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

Good day, and welcome to the Qatar International Islamic Bank's Q2 2022 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the company's CFO, Hossam Khattab. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining our call today for discussing half year results for QIIB. I'm going to speak today with my colleague, Dr. Mohammed Ghiyath, Head of Divisional Investment. We're going to start our presentation today with QIIB Snapshot by end of June or half year results ended by June 2022. We'll start with total market capitalization is about QAR 16.1 billion. The bank operating network is about [ 16 ] branches, which we opened a new branch fully dedicated for corporate customers. We are going to open a new one as well for the SME customers directly in the industrial area. As well, we have about 82 ATMs located in different areas, mainly in malls and shopping malls. Our business runs through our segment mainly business segment is personal banking, corporate banking closure and investment. Our shareholder structure is almost the same compared to the previous quarters and year end as well. Main thing on shareholders one is Qatar Investment associated with 17%. We had about 60% owned by the [indiscernible] Group; 19% owned by GCC and formations. The rest of ownership is between Qatari companies and [indiscernible] presenting 58%. The financial snapshot by first half of the year, we ended June by total assets, QAR 63.2 billion, representing a growth of 2.2% compared today in 2021. Total financing asset QAR 35.5 billion, compared to 37.0% -- QAR 37.0 billion by end of 2021, representing about drop of 4.3%. Nonperforming ratio stand at almost a very slight increase from 2.6 by end of '21 to be 2.7 by end of first half of 2022. Customer deposit, we have growth about 1.7% compared to the year ended 2021. We grew from QAR 38.6 billion to be QAR 39.3 billion by end of first half of 2022. Our net profit stand at QAR 571 million, representing a growth rate of 5% compared to the same period of last year. Earnings per share is QAR 38 compared to QAR 36 by the same date of last year. Capital adequacy stands at 16.4%, which is almost like 3.74 above the minimum order basis ECB including capital conservation above 1%. Our rating is A- with Fitch, A2 with Moody's, both with a stable outlook. If you go more down to the business overview, we're going to show how the split of our business between different segments. From the asset side, [indiscernible] investment representing 41% of our total assets, corporate followed by the cooperative representing 36% of our total assets based on our banking representing 23%. From the revenue side, corporate banking representing about 46% of our total revenue, followed by the base on our banking representing 36% of our total revenue, then we have about 18% the contribution of [indiscernible] investment. If you move to the financial performance. QIIB financial -- QIIB assets, we have a very strong asset growth from 2018 up to half year 2022. We have about an average 5.2 asset growth, which is mainly driven by the strong increase in our financing assets by almost about 6% during the same period. The split of our assets by [ 5]. We have about 56% of our total asset representing financing assets, followed by 26%, representing balance and investments with banks then we have 11%, representing our financial investments. The split of our financing book compared to the ended 2021. By end of June 2022, the majority of our contribution come from consumer lending, 44%. That's a contribution from the consumer lending. Then we have about 21% from the real estate; 19% from the industry, and we have about 4% only from the government. We noticed a major drop from the government sector from 12% by end of 2021 to be only 4% by end of June 2022. From the asset quality, as we mentioned, we have a slight increase in all nonperforming assets from 2.6% by end of 2021 to be 2.7% by first half of 2022. However, we enhanced our coverage ratio to be up from 128.8% by end of 2021 to be 139.4% of all provisions by end of first half of 2022. If we go further down by stages, so the Stage 1 representing about 89% of our total financing book. We have 8.5 that is a split of Stage 2. As we mentioned, 2.7%, that is Stage 3. The capital coverage period -- stage. We mentioned about 0.7% business covered ratio for Stage 1; almost 9% coverage for Stage 2; and 83% coverage ratio for the Stage 3. Overall coverage ratio for the total financing asset is about 3.7%. Profitability, if we move towards the profitability and operational efficiency, the majority of our income or revenue comes from financing and investing, which -- contributing about 90% of our income. So by end of half -- first half of 2022, we have slight drop in our financing income. We're talking about almost like a 10.7% drop in our finance income. This one mainly driven by the growth in our income from the government sector. Government sector by end of first half of 2021 was representing about 20% of our financing portfolio, QAR 8.6 billion. However, in end of first half of 2022, it dropped to be only 4% of our total financing assets with only QAR 1.6 billion. This one definitely is impacting our financing assets by almost like QAR 90 million drop. From the other side, we enhanced our existing activities. We enhanced our fees and commission income, FX income as well. So the total drop in our operating income be only 3.7%. As well we overcome this drop on our income by enhancing our operational efficiency. So we managed to reduce our operational cost by 3% by end of half year -- first half of 2022. As well, we provided good provisions for end of June 2022, which enhances our coverage ratio as I mentioned from -- for -- 53% from 75% to be at 85%. Definitely, as we highlighted in the events before, the management intention to reach almost 100% coverage ratio for Stage 3. As well, we managed to enhance or to maintain our operating efficiency at 19%, which is one of the top end in the region, especially in Qatar from -- as well return on our average assets is about 1.8%, which is one of the top in the market. The normal market rate is about between 1.4% to be 1.6%. However, we at 1.8%. Return on our average equity about 14.1%, which is slightly less than the market, about 14.7%. If we move as well to the capitalization, we have a slightly drop in our capital adequacy from 16.74% by end of 2021 to be 16.24% by end of first half of 2022. This one mainly due to the major payment by the government financing assets, which definitely carried [ zero scored ] asset. This one, the immediate response from our bank is to redeploy this huge fund with Interbank. Definitely, the interbank carry risk minimum 20%. That's why we utilized -- we consumed our capital adequacy. Capital adequacy by end of Q1 was above -- about 17.3%. However, in Q2, it's dropped due to this major factor. Definitely, our target is to maintain our capital adequacy at 3% minimum above the minimum acquired by the PCB, which is 18.5%, including capital conservation buffer, so we minimum for our capital plan is about 16.5% was slightly down that target, which is 16.24%. So we consider to enhance this one by Q2, Q3 and end of year as well. If we move to summarize our H1 results. Our total assets grew by 2.2%, as we mentioned. Finance exit dropped by 4.3%, liquid assets increased from QAR 23.3 billion to be QAR 26.3 billion, representing about 12.9% growth customer deposits grew by 1.6% from QAR 38.6 million -- billion to be QAR 39.3 billion. And net profit grew by 5%. That was the main highlights about our financial performance and capital adequacy, operational efficiency as well. Now we're going to move to the funding section, which will be presented by my colleague, Dr. Mohammed Ghiyath.

Good afternoon, everyone. Regarding our funding overview, our QIIB funding is predominantly driven by customer deposits and equity of investment account holder and impact by the bank on capital. If we check the QIIB funding split, we can see that 49% come from equity of investment account holders, 14% come from current account holders. We have 13% come from the capital, 17% is due to banks and 6% is Sukuk. And for the equity of investment account holders, we can see that 60% come from individuals; and 33% come from government and semi-government; 6% come from corporate; and 1% come from banking financial institutions. For the growth of the total customer deposit. We -- there's -- we can see the QAR 31.2 billion. It's from -- coming from equity from investment account holder. And the QAR 8 billion come from the current account holders. This is like the picture of the funding. As Hossam said, we are related by Page A1 and the stable outlook, we are A2 by Moody's and a stable outlook, and A by Capital Intelligence and a stable outlook with the latest, I mean, formation. So if you have any information -- any questions, we are here to answer you.

Diana, we can go for Q&A.

[Operator Instructions] We will take our first question from [ Lee Beswick ] from QNB.

Where is the presentation?

[indiscernible], please?

Sorry?

Yes. What's you question, please?

The presentation is not on your website. It hasn't been distributed. I was just wondering where it is.

We ask our -- sorry for this because we ask our marketing team to place it. So sorry about this. We will place it.

I believe we already shared with [ Shahan, ] and [ Shahan ] already shared -- and now is available on our, I believe, website. So it is already with [ Shahan. ] [ Shahan, ] did you share it with everyone?

No, I couldn't because I was -- I ran out of time to send up the reminder.

Okay. Very quickly, it will be available on our website.

And we will now take our next question from [ Edmond Christou ] from Bloomberg Intelligence.

Just -- can I ask overall question on the repayment impact. So we have seen the repayment happening in 1Q and 1H. And our understanding from banks, this is mainly due to overdraft. Do you see the NPA going into the second half of the year and this is tapping into maybe repaying other loan facility that is not over the draft, which mean we could see more repayment happening in the second half of the year? The second question is when I look at the staging, there is some downgrade happening on Stage 2, and we also see banks indicating Stage 3 formation by the end of the year. Is this mainly driven by tightening rules from the Central Bank? Or this is exposure from the COVID, if possible to comment on this? And the third one is on the rate differential, Central Bank raising the deposit rate higher than the lending. Do you see margin expanding in the second half of the year or the ample liquidity in the market, keeping the cost of funding very low in the second half of the year?

Okay. I'm going to start with the first one about the repayment of the financing. As I mentioned earlier, our contribution of our government business share of our financing portfolio. Those, as we planned according to our strategy, about 20% to 25%. That's the normal contribution of the government business. However, in Q -- or H1, it is -- be only 4%, so we didn't expect any sales of digitalization or drop of -- actually drop in our financing assets going forward up to the end of year. If we exclude -- just to give you more details about it, if you exclude the government drop in our financing assets, we ended up with about 5.5% increase in our financing assets. So in fact, the drop in our assets by 4.3% is due only to the government business. However, if we exclude it, it would be about 5.5% increase of growth in our financing assets. About Stage 2, we maintain our test financing to the portfolio almost to the theme, even it is drop in second half of 2021. This is only presenting, as I mentioned earlier, about 8.5% of total assets, total financing assets as well as Stage 3 only 2.7%, which is within the market for Stage 3 is about 2.6%. We add that as the QCB reports. However, we already at 2.7%, which is normal within the market. I believe number 3 about the cost of funding and this liquidity issue. I believe, Dr. Ghiyath can cover this one.

For the liquidity, I mean, there is liquidity in the market regarding the Qatar rial and the dollar and the facility of the government is still in for the COVID -- still into the end of the year. So we do not expect any squeeze and liquidity either in USA dollar or Qatar rial.

Okay. Just a follow-up on the 5.1%. This is year-to-date, excluding government repayment? And possible to highlight the sector that's been driving the 5.5%? And on the Stage 2, do you see Central Bank the provision has been tied up, but do you see Stage 2 deteriorating into Stage 3 in the second half?

This one is still not clear because the TCP instructions is to give more support to the customers. Now according to the QCB [indiscernible] release in March. The QCB intention is to ensure that the bank is -- the local banks providing full support of customers. With a customer, we have a new issue with this cash flow while it's still performing. So that's not mean we have to fully apply the relations and to reclassify those customers if it has slight [indiscernible] from the actual of the original repayment schedule. Do we classify those customers to Stage 3 or from Stage 1 to Stage 2 to be more flexible with our customers, to reconsider the cash flow repayment plan. And according to this one, we have to classify them according to the stages. So this one, we're still working on it. We have some customers requested to rescheduled new loans. And we are starting this one right now. Definitely, as the Q3 regulation, this one has been -- should be actually -- should be viewed by our external [indiscernible]. Then we have to submit the full report the QCB and QCB will have the consolidated view report from all banks then you're going to decide which customers to skip our reschedule or our repayment plan, the new repayment plan. We're going to reject then based on the feedback of the QCB you're going to reclassify those customers according to their stages.

Okay. Which means asset reschedule, that will be Stage 2, all right?

Regardless, if it is stage 1 and reschedule and the QCB accepted our orders was accepted, we'll continue as Stage 1 because the reschedule is [indiscernible] repayment is not impacting this classification. That's the initial [indiscernible]...

Okay. I got it. And this is until the end of the year, the flexibility?

No. This one -- initially towards by end of July, all banks should submit the reports. Now it's extended up to end of August, where most should be -- all banks submit the feedback or the reports, the QCBs going to consolidate all feedback from all banks they going to decide which want to action to. Based on the feedback we're going to sit on the QCB, we are going to reclassify those customers according to the various stage.

And we will now take our next question from [ Guy Serves ] from Al Rayan investments.

This is Shabbir Kagalwala from Al Rayan Investment. I had a couple of questions. Sorry, I joined a bit late, so I don't know if you've discussed this already. In the second quarter, we have seen a drop in margins, predominantly mainly due to lower financing income and higher financing expenses. Just would like to know what's the outlook of the margin for the remainder of the year? And are you seeing any benefits coming in from the increase in interest rates?

Thank you, Shabbir. Yes, total agree with you. We have about 20 basis points on our financing income, actually as a motion on our income. We're usually between 3.75%. In Q2, we dropped to be 3.54%, which almost like 20 basis points drop. Our cost of fund is almost the same. So we noticed with about 20 bps drop in our net interest margin due to mainly the double our income. Definitely, as you mentioned, from a systemic perspective, we cannot update or reflect this increase in our financing rate immediately to our customers. This one is on gradually business based on the -- any revolving or any new customers comes. So we're going to definitely update our profit rates. And this one, we expect to take between 3 to 6 months. So by end of year, we might see this reflection on the -- our income due to the rate increase.

All right. And this quarter, you have seen a reduction in operating expenses. And sequentially, it is falling every quarter we are seeing this reduction coming in. So you had mentioned in the past about cost optimization and things like that. So what's the outlook? How much of that is done? And how much of it you think will come? Like how much of it is still about to come in and where do you see cost or cost-to-income ratio towards the end of the year?

As we mentioned even earlier, we are targeting less than 20% close to [indiscernible]. We achieved almost the best we achieved is about 18.2%, which is almost like 1.5 years ago. Now we add 18.8%, 18.9%. So definitely, we continue enhancing our operational efficiency, so transforming our normal traditional banking operations to be more committed or intelligent like we enhance it, and we invest a lot in our mobile application, when this -- a lot in our Internet banking, especially for the corporate side, even tenant from the back site as well. We enhanced a lot of tenant observations to be fully automated, who will have save a lot of human resources, it's save a lot of normal overhead and running cost. This one, we continue enhancing. But as I mentioned, our target is to be between 18% to 20%. That is the maximum we have in our strategy, our target is to be less than 20%.

Right. And there has been a sequential decline in staff costs predominantly. So is it because of this initiative that you are like reducing the staff? Or are there any one-offs here? Or what's happening?

No, it is not. Yes, definitely, we have small decrease in our staff cost. It's not that huge. It's only about 3.6% drop in our staff cost. And this one, as I mentioned, mainly due to -- will it make some of the positions or staff, which is not anymore needed due to, as I mentioned, this kind of automation. For example, before remittance, it goes to different stage, different levels before being processed. Now a big portion of our money transfer is STP. So does not need fully placed with an automated process, automated content in place, way to ensure this kind of transaction is fully automated to without need to have in human intervention. Definitely, this one is flipped our staff cost -- staff needed -- the staff count needed. The same from corporate operation, the same from the [indiscernible] operations. Now most of our customers, they're applying for their financing. So the mobile banking. So the need of staff at tranches or even at the back office to execute those transactions is not anymore required. So that's why I'm saying, we trying to enhance even our organizational structure, who were to place good qualified staff with low performance staff to enhance the efficiency of our staff even to operational enhancement as well.

And we have one more question from [ Lee Beswick ] from QNB.

Can you talk about funding costs into the second half of the year particularly in relation to the interbank funding that you source? I mean, you have about QAR 10 billion -- QAR 11 billion, sorry, of interbank funding at the end of June. So what's the outlook for that funding cost given the sort of KIBOR rates are going up pretty quickly in relation to QIIB?

Doctor?

For the funding -- for the end of the year, as I said, we almost -- I mean, our -- yes, it's will not be that the big differences because I know there is -- the interest rate will go up soon, but that, of course, will reflect in our rates and to the -- I'm not talking about the interbanking or sorts. The impact, I mean, for the course of fund will be -- of course, when the interest rates go up, the cost of fund will go up. But we will compensate this because we invested in other banks, so we make the difference. I mean, so it's -- we will not have any impact in our profit.

Yes. In addition to what Doctor mentioned as well from the cost of funds side, we work very close with our corporate team, retail team to enhance us with the composition of our customers' deposits. While we managed to reduce our costly deposits, which is payment deposit by almost 3% compared to the end of year, which as well almost like 4% compared to the same quarter of last year. We compensated this one by low-cost deposits, mainly current accounts and saving accounts. We have about almost like 9% growth in our cheap funding, which is mainly card and saving accounts. This one has been replaced the costly one, which is a customer deposit. As well, we try to reduce our deposit to the deliver the way we ensure there's no -- any negative impact in our profitability. Because as I mentioned, we have a large amount of payment from the government financing side where we have to respond to this one by reducing our deposit even the Interbank one.

And we have no further questions. So I would like to turn the conference back to our host for any additional or closing remarks.

Thank you, everyone.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect.