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

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

Thank you very much. Good day, everybody. Welcome to the QIB Q2 2022 Results Call. We'll start with a quick update on where Qatar stands as of now, Qatar economy, and then we'll take on to QIB and followed by Q&A. In terms of Qatar economy, we see that the post-COVID growth continues to remain strong. Overall, economy is doing quite well. Strong hydrocarbon prices are really helping and boosting the overall liquidity into the system. The banking system in general has remained strong, both in terms of liquidity, capital, asset quality, various perspectives. Strong liquidity -- strong revenue generation by the state has allowed them to inject the liquidity into the system, both through repayments of the short-term financing there from the banks as well as through deposits. Overall, the medium-term outlook continues to remain very strong, given where the hydrocarbon prices are and the LNG expansion plan which the country has. Going to QIB results, I think we are, again, very happy to announce the Q2 results, whereby our total assets for the bank stand at QAR 193 billion, which is up 4.8% compared to June last year, but flat versus the first quarter of this year. Similarly, the total financing is at about QAR 127 billion, flat versus last year as well as -- which remains the same as the Q1 numbers as well. However, on the deposit side, our deposits have reached almost QAR 129 billion, up 3.2% versus last year, growing by 5.1% in the quarter. Overall, the loan-to-deposit ratio of the bank currently stands at 98%, one of the best in the country. And in terms of the QCB regulations of the credit ratio, the ratio stands at almost 94%. In terms of the asset quality, our NPL ratios remain at about 1.5% with no significant new NPL generation in the quarter. The coverage ratio remains very strong. The Stage 3 NPL coverage ratio remains very strong at 95%. On the capital adequacy side, our total equity stands at about QAR 26 billion with a capital adequacy ratio of 18.5%, well above the QCB guidelines and Basel III guidelines. Going on to the profitability metrics. For the first half of the year, the bank has reported a net operating income after payment of returns to Sukuk holders and the deposit holders of QAR 3.2 billion, representing a growth of 5.1% compared to first half of 2021. The bank was able to contain the expenses at QAR 540 million, up 0.8% compared to last year, enabling the bank to improve its efficiency ratios, bringing its cost-to-income ratio down to 16.8% compared to 17.5% last year. The bank continued to take precautionary provisions, predominantly allocated to Stage 1 and Stage 2 portfolios. The total financing provisions for the first half of the year was QAR 885 million, down 3.3% compared to last year. The total provisions came to QAR 837 million, thanks to certain recovery and reversal that we had generated in the first quarter of this year. This, in effect, represented the bank was able to generate a net profit of QAR 1815 billion, up 13.8% compared to last year. Overall, I think we have continued to demonstrate a consistency in delivering strong set of results over the coming -- over the previous quarters and the years. I'm done with presenting the Q2 results. Happy to take any questions from any investors.

[Operator Instructions] We will take our first question from Chiro Ghosh from SICO.

This is Chiro Ghosh from SICO Bahrain. First, congratulations for a good set of results. In fact, when I look at it, almost all line item looked quite good and quite strong. The only concern which we still have is the loan book, like, if you see for last 5 quarters almost the loan book has remained around QAR 1.26 billion, QAR 1.27 billion. So if you can throw some light on that, should we expect the loan book to grow over the next 2 or 3 quarters, what is the ground reality? What is the borrowing demand? These are my questions.

Thanks, Chiro. So going on the financing book growth, I think at the beginning of the year, we -- at the end of first quarter, we had given an indication that we expect the loan book to grow by 6% to 8% on the private sector side, while the public sector will get driven by what the government decision is in terms of how the liquidity will be injected into the system. So if we look at the first half of the year, I think compared to December, our private sector book has grown almost 2%, while we have seen a drop of almost 9% on the government-related businesses. This is very consistent with what we were expecting in terms of what really is going to happen if there is going to be significant revenue generation by the state. We will -- I think we will -- what we have seen in the first half of the year, I believe that trend would continue, whereby we believe that government will still continue to reduce their credit from the banking sector and will continue to inject deposits at the same point of time as well. On the private sector side, I think from where we look as of now, I think the numbers that we had given for 6% to 8% looks a little bit stretched. I think we would believe that the full year growth would come around 4% to 5% on the private sector growth given the fact that we -- now we are entering into the summer season and followed by that, we are going to be -- Qatar will be hosting a mega event for the FIFA World Cup and there will be a lot more, let's say, activities and attention towards that. So I don't believe there's going to be significant off-take on the credit side. However, the ground remains very strong for going forward. As we go into 2023 onwards, we believe that the LNG expansion plans of the government will start seeing more, let's say, on the ground activities whereby the contracts would get awarded to contractors and subcontractors, which should drive up the demand. More or less with the overall improvement in the business conditions and the outlook, I think we'll see more private sector participation and initiation of new initiatives. So I believe that 2022 the growth will remain muted at least -- and we -- I think, overall, if we are able to achieve a 3% growth after taking both public sector and private sector put together, that would be a significant achievement. But that's a lot -- that still would require a lot of work to do if really if government continues to reduce the reliance on the credit from banking sector. And I think this is not something that is very specific to QIB. This is more generic trend that we are seeing across the Qatari banking sector and which is kind of a bit normal. In terms of does it really reflect on the bank's performance or the profitability, I would say not necessarily. Given the way the interest rates are rising and having an impact on cost of funds, I think letting go off -- yes, these are high-quality credits, but these are low-margin credits and which the margins would get squeezed further when in the rising interest rate environment when you need to fund your balance sheet at a higher rate. So I think from the, let's say, balance sheet perspective, it is not a very positive signal, but it does really contribute or help towards the NIM formation for the bank.

[Operator Instructions] We will now take our next question from Vikram Vis from NBK Capital.

You mentioned that you're still putting in precautionary provisions in your income statement. My question is how long will you keep putting these precautionary provisions, over how many quarters? And when should we expect the bank to get back to pre-crisis cost of risk levels?

Again, Vikram, I think we have been very clear in our, let's say, guidance that if we are going to have good operating performances, we will continue to build provisions. However, we do face -- we were -- we do face -- so these are more precautionary to take care of -- reduce the future volatility in the bank's earnings given if there was some unexpected, let's say, quality deterioration or some idiosyncratic credit risk that comes up. So as long as we continue to have good operating performance, we'll continue to build provisions. What we will need to do is maybe we might need to change the strategy a bit whereby we are allocating quite a bit to Stage 1 at this point of time. Maybe we were -- we might look towards allocating more towards Stage 2 or maybe we may even consider precautionary downgrades of customers from Stage 1 to Stage 2 or Stage 2 to Stage 3 to be able to justify and manage these provision levels. But we continue to remain with our risk -- pragmatic risk management policy that we will continue to build provisions as long as we are generating good operating performances.

Clear. Clear, Gourang. Just one more question. There was a change in the Central Bank governor, I think at the beginning of the year or late last year. What is the outlook of the new Central Bank governor on the asset quality or provisions? Are they more conservative? Are they more liberal now compared to the earlier Central Bank management?

I think you have to understand that we are talking about an institution. We are talking about a regulator where while individuals have -- can influence the process, but overall quality of the strategy remains more or less aligned. So I don't think so we are going to -- we don't have any indication that there is any change or shift in the conservative outlook, which the QCB -- Central Bank -- QCB takes at all points of time. So I believe that we will continue to see a similar conservative outlook from Central Bank. There are no indications otherwise.

We will now take the next question from Waruna Kumarage from SICO.

I have a couple of questions. The first question is on the net financing margin.

Go ahead.

[Operator Instructions] We just got a question from Ankit Mittal from HSBC.

So just wanted to ask on the net interest margin. So what's the outlook now for the second half of the year given that now we have like firm expectations of more rate hikes from U.S. Fed and keeping in mind that QCB has not raised the lending rates in line with the deposit rates, so any outlook for the second half and next year would be very helpful.

As, Ankit, I said, right, what we had mentioned at the end of Q1 is to say that we are definitely expecting the Fed to increase the rate hikes. Yes, there may be a couple of extra quarter basis points hikes that now currently look more, let's say, ingrained in the way the inflation situation is there in U.S. But we are very clear that we will need to wait and watch as to how does QCB increase the lending rates. And as you have rightly mentioned that they have not increased the lending rates to that extent. So that effectively really takes away the advantage of the -- partly the advantage of the higher interest rate environment that the banks would normally benefit from. However, on the other side, as I mentioned, that the government is injecting the liquidity into the system, both in terms of reducing their credit off-take as well as through deposits. I think there have been -- if you look at the overall system government deposits, you will see significant improvement in those levels. I think what has that helped is that while the overall QCB deposit rates have gone up, I think the competition that was there in the market, the premium that were required to be paid for expensive deposits have really come down, so effectively absorbed a bit of the impact of the increased interest rates on the funding costs for the banks, especially on the deposit side, the wholesale banking follows the market. So I don't think so there's much to talk about that. But we've given the -- we, being the bank that rely quite a bit on deposit base for funding, as I had mentioned in my presentation, our loan-to-deposit ratio is 98%, which is well, well below the market average of almost about 120% plus. So I think from that perspective, we did not see the cost of funds go up that much, at least in Q2. And that's what if you've seen that our NIMs have slightly improved this year compared to last year. I think if the liquidity situation remains quite strong and we see no reason why it should change at this point of time and if the credit off-take is not going to be that very strong, we believe that the NIMs might see a small improvement, maybe by about 3, 4 basis points more in the second half of the year. But I think the bigger benefits will start accruing next year, hoping that the liquidity situation continues to remain where it is. So we'll not be able to give you a definitive guidelines in terms of where it goes because there are a number of moving parts, as we mentioned, to say how does QCB respond to the lending rates, how the liquidity scenario remains with one factor kind of offsetting the other. So overall, we believe that NIMs will remain strong where we are, though we may not see a very large improvement. Maybe in Q4 we might see a better, let's say, impact as given the fact that there is always a lag effect of 3 to 6 months, rough -- almost 6 months -- 3 months is a wrong parameter, I would say, 6 months at least before the rate hikes really start translating into asset yields.

Just one more follow-up on fee income. So I think Q2 core fee income was quite strong. So is that sustainable? I think second half, we will be having a benefit of, I think, World Cup as well. So I think any outlook on the fee income for the second half and next year?

I think the fee income for the first half of year was strong, and it was driven by the core activities, as you have rightly mentioned, and we believe that those activities should continue to work in our favor as we go into the second half. There is always an element, in the first half of the year, we did have some investment banking revenues coming in from our investment banking subsidiary, QINVEST. Now that the markets have really turned a little bit on the capital markets side, so we might need -- we'll have to wait and watch how those really turn up. But overall, we still expect to carry on the overall momentum.

[Operator Instructions] We do have a follow-up question from Chiro Ghosh from SICO.

Just a very quick short question is, can you please remind us what percentage of your liabilities from outside Qatar?

In terms of our deposits, we are -- let me just -- I think we are at about 20%. So we are well below the market average of about -- which is about north of 40%. So if you look at the QCB statistics, I think the external funding is almost 40%, 45%, somewhere in between. I think it's coming down since the beginning of the year where it was almost 44%, 45%. But I think it's still around 40%. We are around 20%, 21%. So we've always been quite active in the local market. And even if we look at the first half of the year, we have actually tried to reduce the overseas deposits. What we continue to do, we'll continue to look on the wholesale funding side of it a little bit. But again, still -- we are still much smaller than overall Qatari banking sector if you want to look from the external funding perspective.

[Operator Instructions] We will now take the next question from Edmond Christou from Bloomberg Intelligence.

Just a similar question, but in terms of the foreign or dollar lending, what is the percentage on the loan books in terms of the dollar? And the second question, you have done fantastically well on the cost base is falling sequentially. But clearly, also you are investing into risk management and other initiatives in your strategy and also we have an inflation. How do you see this is going into the second half of the year? And do you have any campaign or marketing plan with the World Cup? Do you expect some pickup towards the Q4?

As you ask too many questions, we'll go one by one. So I think our foreign currency funding is roughly around 30%. The dollar funding is -- dollar lending is about 30%. So I think that should more or less answer your question in terms of where does our lending book look like. In terms of our investments into technology both from the perspective of digital as well as InfoSec, I think we have been doing it, and we have been consistently doing it. I think it's a question of how we are investing into those, and we continue to remain quite, let's say, cost-conscious in terms of managing these costs into reasonable levels and trying to generate other efficiencies later on. But we do expect that the cost might go up, but marginally, but not -- nothing very significant at least in terms of absolute levels. In terms of the FIFA marketing, I think we have already been doing it for quite some time. I think it's -- we are -- we have tied up with Visa to offer various kind of packages and benefits to our customers, especially on the retail side depending upon the kind of spend they do and the kind of products they are taking. So we have been doing it. Yes, it might definitely -- will go up during the second half of the year, but nothing very significant that should really cause us -- maybe you might have a small increase, but we are -- I think we are well into that spending cycle already since Q2.

Okay. Perfect. Can I follow up on the cost of risk? For modeling purpose, is it prudent to assume second quarter cost of risk is sustainable into the second half or you see gradual decline?

I think I've already answered the question that it is -- these are all precautionary provisions that we continue to take. And as long as we have strong operating performances, we'll continue to build. How we will justify, I already explained that as well that if required, we might downgrade some customers from Stage 1 to Stage 2 or Stage 2 to Stage 3, improve the coverages on Stage 2. But if we are going to generate operating performance -- strong operating performance, we believe it is prudent to build provisions. I think that provides stability in your performance. And I think if you look at our results over the last 6, 7, 8 years, I think that's where the bank has been focusing on to provide stable, sustainable yet very healthy returns to our shareholders.

[Operator Instructions] We will now take the next question from Mustafa Ameer from Al Rayan Investment.

This is Zohaib from Al Rayan Investment. Your cost-to-income ratio keeps reducing. I think right now it's at 16%. It's probably first in the world probably. Do you think this is...

16.8%.

Do you think -- yes.

It's 16.8%, not 16%. 16.8%.

Okay, 16.8%. Do you think this is sustainable? Or do you think this -- I mean, you've probably gone a bit too far in reducing the cost. And probably you need more -- you need to improve on more costs as needed to -- for better operations or something? Or you think this is -- you're still fine with this?

Now it's how you want to look at it. As the CFO, if you ask me, I always challenge my business and my operations team to see how we can generate more efficiencies and I think that's the general message that goes from our Board as well as the CEO as well. What we have overdone I could not understand because I think we have continued to invest. I think our absolute level of costs have not come down. What we have done is not to bring in the complacency that the fact that just because we are having a good revenue doesn't mean that you need to spend more. We spend more and directed towards those activities that generate more revenues to us and help us in further improving our efficiencies. Now in terms of our absolute level, of course, yes, we have been fairly successful. We -- it's still almost 1% above last year. With the inflation coming, maybe we might see a small -- we might see an, again, uptick on that as well. However, as long as the revenues keep generating -- increasing as well, I think we should be able to generate healthy cost-to-income ratio. Now is -- am I saying that will it remain at 16.8%? No, I'm not saying that. I think what we have been always telling to all our investors and stakeholders is that as long as we are healthy and well below the market, I think if you look at some of our peers as well, I think everybody has been actively working to bring down their cost-to-income ratio as well. So we are not the only one. I think what we continue to benefit from is the discipline that we have put in the organization over the last very many years, and we continue to work on that. So we might see and -- we might see that the cost-to-income ratio might go up back to 17%, 17.5%, but that's still well below what the industry average is. So while there are no clear, let's say, items that stand in front of us to say that why the -- that the cost-to-income ratio should go up significantly, there are always room for us to be able to spend more, if required, given the high level of efficiency that we have already achieved. So I think we look at more as an opportunity to be able to spend more efficiently rather than anything else.

And we will now take our last question from [ Raul Tony ] from Avalon Global Research.

Hello?

Congratulations for the good set of numbers. Couple of questions from my side. Sir, can you give some indication on the industry-wise exposure of the loan book? And which industry you expect to drive the growth in FY '23?

I think, overall, I think I already mentioned that we will -- we see that the private sector will continue to grow compared to public sector where the strong liquidity is expected to -- strong revenue from the government is really expected to boost liquidity in form of deposits as well as in forms of lower credit off-take from the banking sector. Within the private sector, we believe that areas which are more aligned to hydrocarbon, we will see those supporting industries, whether it be upstream or downstream in the sense is activities that are really going to help in building those infrastructures, which are basically the contractors, subcontractors, we will see off-take out there. We see off-take in ancillary areas of services, especially in terms of LNG shipping, transportation and infrastructure. So we see investments there. We also believe that given the fact that the country is committed to its 2030 National Vision and given the strong revenue generation that it is going to make, we will see higher spend in the areas which are there. A lot of work has already been done on the infrastructure, thanks to the 2022 FIFA World Cup. But I think there are more areas, especially in terms of education, electricity and other infrastructure services where we will continue to see spends predominantly service-oriented where we'll continue to see more investments. So these are the predominant areas we believe will benefit as we go into 2023 and beyond.

Okay. And my second question, since I'm tracking this QIB for the first time, so I would request you to throw some light on one of the line items from P&L that is a return to unrestricted investment account holders.

What I could do is for the benefit of everybody, you can reach out to the Investor Relations team, and we can guide you through the financials of our bank. Given that we are an Islamic bank, it's -- there are a few nuances that it would be good for you to know. In summary, to answer this is basically the profit that we paid to our deposit holders because deposit holders are known as unrestricted investment account holders for an Islamic bank. Any of these kind of technical questions, you please reach out one is to one, and I think that could be best answered there.

And there are no further questions, so I would like to turn the conference back to our host for any additional or closing remarks.

Thank you very much for everybody to join our Q2 results call. Hope to see all of you in the Q3 results call as well. Thank you very much. Bye-bye.

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