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

Hello, and welcome to Qatar International Islamic Bank Conference Call. Please note that this call is being recorded. I'd now like to hand over to the moderator for today, Shahan. Please go ahead.

Thank you. Hello, everyone. I want to welcome you to QIIBs Third Quarter 9 Months 2020 Financial Results Conference Call. So on this call from management, we have the bank CFO, Hossam Khattab and Dr. Mohammed Ghiyath, Head of Treasury and Investments. 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 to Hossam. Please go ahead.

Good morning, good afternoon, ladies and gentlemen. My name is Hossam Khattab, the CFO of Qatar International Islamic Bank. Today, I will walk you through this presentation along with my colleague, Dr. Mohammed Ghiyath, the Head of Treasury and Investment. Today, meeting will cover the following topics. First, we'll start with QIIB overview and strategy. Then we will move to the financial performance then funding and overview and will end our presentation today by rating overview, and definitely will open the session for Q&A at the end of our presentation. I will start my presentation today with Slide 5 of our presentation which is providing on high level overview about QIIB. Qatar International Islamic Bank has been established in 1990, began its operation in January 1991. It is sixth largest bank by market capitalization on Qatar Stock Exchange as of September 2024, with market capitalization over QAR 16.6 billion. The financial performance of -- sorry, we will start with the shareholder structure first. QIIB shareholder structure has remained stable over the last few years with Qatar Investment Authority, the sovereign wealth fund of Qatar owns about 17% of the bank issued capital, other Qatari companies and individuals development owns about 62%, where the foreign nationals owns up over 21%. It's good to highlight as well that there's a Bank Articles of Association, no single shareholders owns more than 5% of the bank issued capital. If we move to now to the financial snapshot, the financial assumption for Q3 2024 as follows: total assets stand at QAR 6.0 billion, with a slight decline from QAR 61.6 billion by end of December 2023, total banking financing assets go to QAR 39.0 billion by end of Q3 2024, showing a steady increase of 7% compared with December 2023. The bank nonperforming ratio at end of Q3 2024 stand at 3.4%, reflecting a slight increase from December 2023. Nevertheless, it is still lower than the market average. The bank total customers' deposit at end of Q3 2024, up by 5.2% compared with year-end December 2023. The bank net profit by the end of 3 quarters of 2024 grow to be almost over QAR 1 billion representing about 6.5% growth compared with the 3 quarters of 2023. As well the bank continue to uphold robust and stable capital position with CAR ratio go to 19.3% at the end of September 2024, providing a buffer -- almost like 5% over the minimum requirement by QCB, Qatar Central Bank. The bank runs its operations to 3 major business segments, which is Corporate Banking, Personal Banking, Treasury and investments. If we move to Slide 6, which shows to you what is the profitability and asset by each segment by end of September 2024. The split of the bank's net revenues and total assets between the 3 major business segments are as follow. Corporate Banking, representing about 55% of the total bank revenues, whereas the share of the assets about 43%. It is supported by 3 branches fully dedicated to serving corporate customers. Then Personal Banking, the share of revenue is about 20%, and the share of the total asset is up about 25%. The retail branches network consisted of 17 physical branch and 1 digital branch complemented by more than almost like 80 ATMs across rest of Qatar. Then the Treasury and Investment segment. with about 25% of the share of the net revenues and 32% of the total assets. That was like if we move to the financial performance by Page 8. This slide gives you an overview about the QIIB asset composition by type. As you can see, financing assets represent about 65% of the total bank assets, 17% for finance and investment with banks. It is mainly interbank placements. Then about 12% representing financial investment predominantly sovereigns and FIs sukuk rated from A to profitability. The bank financing book well diversified as well across different industries, including consumer lending, with 46% of the total financing asset book, trading about 22%, real estate financing is 8%, government or public sector with 5%. And you can see this almost stable across 2024 even with compared to 2023 year-end, it is almost stable. If we move to Page #9, which is asset quality, QIIB demonstrated a solid track record of maintaining our cost asset quality, which is a key factor in ensuring the bank financial stability and solid risk management. The collateral backed financing deals provided an additional year of rotation, ensuring the bank exposure is well secured and mitigate any potential risk. As you can see, specially financing ratio stands at 3.4% by end of Q3 2024 compared with 2.9% by end of 2023. Nevertheless, it is still less than the industrial average supported by financing growth and the stable operating condition. Still Stage 3 NPL coverage ratio reached almost like 95% by end of September 2024. So overall, as well as you can see in the table at the right of the slight down almost like 4.6%, up from 4.6% by end of 2023. That is the asset quality, Slide B. If we move to Page 10, which is a profitability and operating efficiency. You can see as well that the bank has sustained a strong profitability and efficiency ratio over the last 5 years, the breakdown that win, down shows the bank enhanced its return on average assets from 1.6% by end of 2022 to be at 2.3% by third quarter of 2024 as well the average equity enhanced to be 14.6% up from 11.4% by end of 2022. The operating efficiency as well has maintained a very strong position at 19.6%, reflecting the bank efficiency which consider one of the most efficient bank at the local and regional level as well. This is mainly driven by the bank digital transformation strategy initiated back to year 2022, and we are still achieving a good progress to transform or to be able to well convert most of our manual and front office operations to be fully automated, which we expect to as well to add and to enhance our capital cost-to-income ratio further over the next few years. If we move to Slide 11 or Page 11, this one gives you an overview about the capital structure. As well, QIIB maintained a very robust capital structure with capital adequacy at 19.3%, supported by both Tier 1 and Tier 2 capital. Tier 2 only represents about 6% of the total eligible capital. The current level of capital adequacy is well above the minimum required by the QCB, including even the ICAP additional capital charge. CET1, as you can see, stand at 14.11%, which is well above as well the QCB minimum requirement by 8.5%. As well, the bank maintained a very strong LCR at 355% over 100% required by the QCB, very strong NSFR at 120% over as well the minimum required by the QCB at 100% and credit deposit ratio only at 88.6% by end of Q3 2024. All this strong financial performance metrics and regulatory compliance at the end of Q3 provide a very solid track record of QIIB maintaining its ratios. Now at the end of my presentation today, I'm going to move it to my colleague, Dr. to give you an overview about the funding and the rating of the bank.

Good afternoon, everyone. Funding overview. QIIB funding is predominantly driven by customer deposits and the equity of investment account holders and is backed by the bank owned capital. QIIB funding split in end of quarter 3, 2024. 58% comes from equity of investment account holder when it was 53% by the end of the year 2023. And you have 16% is coming from capital, 10% from current account and 10% coming from other -- due to banks and 4% to sukuk. The equity of investment account holder breakdown by sectors. 62% come from individuals, 8% come from corporate, 29% comes from government and semi-government and only 1% comes from nonbanking financial institutions. The growth in the total deposit -- they are -- we can see that QAR 34.9 billion is from equity of investment account holders and QAR 6 billion is from the current account. That gives you the breakdown of the QIIB funding split. Regarding the credit ratings, we, at QIIB, we have Fitch rating A+, the outlook is Stable and date in July 2024. For Moody's, we have A2 and the outlook Stable and the date is July 2024. And capital intelligence, A+ and the outlook Stable and date March 2024. That give you idea about the credit ratings of the bank. Thank you very much. If you have any questions, please you can begin.

[Operator Instructions] Our first question comes from Abhinav Sinha from Lesha Bank.

Yes. Can you hear me now?

Yes, I can hear you now.

Yes. So if I look at the net income number, while it is up quarter-on-quarter, if I look at the net interest income and pretax pre-provision profit, it is down year-over-year. So could you explain like what are -- what is driving that? And how -- what is your outlook for the coming quarters on that?

Net interest income is not down year-over-year basically it is up over the last few years, only in this year second and third quarter, it is down. But still we are maintaining a very good positive net interest income amongst other banks. Over this year and last year as well during the rate hike environment with all customer support has been repriced, or the cost side has been repriced at the highest rate that was the main driver of our net interest income to be down over 2024. But as I mentioned, still we are maintaining a very good strong performance. As you can see, the revenue is up by almost 18% over the first 3 quarters. And we, as well, we maintained a very good cost-to-income ratio, which is one of the most efficient within the Qatar market. So that's giving you a good overview at the end of the year, you have to balance between the financing deposits to maintain new customers and to maintain your deposits, you have to consider this or to absorb this additional cost. But the overall average cost of fund at the bank level is still one of the best within the market. Our cost average, cost of fund is almost like at 3.1%, where most of other bank is 2 or 4 plus, that is my comment of your question.

And given that now the rate hikes have already happened, so like one at least. So any outlook on your NIMs for the coming quarters on a net interest margin?

Yes, for sure. As well if you attend our last investor call as well, we mentioned that we have adopted about 24 bps of from NIM from end of 2023 to Q3 and even close to the same level almost at Q2. So by end Q2, our net interest margins is about 261 basis points down from 289 by end of 2023. In Q3 2024, it's enhanced almost like 5% up to be at 266 basically. This one mainly driven by a good enhancement in our yield, our asset side compared to last quarter as with the enhancement of our margins, profit margins and commissions as well. And we expect, once we are at that level, that was almost the same level. We was enjoying before 2022. So before 2022, our NIM, it was about 200 -- between 240 to 250 basis points. which is still higher. So we expect this one over the next few quarters up to end of first half of 2025 to land at the same level between 240 to 250 basis points.

Your next question comes from Maha Marhaba from ADIA.

Thank you for this presentation and for the call. I have 2 questions actually. Just a follow-up on the margin. So if you look at the net financing margin, it has been, as you mentioned, it has improved in Q3, which drove to some improvement in the interest income or net financing income in Q3 compared to the past 2 quarters where we had more or less flattish net financing income. So you're mentioning that in the next 2 to 3 quarters, we should expect a range of 240 to 250 bps. However, you mentioned that you reached 266 bps in Q3, does this mean like we should see some contraction in the next 3 quarters? And my other question is on the margin is -- can you give us some guidance on the sensitivity to interest rate given the outlook that, with the expectation for full rates to go down?

Yes. Thank you for the question. And as you quickly mentioned, you can notice that we have a good enhancement of our profit margin on the asset side, from, you can say, 4.5% by end of 2023 to be almost like 16% by end of Q3 2024. However the most hit comes from the cost of funding that's one of our strategy to maintain our customer deposit even we can enhance this one by reducing the deposit -- customers deposit, you can see our loan to deposits on 88.7%, which is one of the lowest in the market, most of other bank is over 100%. So it gives us a good and very solid position to drop some of our customers deposits. But as the bank strategy is to maintain the loyal customers to the bank and to maintain this kind of relation with our customers. That's why we take a decision to absorb that additional cost to maintaining the customer base. However, this one it is mainly now at the highest level, which is almost compared to the market, it's almost at the same level. Definitely, we expect to have some growth in our financing income. Over the next few quarters since the rate hike will already started. In September, we expect additional 25 to 50 basis points over the next 2 months, as an additional at minimum 50 basis points over the 6 -- over the first half of 2025. So we expect about 100 basis points to be dropped from our financing assets. This one definitely will be reflected on some of our revolving deals and not all we maintain almost like 70% to 30% of our financing assets is evolving. It will take about 3 to 6 months to be fully repriced at the new rates. And that's why we -- as I mentioned, we expect by end of first half of 2025, the rate or the adjustment to our financing assets to be take over this in few quarters. On the liability side, as well these adjustments really take place last 2 months since the rate dropped by 50 bps. As well, we noticed some drop in our cost of fund over the last few weeks, and you can start -- we started this one by September. Almost right now the costing of pricing of our deposits is dropped by almost like 30 to 40 basis points. And we expect this one to continue over the next few months as well. That's why I expect the net interest margin to be landed between QAR 240 million to QAR 150 million, which was the same position before 2023.

Your next question comes from Wei Chao from Orion.

This is Shabbir Kagalwala from Al Rayan Investments. I had a couple of questions, if I may. What we have seen is that the cost of risk is -- has significantly reduced versus last year. So what sort of guidance do you have for this year and the next year for the cost of risk side? Also in terms of, say, the coverage on Stage 3 remains at 87%. So is this the status quo now that you are happy with the current coverage? Or you would like -- because earlier, you had plans of making it at 100%. So is the plan still on?

Thank you, Shabbir. Thank you for your questions. First of all, as we mentioned a couple of times ago that the cost of risk basically is linked directly to the coverage ratio are targeting, which is, as you mentioned, it's 100%. We need to targeting to achieve 100% coverage ratio for Stage 3. Over the last few years between 2022 and 2024. We managed to enhance our coverage ratio from level of 50% to 60% to be over 87%, as you mentioned, if we consider as well as the suspended profit, it will be almost like 95% and that is the coverage ratio so far. Cost of risk is at 56 bps down from 111 by end of 2023 but it's still much higher level of 2020, which is before COVID takes place. And this level should be very reasonable considering that we almost achieved 100% of the coverage ratio of Stage 3. And even we expect this one to be more positive over the next few months considering, as you know, that the -- I mean decree will -- the GDP bought back all national guarantee program facilities. This one, we expect to have a good and positive impact on our nonperforming ratio as with the coverage ratio, as well some more progress on the contracting business constructions as well as those contractors will expect as well as to have a good base on our performance and profitability as well over the next few quarters.

So thank you for bringing the QCB thing up, just wanted to know how much of your book is currently exposed to this kind of loans, this is COVID related loans, which the government had come up with like waving off some of it. So how much of that loans currently does QIIB have on its books?

Yes. Over -- only in October, we received about almost QAR 22 million. That's the size of the portfolio as well, we get some approval from QCB to reclassify some of nonperforming customers to be performing again. You know the QCB regulation is we have to send every time if you want to classify any customer from Stage 3 to Stage 2, from Stage 2 to Stage 1 and even we have to get QCB permission first, which we've done, and we have to prove a track record of payment for 12 months continuously, which we provided even the above half of what we submitted. But at the end of the day, we'll have a good amount of reversals from Stage 3 to Stage 2 over this quarter, which we expect to have a good and positive impact on our no performing ratio.

All right. And my final question on the investment book side, we have seen is that the investment book has slowly come off in terms of, say, the number is -- you peaked in September 2023 and then it's sequentially down. So what's the outlook for that? Are we seeing these numbers to continuously go down, you were happy with this or this will go up in a way and what's the yield on the book you're currently enjoying?

Good one as well. You know our strategy before as during the last few years, where the QCB was in all these program of projects by the QCB on monthly basis. We were participating this one because it provide a good yield or a good return over the short term, which is supporting our NSFR liquidity position as well as we are getting a good return on this one. Recently, we changed it to use our position of the treasury business and we look more over the longer-term one because this one, we expect to maintain a good profitability over the next few years before the strategy is to focus on the short and long-term -- short-term investments to enhance our yield as well to support our liquidity position. Now since the rate will shift to be down and this one should be as I would expect more cuts over the next few months. So our strategy now is to focus more on the longer-term investment to maintain this good yield over the next few years.

All right. So does that mean that, since you're adding on duration, that means that the yield will improve?

Will improve in short while. We start to shift from shorter term to longer term. Even as you can see, it still is negative, but you cannot shift it over the time. We expect some issuances to be done like QIIB recently Dukhan Bank because our strategy is to invest in investment grade, which is even sometimes it's between A to A3 to enhance our capital adequacy as well to not have a good impact on the capital adequacy. So we gradually, we start to shift from shorter to longer-term investments. And we expect to have additional investment over the next few months to enhance or to maintain actually the yield at a good level.

Your next question comes from Maha Marhaba from ADIA.

I just have a follow-up question on the provisioning, the cost of risk. So what I noticed over the past years, Q4 usually come up with the higher coverage and on high provisioning. So you are mentioning now that you're happy with the level of provisioning you are and the cost of risk of 56 bps is where you are looking. So shall we assume this is also valid for Q4? Or we should expect some increase at least during Q4?

Thank you for the question first. And definitely, we are -- as a management, we are very conservative. We like to achieve the most coverage or most risk management, you can say to mitigate any potential risks. That's why definitely, whenever any opportunity to enhance our ECL, not just the Stage 3 provisions, even the Stage 2, it is at almost like over 8% as of now, or as of September. We definitely, when we have an opportunity, we're going to support the provisions and the ECL over this quarter by end of year. But we do not expect to have a huge and dramatic increase in our cost of risk. That will be based off for sure for the loan loss review, which is ongoing right now. But as I mentioned earlier, we expect to have good positive recovery from some of the customers already about to be under Stage 2 now. And -- but we are going to use this one to support other customers even it's not required to increase the coverage ratio. You know the QCB is 20, 50, 100 basis points, 100%. That's the coverage ratio. So we can say almost like 95% is covered. And even some of the customers as the QCB and regulations only required to have only 20%, but we added some additional provisions to be protected over the next few quarters. So that is our strategy, and we'll continue this one over the next few months until the end of year.

We don't have any pending questions. I'd now like to hand over to Shahan for further remarks.

Actually, I have a question. Hossam, other quick question regarding the share buybacks. Have you guys -- your Board discussed it at all?

No. Because our capital adequacy is adequate, it is reasonable, I know, as I mentioned, it is much higher than the minimum requirement. But as well, we're considering what is our market average. As you can see, most of bankers is running over 20%. So to not be away from the market average, that's why we want to maintain the capital at the same position. So we're not considering this one so far.

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

Thank you, Shahan, thank you everyone.

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