line total assets. Basically, it's mid-single-digit growth, which we mentioned. Then in terms of the EPS and the overall increase or the evolution of our net banking income, so net banking income has improved, yes. That's a function of better spreads as well as the noninterest income or the nonprofit income, I should say. However, whenever as you -- as we mentioned historically that we always be very conservative in terms of our provisioning, so we continue to provide to ensure that we build buffers for any future situations. So I think that was one of the main cause where you see bottom line increasing by 3%, whereas the net banking income grown by almost 6%. So I think I answered your question.

Yes. And just on depreciation, like what was driving that, the significant increase in depreciation?

Yes. So there are 2 points in terms of depreciation increase. One, if you remember, we moved to this head office building in the second part of 2024 or second half of 2024. So again, this year had a full charge of depreciation. Over and above, there were certain facilities or there were certain locations, which were -- in the last year were on short-dated contracts because we were moving the buildings and we were unable to finalize or we were like looking for the outlook in terms of the rental contracts. So we finalized those rental contracts starting in this year. And since they were also long-dated contracts, so again, it has an impact of this ROU depreciation. So it's predominantly -- so I hope I answered your question.

Our next question comes back from the line of Zohaib Pervez from Al Rayan Investment.

My question is on the investment securities. So firstly, your -- the investment book has grown significantly in this quarter. Is it because there is a change in strategy? Is this a new area that you're looking at? And where do you see this stabilizing? Is it going as a percentage of total assets, I mean, because it has grown significantly from about, like what, 14% last year to now significantly higher? The second question is on the income from this investment book. Even though the book was higher, the income was actually numerically lower. So could you give us more sense how is it, because the investments are made at the end of the quarter? Or how does -- what is the rationale for those?

Yes. Thank you, Zohaib. I think on the investment front, the major rise we saw it in the last week. So that will basically get reflected in the profitability in the future quarters. As far as how we will close this year, I think maybe QAR 1 billion or so could be added. And just for your heads up, whatever we have added in terms of investments, they are high yield as well as the HQLAs. So that helps the cause in terms of managing the LCRs, NSFRs and the U.S. dollar positions also. So this -- having said that, now when we see the movement in the investment income, we see a dip. We see a dip of almost 10%. Now this dip is predominantly -- is a function of the placements. If you see the volumes of the placements from last year till now, starting from Q4, we started to reduce those placements given the function or -- it's a function of the liquidity management. So major impact came from those placement incomes since the balances were not there, so we were not generating income. However, just to assure you, since you cannot see it now, but at the year-end disclosures, you might be able to see, the coupon income has seen an increase, and that is again a function of the overall rise in the investments. So I hope I answered your question.

And excellent decisions on moving from the interbank lower areas to investments. Could you give us some sense of what is the average yield on your investment book currently?

Yes, it's somewhere in a range of close to 440, 450 bps. And again, by the year-end, you will get to see the exact yields because we disclose this as a part of the financials on a yearly basis.

There are no further questions. I'll now turn the call back over to our moderator, Shahan, for final remarks.

Okay. I'd like to thank the management for giving us an update on the second quarter and the guidance, and we will pick this up again in the third quarter.

Thank you, Shahan. Thank you, everyone. Thank you.

The meeting has now concluded. Thank you all for joining. You may now disconnect.