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

Good day, and welcome to the Qatar Islamic Bank Q4 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gourang Hemani, CEO. Please go ahead, sir.

Thank you. No, unfortunately, I'm still and happily still the CFO of the bank. So I'm happy to say that. Thanks again to QNBFS for hosting the conference. We'll quickly start with a quick update on what's happening in Qatar, and then we'll move on to QIB results, and then we'll follow it up with the question and answers. So in terms of Qatar overall economy, I think we have been seeing a good growth starting from July of last year. The country continues to benefit from very high hydrocarbon prices and has been very wisely spending it for capital expenditure expansion. And in terms of 2022 World Cup, we are in the landmark year, one of the largest events to be hosted in the country and in the region. In terms of the high hydrocarbon prices and in terms of the overall spending pattern that has been executed by the country, we are expecting that in the coming 1, 2 years, the GDP growth for the country will be above 4%. The omicron wave of COVID has impacted in Qatar like rest of the world. However, I think the very prudent and well-executed vaccination policy has allowed to contain the economic impact of this to be very limited. And from -- based on what we are hearing worldwide, I think it's going to have a more temporary impact rather than any longer-term impact, with the current variant. I think as we will -- as we go into 2022, we'll be seeing high expenditures in the country, both for the short-term purposes to make this mega-event a very successful event as we can see from all the plans that have been made, but at the same point of time, continue towards the medium-term 2030 expansion growth plan, whereby they plan to increase the LNG expansion capacities, trying to institute very many structural reforms that include foreign direct investment, residency program, labor reform, et cetera. All these put together puts Qatar in a very positive growth path and very positive atmosphere for the banking sector. In terms of the year-to-date growth in the Qatari banking sector, up to November, we've seen a year-to-date growth in assets of 6.7%, reaching over QAR 1.8 trillion. The loans have grown year-to-date in the system by about 7.5%, and deposit growth has been 6.4%, very strong, very healthy, consistent with what we had been projecting at the beginning of the year for the system. In terms of QIB, I think we are very pleased to announce that we have achieved net profit attributable to shareholders reaching QAR 3.555 billion, which is about 16% higher for last year, with translating into basic earnings per share of QAR 1.42. QIB Board of Directors have proposed a dividend distribution of QAR 0.575 per share. That is 57.5% of nominal share value, subject to approval by the Central Bank and Qatar -- QIB's General Assembly. This translates to a very improved payout of 40% for 2021. The total assets of the bank have reached QAR 194 billion, translate into 11.2% in 2021, of which 4.2% came in the last quarter of 2021. The financing activities have registered an annual growth of 7.8%, of which 1% came in Q4, resulting in the total balance sheet -- total financing assets of QAR 128 billion. Investing activities have grown sharply by 33.5% in 2021 to reach QAR 44 billion with majority of the new investments in the State of Qatar Sukuk. The bank has shown a very strong deposit generation ability, having grown their deposits by 11% in 2021 to reach QAR 131 billion. The bank's strong asset liability balancing capabilities can be seen from the fact that bank has been improved its financing to deposit ratio from 101% in 2020 to 98%, reflecting the bank's strong liquidity position if you take into consideration the strong LCR, NSFR and other regulatory liquidity ratios in place. In terms of profitability, the bank's total income reached QAR 8.1 billion, registering a growth of 2.2%. The bank's income through financing activities, despite low interest rate environments, have grown by 1%, and the bank's fee income has grown by 10%. The big benefit the bank received was -- on the low interest rate environment was on the funding cost, whereby the total funding paid on the URIA and Sukuk dropped by 15% to reach QAR 2.140 billion. In terms of the overall net operating income, the banks were registered marginally shy of QAR 6 billion at QAR 5.990 billion, up 10% compared to last year. The bank was also able to contain its total general and administrative expenses 1% below last year, and are -- now stand at QAR 1.1 billion. The bank's drive to improve efficiency, supported by strict control -- cost control measures, enabling to bring down the cost-to-income ratio from 20.1% to 18%, one of the lowest in the banking sector, especially the lowest in the Qatari banking sector. The bank was also able to manage its nonperforming finance assets to total assets -- total financing assets at about 1.4% level, one of the lowest in the industries. Moreover, the bank's stage 2 financing ratio was also stable around 15.75%. The bank continued to take precautionary impairment charges of -- for financing assets at QAR 1.3 billion, which is up 5% compared to last year. This translated to an annual cost of risk of about 1% and improving -- has been improving the coverage ratio of stage 3 financing to 95% compared to 92.5%. In terms of the overall coverage by taking into the total provision versus the total impaired financing, the coverage is almost 270% compared to 227% last year. The bank's total shareholders' equity reached QAR 20.7 billion, reflecting a growth of 13.3%. The bank's capital adequacy ratio stands at about 18.92%, well above the Basel and Qatar Central Bank minimum requirement of 14%. Having taken you through a summary of the results, happy to take any questions.

[Operator Instructions] We will still take the first question from Edmond Christou from Bloomberg International Research.

Just want to understand the margin into the first half of this year. How do you see the competitive pressure? I think looking at Q4, clearly, the asset lead has dropped notably. How do you see the competitive pressure into next year? And also on the cost of funding, I think there's a slight increase in the cost of funding, but you still prioritize a healthy and low [ NDR ] in the industry. So how do you see this evolving into at least the first half of the year? And for the second half of the year, what is the sensitivity of interest rate hike in terms of positive or negative impact on margin if possible? The second one is on the fee and ForEx generation. It was slightly weak in Q4, expected to be better on what we hear on improving business activity in Qatar. Do you have any -- a view on how this should evolve into next year? What's the expectation on this?

In terms of the net profit margin on the financing portfolio, I think we have been fairly stable for the year at about 3.3% to 3.4% across the year. And I think it's almost in line with last year as well. So what we have been seeing is the fact that the low interest rate impact on the asset book has been more than compensated or kind of almost compensated by what we have been seeing on the reduction that we've been able to get on cost of funding, especially on the URIA book. So our forecast, at least for the first half of the next year is we believe the margins to continue to remain stable, but we have projected, as we go -- our planning purposes is, we expect the first half -- we did not anticipate any major increase in the Fed rates or the corresponding Qatar Central Bank lending rates for the first half of the year. And we expect it to grow by about 50 to 75 basis points in the second half of the year. So first half, we expect the [ news ] to be around the same level than what we have seen for the year 2021. And as we go into second half, we will see the impact slowly percolating into the P&L. However, given the fact that it -- most of the impact does come in on the rollover dates of the financing, so we should start seeing it coming in -- more benefit coming in from the Q3 and the latter half of the Q4. We believe that, however, this could also result in depositors demanding for higher cost of funding. So I think we still believe our overall projection for 2022 is that we should be able to maintain our overall wins with full benefits accruing from 2023 onwards. Having said that, if the Fed hikes and the QCB interest rate hikes are earlier in the year, then we could see more impact happening from the second half of the year. If what the markets are saying that there could be a potential fed hike in March and if QCB follows it, then we should see the benefits starting to come from end of second half or end of second quarter and beginning of third quarter of next year -- third quarter of 2022.

How many hikes have you graphed into the budget? How many hikes you packed into the budget?

2 to 3 hikes, you can say third hike, but the third hike coming more in the end of the year, so not having any impact on the profitability of the bank.

Okay. Yes, the second one on the fee and ForEx, I wasn't expecting it to improve sequentially given the improving business environment. But it has been volatile previously, so just some view onto next year.

I think, in the sense is, if you have noticed that our Q3 has always been very strong from the fee income side of view. And I think that's the point of time you have a lot more holidays and a lot more customer spending, especially on the card-related activities, et cetera. I think Q4 has again was slightly dampened by the fact that omicron related impact and all people starting to really slow down the travel and slow down the spending as such. However, we keep allocating the fact that it's never a point to look at it just on a quarter-by-quarter. Fee income needs to be observed and monitored over a medium term, at least on a half year basis on the 3 quarters, because there are elements of fee income that can be very transactional-driven or could be fee-driven. So I would not really make a comment to say whether it was a weak quarter or not a weak quarter. I would say, please look at the overall growth, has been 10% growth in the fee income, which I believe is very healthy given the current market environment that we are in.

We will now take our next question from the Lee El-Hage from Bloomberg Intelligence Research.

So my first question is attributed to cost of risk. So I've noticed that the cost of risk has improved significantly, sequentially as it has benefited from provision releases on Stage 1. But also, at the same time, there was a downgrade from Stage 1 to Stage 2 and provisions moves with them, so if this related to the end of the support program. Or do you have any update concerning corporate data that resulted in such a downgrade? Also going forward, do you expect more leases from Stage 1 to keep the cost of risk at low levels? And what is the comfortable level for the coverage ratio for Stage 1, given that at the beginning of 2020, the coverage ratio for stage 1 was at 0.6%? Also I have a second question. Concerning that, would you expect -- do you expect the repayment to dampen public sector growth, government repayment, I mean, to dampen public sector growth? And what is your expectation in terms of loan growth for your bank and for the sector as a whole as well? And would your priority be to gain market share for 2022 or like rather than gaining on margin for this year?

Okay. Turning to the first question on the impairment. Again, we as a bank have always been very conservative, and we tend to take more impairment charges at the beginning of the year so that we try to kind of -- if you've seen our -- the results, if you keep noticing that normally, you would see that the Q1 and Q2 tend to have a higher provision charges because we try -- we prefer to bill up the provisions in order to cater to any uncertainties. And when those provisions without -- as we keep heading to during the year, we get more clarity on how the asset quality tends to move. So in the first quarter or second quarter, you will see more allocations towards Stage 1 and Stage 2, which only get let's say, translated to Stage 2 and Stage 3 as we get more clarity in terms of the NPL generation and the asset quality formation. So I would not call it as a release from Stage 1, but I would say it is -- in the last quarter, but I would say it's more about allocation of the provisions that we would have built in the first half of the year as we keep moving closer to the end of the year and we get more clarity in terms of where the asset quality stands at. The way we look at it is in terms of the overall charges that we are -- overall impairment charges that we have built in, I think, as I was mentioning, that we have increased effect compared to last year. Our total impairment charges for financing have grown by almost 5% to reach QAR 1.3 billion. I think if you look at the quality of our portfolio and if you compare it with the cost of risk that we take. That clearly translates that despite having a very good quality of portfolio compared to the peers, I think we've continued to build provisions. I think that's the conservative approach we take. We strongly believe the fact that if you are able to generate strong operating revenues, it makes sense to allocate more towards provisioning and impairment to build balance sheet strength. And I think this is not something new, but which -- we have been following across quite very many years. The second question, can you remind me what was it? The question you had?

So the second question I had, do you expect government repayment to dampen public sector growth? And what is your expectation in terms of loan growth for your bank for 2022?

Okay. I think -- I really don't see that we should be witnessing significant public sector repayments. I think what you could see is there are different ways to look at it, right? The public sector is a fund that comes into the system, can either come through more deposits into the system or it could come in form of repayment of shorter-term facilities. The way we look at it is in terms of SQIB, our government-rated exposure, in fact, has significantly increased in 2021 compared to 2020. The reason I put it is to say is that we don't look at government exposure or purely from the perspective of the financing. Even if we speak from that, I think our lending to government and government-related entities have increased by almost 33%. And they're now -- the financing to government and government-related entities is about almost QAR 23 billion compared to QAR 17 billion last year. And if you add on top of it that we have added about -- we have increased our investments by almost 33%, 34%, almost entirely coming from -- oh not almost -- coming from investment in the state of Qatar, Sukuk. So in fact, our overall exposure to the government has -- on the assets exposure has increased from 26% to 32%. So we expect, in 2022, that -- I think there'll be a lot more spending happening by the government, especially on the, let's say, operating expenditure bit of it for the 2022 World Cup. And I think that they also are cognizant of the fact that they want to maintain a good liquidity. So I see more inflows happening from the government on the deposit side of the balance sheet rather than on the repayment side of the assets. In terms of the industry outlook, I believe that I think the -- as I was mentioning at the beginning of the call, we've seen a total loan growth of about 7.5% in November, which is almost in midway between our forecast for the year, which is about 6.5% to 9%. I believe, therefore, for next year, we also expect the balance sheet and financing book to grow around 7% to 9% around that range. And I think this is a healthy growth levels to be maintained over a medium-term level. I think this will be boosted by the fact that as the government prepares to -- for the planned expansion on the LNG and the other expansion projects that they have in place, especially in terms of the infrastructure, I think while hydrocarbon expansion, the LNG expansion may not have a direct impact on the banking sector, because we will hardly have very many local banks participating, given the fact that majority of the requirements are in foreign currency and especially they are very tight in pricing. So I -- we believe the -- I think Q3 has already shown the way they want to do it. I think they are going to -- they tapped the capital markets in 2021 for a very, very significant size transaction. We expect other partners to bring in their capital and to go for wholesale funding. So there will be no direct impact of that. But what we have seen, as we have seen in the -- what we expected as in line with what we have seen in the past is that there's going to be more of an indirect benefit, especially in the areas of manufacturing and services sector, whereas the subcontracts will get awarded to the private sector, you will see more participation happening from them, which is kind of an indirect benefit coming from the entire, let's say, both the capital expenditure spending that we expect on the hydrocarbon side as well as on the other domestic sector capital spending in the areas of, predominantly, infrastructure.

We will now take our next question from Chiro Ghosh from SICO.

This is Chiro Ghosh from SICO. I have very -- a couple of very quick questions. First is about the margin side. I remember in the previous call, you had said that a lot of your loans have a floor, which has healthy protected margins. I just wanted to know how does it pan out in the current scenario. And does it also have a gap in the sense if the interest rate goes up very fast, would they also get restricted, the deals would get restricted? That's my first question. And second one is your operating expense slightly went up faster than revenue, but it's still one of the lowest in the industry. If you can close -- give us some color, how do you expect it to pan out for 2022, because it's really -- I mean, how competitive or how sustainable it is.

Okay. On the first question, as I said, yes, we have benefited, in many cases, from the floor. And as the interest rates start picking up, we start to expect seeing the benefit. So we do expect our asset ease to go up. But as I said, I'm more -- it's more about the timing, because we believe there is going to be -- as I explained earlier as well, there is a lag effect between the pricing between the fed hikes and the QCB hikes and that translating into our P&L. However, none -- rarely do we have any caps in -- built into our -- any of our assets. So we do not have -- we do not seem to be any negative impact coming even if the rates do get increased quickly in 2022. In terms of the second question on the operating expenses, yes, yes, there was a slight increase in fourth quarter of the year. I think that was a combination of certain nonrecurring spend that we had on certain legal cases, also on some consultancy-driven activities and also driven by the fact that we have had increased marketing spend, thanks to certain launch of -- to support launch of certain products and services. In general, as I've been saying, I think 18% level is a fantastic level if we are able to maintain it. I think we do expect the absolute level of cost to go up in 2022. And as we move forward, as we continue to invest in digital space, as we continue to improve on, let's say, marketing and other expenses, I think there will be, as I have mentioned in the last call, I think 2022, almost every organization is going to have a onetime impact of their participation in the 2022 World Cup either through marketing and other activities. So the absolute levels of cost would go up. We hope that our revenues are able to show that and show a similar level of growth in terms of it. So while there could be marginal increase in the cost-to-income ratio in 2022, we do not see it as something that is going to have a major impact. I think as long as we are able to operate anywhere 19% and below, I think we should be fairly happy in terms of how we are able to -- how we are approaching the overall efficiency-related initiatives and measures that we want to take.

Just one very quick one. The 7% to 9% loan growth, which are expected -- do you expect most of it to come from a public sector lending or you'll be lending to other sectors also?

I think if you look at it, I think the trend of 2021 is expected to continue. I think the overall system loan growth was about 7.5%. And if you look at it, I think the growth was evenly distributed between public sector and private sector. I think the public sector growth, the systemic growth for the first 11 months, because that's last statistic available as of now was about 7.7% and domestic private sector was 9%. So if you take out the reduction in the international, which I consider more as a private sector, so I think it's been a balanced growth, and I think the same trend is expected to continue in 2022.

We will now take our next question from Abraham [ Ashanathi ] from GIP Capital.

I have a couple questions on my side. One is regarding your loan growth and the sector loan growth. What is your expectation for 2022 and 2023 loan growth? As well as if we look at if there is -- are more rate hikes for 2022, if we assume that it hikes to be around 100 basis points, how would that translate to your NIMs as well?

I'm not sure if you are able to join the call from the beginning, because as I answered both the questions. However, I will answer it very quickly again to say that we said that we expect the loan growth to be about 6% to 9% for the -- for 2022, almost in line with our projection that we had put in for 2021, and we believe it's a very healthy sustainable levels. The growth will come evenly from public sector as well as from private sector. In terms of the impact of interest rate hikes on the NIM, I think I already mentioned about it to say that we are putting in about 3 hikes more in the second half of the year. We expect the NIMs to remain stable. Our financing margins, that is the financing yield minus the cost of deposits or URIA is about 3.3% to 3.4%, and we expect it to continue for the next year, at least for the first 8 to 9 months. We don't expect any major benefits to come from the interest rate hikes unless the hikes are much more.

Ladies and gentlemen, please stand by as we're experiencing a momentary interruption in today's conference. [Technical Difficulty] Please go ahead, sir. Your line is now open.

Okay. Sorry, I seem to be having a connection problem. I got dropped again. So happy to take the question again in case -- unless [Foreign Language] have already answered it.

No, Gourang.

Okay. Can anybody repeat the question, if there's any question that is standing to be answered?

We will now take the next question from Maha Maharam from ADIA.

I have a question, please, on the FOL and the -- all the related approvals. Can you please give us some update on the approvals for the AGM or the Qatar Central Bank, please?

Yes. So as you know, while the law has been passed, we are going through the various regulatory approvals, including the approval from Qatar Central Bank, which needs to be followed by the approval by the shareholders in the Extraordinary General Meeting. We are following up with the regulators to see when the approvals -- when the necessary formalities can be completed. Honestly, I don't have much of a clarity at this point of time which I could be able to share with you, but we believe things are moving, and we should expect that if all things go right, I think within the first half of this year.

There appears to be no further questions at this time.

Okay. If there are no more questions, we can wrap up this call. Thank you, Gourang, for the update, and we can pick this up next quarter.

Thank you very much. And again, sorry, everybody that I unfortunately got dropped a couple of times, and thank you for attending. And thank you for waiting. Stay safe, and have a very happy and successful 2022. Thank you very much.

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