Qatar International Islamic Bank (Q.P.S.C) (QIIK) Earnings Call Transcript & Summary

Good day, and welcome to the Qatar International Islamic Bank Q3 2021 Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Hossam Khattab. Please go ahead, sir.

Good afternoon, everyone, or good morning. Thank you for joining our call today, the Q3 2021 QIIB results. I'm going to start my presentation today and give you an update about QIIB's overall performance in Q3 2021. I'm going to start with total increase in our assets or total market share of the QIIB. Our market share from the Islamic banking is about 16% for the total assets of the Islamic banking, about 4% of the total banking assets include in Qatar. QIIB still is the largest Islamic bank listed in Qatar Exchange with a total market capitalization about USD 4.0 billion. This one is [ descending ] almost like -- about 7.5% growth from our market capitalization by end of 2020, it was a stand at USD 3.7 billion. Our network still is about 15 branches within Qatar, 83 ATMs. Then the shareholder structure of QIIB, it is still consistent with last year and even the last quarter, 17%, that is the major central shareholder, Qatar Investment Facility (sic) [ Qatar Investment Authority ]. We have about 18% owned by GCC and foreign investors, the rest of which is about 65% owned by Qatari companies and individuals. Among from that, we have [ that ] group, which is -- [ own ] almost 60% of the total QIIB shares. QIIB business segment is still divided into corporate banking, personal banking and treasury and investments. The financial snapshot of Q3 2021, it is -- notice that we have a decline our total assets by 4%, down from USD 16.8 billion as it was in December, to be at USD 16.1 billion in Q3. The same from the financing income, it dropped from USD 11.1 billion in December 2020 to be at USD 10.3 billion, it stood at, in Q3 2021. This one, definitely, we're going to give you a brief overview of our financing assets under the asset plan in the next few slides. The total nonperformance is increased from 1.6% to 2.5% in Q3. Customer deposits has grown from 10-point -- almost like USD 10 billion in 2020 December to be at USD 10.8 billion in Q3 2021, which represents almost like 8.2% growth. Net profit stands at USD 230.6 million in Q3 -- by end of Q3, which represents almost like [ 70% ] on 3 quarters of September to September. Quarter-to-quarter, we have about 9% growth. Annualized profit growth is about [ 90% ]. Capital adequacy stands at 16.6%, which is almost the same like last year. Rating with Fitch and Moody's -- A with Fitch, A2 with Moody's. The business of QIIB is mainly driven by 3 major segments. As we highlighted before that the major contribution comes from the corporate financing, which represented about 43% of the total banking assets and the contribution into the income of the revenue of the bank by 49%. It is followed by the personal banking financing asset. It contributed to the assets by almost like 25%, although the contribution into the revenue of the bank is about 35%. Then we have treasury and investments representing about 33% of the total banking assets. The contribution into the revenue is about 16%. If you move to the Section 2, which is the financial performance. The average growth between 2017 up to Q3 2021 is about 5.6% growth. However, as we highlighted earlier, we have year-end to Q3, growth about 4%. This one mainly driven from financing activities. It has dropped about 8% from last year. This main drop has come mainly from the public sector financing asset, which has been [ dropped ] by almost USD 1.5 billion or 50% of the total government or the public sector portfolio. This one has been slightly offset by the growth we have in our financing from corporate and individual, about USD 700 million has increased during the 2021, which within this almost like 6% growth on an annual basis. So this growth in our corporate and individual base financing assets has been offset -- has offset the decline of the drop in our public sector financing assets. So the net is about 8% December to September. The composition of our assets by the type, mainly QIIB assets concentrated in the financing assets, representing almost like 64%. Second contribution comes from investment and balances -- investments with banks, representing about 18% of our total assets. Then we have our financial investments, which representing about 11%. More contribution come from cash and balances and other investments, definitely. The split of our financing assets by industry or by segment. Before we have about, as we highlighted, 24% comes from the government business now it's become almost like 12% due to the major settlement of some of our corporate government customers. We have 38% contribution from consumer and personal lending, up from 31% by December 2020. We have about 19%, which is the same for the real estate segment or industry. Then we have about 10% coming from the contracting, then is about 16% from other trading and other industries. That is the contribution or the split of our financing book. If we move to the asset quality, as we highlighted, we have increased our nonperforming ratio from 1.6 to be 2.6 -- 2.5% in Q3. This one mainly due to some of our corporate customers has become nonperforming during Q3. The bank has definitely classified them as nonperforming as [ per the Q3 ] regulation as well as tenders. We provided the acquired provision in Q3. Overall, nonperforming ratio stands at 2.5%, up from 1.6%. The overall coverage ratio is drop from 134% to 111%. However, the total coverage ratio for our financing assets is up from 2% by December 2020 to be at 2.6% as of September 2021. By end of December, we have about QAR 832 million provision. By September 2021, we increased to be 1.7 billion -- QAR 1 billion almost like provisions for all financing assets, which represented about 2.6%. Definitely, this one has impacted our cost of risk. Cost of risk up to Q3 2021 is 45 basis point. We anticipated this one to be at 65% -- 65 basis points by end of December, which is almost like [ 150 million ] additional provisions during Q4. If we move to profitability and operational efficiency, the QIIB continue its operational good performance in Q3. We have about a 2% increase from income from financing assets. We have dropped in our investing activities by almost like 15%. This one mainly due to the placement with banks, the [ drop of the 5 placements ] with banks as well as the profit, the market, definitely, last year, it was about average market profit rates about 110 basis points. During the 9 months of 2021, this average [ both of these ] works to be almost like [ 50 ] basis points. That has been definitely impacted our placement and profits from placement with banks. We have a very good growth -- good growth in our fees and commercial income by 17%. This one mainly due to the good operation or good income and fees we achieved from our cards operation. Last year, we had not any usage of our card operations, basically VISA and Mastercard. This year due to the restriction has been revoked and all -- most of the business become a normal. So our customers procured credit cards again. And you have a good increase as well from the fees from corporate banking and personal banking as well. So the total banking income, we had about 1% growth compared to September 2020. 90% or more of our income comes from basically financing and investing activities. We have about 8% comes from fees and commissions income, 2% only from [ ForEx ] income. That is the breakdown of our income by type. We -- as well in Q3, we continued to enhance our operation efficiency. It is down to be at 18.7% in Q3 2021 compared to the December -- 20.3% by December 2020 too. The measured drop is about 1.6%. This one mainly driven by the increase in our operating income by almost 1% as will we have about decline -- we managed to reduce our expenses or our operation costs by [indiscernible] in Q3 2021 compared to Q3 2020. On the other side, definitely, our cost of fund has been reduced by almost like 30% compared to last year. That is the breakdown of our income as well as the operational efficiency. Our return on average assets stand at 1.9%, up from 1.6% by December 2020. Our return on average equity is about 15.9% compared to 13.5% in December 2020. The major highlights in the last section, as we have added before, it's total assets dropped by 4%. Financing book dropped by 8%, almost. Our investment portfolio grew by 4.7%. Overall, investment has been dropped by 8.5%. Customer dropped -- customer deposits increased by 8.2%. Total equity increased by 3%. Capital -- our capital adequacy has been at 16.6%, which is almost same compared to December. We have as well LCR stands at 262. Credit issued, we managed to drop the credit issued definitely due to the reduction of financing assets. So it stands at 88.5%, which is less than the many -- the maximum required by the QCB which is 100%. So we are within the QCB regulation. December 2020, it was about 105. So we managed to reduce it by almost like 17% compared to last year. That is the main issues for our performance in Q3. We're going to move now to the funding side of -- funding overview, which is going to be covered by my colleague Dr. Mohammed Ghiyath. Floor for you, Doctor.

Okay. Thank you, Hossam. For our funding overview, our QIIB funding is predominantly driven by customer deposits and equity of investment account holder and it's backed by the bank's own capital. If we look at the QIIB funding split diagram, we can see that 53% come from equity of investment account holders. We have a 15% capital account -- capital account customer. We have 14% [ customer ], and we have 13% due to banks. And 4% is our Sukuk. If we check the equity of investment account holders, we can say that 60% of that account come from individual and 31% come from government and semi-government and 7% of corporate and 2% from non-banking financial institutions. So the total deposit, as I said, it was like $10.8 billion. $8.5 billion is coming from equity of investment account holders. And $2.2 billion is the current account. So that gives you an overview about our funding overview. For -- reiterating, we are rated A by long-term by Fitch. And A2 by Moody's. And A by Capital Intelligence. For our bank, we are the third largest Islamic Bank in Qatar. We have a strong organic growth. We are the second largest Islamic bank network in Qatar with 15 branches. We have very strong brand names since 1991. And of course, our long-term issuer rating is by -- A by Fitch and A2 by Moody's. And we have a strong government support with Qatar Investment Authority as one of the bank's largest shareholders. Thank you very much and from -- that's my presentation. Any questions?

So I believe now we can move to the questions.

[Operator Instructions] We will now take our first question from Amit Jain from Franklin Templeton Investments.

So I had a couple of questions. The first one is on -- we recently saw that Fitch actually changed its outlook to rating watch negative. And so -- and it was mostly dependent on the issue of nonresident deposit or nonresident funding in the system. So where do you guys stand on that? And if you could provide some color -- your own opinion regarding that issue, that would be very helpful? And second is that we saw this sharp increase in NPL ratio. So if you could talk a little bit more about that and how do you see the asset quality in general in rest of your asset? Also if you could explain where does this NPL formation comes from?

Okay. I'm going to reply first on the Fitch rating was negative, which has been led to almost like a couple of Qatari banks. This one, as you correctly mentioned about the Fitch, the nonresident deposits, which has been increased from 38% in December 2018 to be at 48% in August 2021. However, in QIIB, we have very respected policy in terms of the nonresident deposits. We have -- we are viewing this one on monthly basis, and the bank policy is not to include it or not have any nonresident deposits over about -- over 15% of the total funding book. The current -- the situation of the current outstanding nonresident deposits by end of September is about 7% of the total customer or total bank deposits, [ including the element ] of funding from banks. The overall funding ratio is about 12% of the total funding book, which is very -- one of the most conservative banks in Qatar. This one has been already mentioned by regulator itself. They mentioned that QIIB is 1 of the most conservative banks in terms of the nonresident deposits. So we...

Sorry.

Go ahead.

Sorry, I think I missed the number. So what is the percentage you said for the overall funding? What is the nonresident funding is -- of the overall funding?

Okay. Overall funding is less than 12%.

All right. Thank you Yes, I totally missed that.

However, apart from this one, this 1, definitely, the overall funding include the debt market transaction. So if you only talking about customers' deposits, including banks, this one is almost 7% only of the total deposits.. If you move to the NPL ratio, as we highlighted earlier, this 1 mainly due to some of corporate customers becomes nonperforming during -- some of the [ facilities of ] the customers and the QCB regulation -- under QCB regulations, if one of the customers, the facility becomes nonperforming, the total exposure to that customers should be classified as nonperforming. So some of our customers, some of their facilities becomes nonperforming during Q3 which, as per the regulation, we have to classify the whole portfolio as nonperforming. So those customers, all the -- let's say, all the transactions has or exposure has been classified as nonperforming during the Q3. That's why our nonperforming ratio jumped from 1.6% to be 2.5%. However, and on the other side, we have provided the QCB, we have provided the provisions as the QCB regulations and the international definitely standard. And we expect to provide whatever required by Q3, if necessary. So we not anticipated any further deterioration of our NPA ratios by the Q3, even we expect and [indiscernible] is going to -- if not maintained at the same level, we might enhance to be less than 2% as was previously during 2020 in the rest of 2021.

[Operator Instructions] There are currently no questions. Pardon me, we do. We will now take a follow-up question from Amit Jain from Franklin Templin Investments.

Yes. I have one last one. So this is regarding the loan growth. It seems that in the system, the government loans are generally coming down with higher liquidity in their hand. So what is your own expectation of your loan book growth in this scenario? I'm getting like all the banks are targeting private sector at this point. So where do you stand yourself?

Mainly the Qatari banking system, apart from the financing book almost like more than 50% is a public sector financing assets. We anticipated this one. Previously, we maintaining about our financing book with about 24% or we spilt into 4 quarters. Quarter 2 public or government financing, quarter 2 25% to the personal banking, 25% to the real estate and 25% to other corporate customers. So we definitely will focus as well on the public sector financing assets. We anticipated to achieve 6% to 7% asset growth by end of 2020 -- 2021. We anticipate as well to have at least 4% to 5% growth in our financing book assets. So we expect to -- our share of the -- our split of the government or public sector financing assets to be within 20% to 25% by Q4.

So we should expect a sharp growth in 4Q, right?

Yes.

We will now take a next question from Shabbir Kagalwala from Al Rayan Investments.

So I had a couple of questions, if I may. On the coverage side, we have seen that the stage 3 coverage has fallen in the quarter. What's the plan for Q4? Where do you want to see this coverage in Q4? That's my first question. And you mentioned about government loan -- sorry, if you can answer, I can ask my question later.

No, that's up to you if you want to reply one by one or can ask you all questions, and I will reply at the end. Back to you.

No problem. We can start with this one.

Okay. So the coverage issue. I totally agree with you, it has been dropped from almost like 134 to be 111 Q3. As I highlighted before, it was due to 1 of a couple of our customers become nonperforming [indiscernible]. We provided the provision as per the QCB regulation minimum 20%. This one, definitely reflected in our [indiscernible], we provided the first of this Q3. It is about 45 basis points. As I highlighted as well before basically, we expected this one to be 65% -- 65 basis points by Q4. So we're going to provide the additional provisions to ensure we will be within -- the contribution to be within 70% by the end of Q4.

So Stage 3 will be 70% covered, do you mean?

Yes. They're almost like 70%.

And do you agree with respect...

[Indiscernible]

Right. 5 And do you expect any more NPLs coming from these clients? Or everything is perfect up to now?

As I mentioned, Shabbir, like we provide the full customer exposure. So even if -- [ this is obviously the end ] you are like if only 1 deal or 1 facility within the customer exposure has been -- becomes nonperforming, we have to classify the full or the entire customer portfolio. And that was the key for some of our customers. So it's not about the deal, it's about the customer. So we classify the full customer. We hope and we're working with the customer to fix this issue. And we -- we hope this customer -- this facility itself becomes performing again and we can classify it again as performing by end of Q4. Otherwise, we're going to provide the additional provision to those specific customers.

Right. And in terms of the pipeline, in terms of the growth, which sectors do you see taking up front page right now in terms of loan growth for this year as well as 2022?

As I highlighted, we have almost USD 1.5 billion or you can see about QAR 5 billion drop in our public sector portfolio, which almost like 50% of our public sector portfolio in Q3. On the other side, we had a good growth of personal and corporate banking assets, almost like QAR 1.5 billion -- represents about 6% year-over-year. So we expected to maintain the same asset growth -- good asset growth from the corporate and personal banking in Q4. On the other side, from the public sector side, we're focusing on enhance our asset positions, and we are targeting to doing in a new public sector customers to reduce or to enhance the decline done during the last quarters.

Right. And in terms of your corporate customers, which segments or which industries are you focusing on more?

Mainly now, you know, like Qatari, most of the business are concentrated in the construction business, definitely trading and services. That is the main service or major customers now is working with those 3 segment, business segments: construction, service and trading.

All right. And my final question is on the cost. You have seen a significant drop in the operating expenses in this quarter as well it's a sequential decline. Where do you see this stopping? Or do you expect more cost savings to come in the future?

We expect most cost savings, as I highlighted in my conference call, we have ambitious efficiency or digital transformation strategy. We started to achieve this 1 -- we accelerated the implementation of this partly since COVID started. We will have -- initially, we have the plan to move from a manual to operation or to digital. In 3 years, we accelerated this one -- most of our achievements or most of our objectives have been achieved. Still, we are working on to achieve the risk. So we expect the full impact of this achievements of this transformation to be in the coming few quarters. So we achieved some of -- significant part of this one but still, we are targeting to reduce our cost to income ratio more.

There are currently no questions in the queue at this time.

Thank you, everyone.

If there are no more questions, we can wrap this up. Thank you, Hossam thank you, Dr. Mohammed for giving us an update, and we will pick this up again next quarter.

Thank you.

Thank you, everyone. Have a good evening, bye.

Ladies and gentlemen, that will conclude today's call. You may now all disconnect.