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

Hello, and welcome to the Qatar Islamic Bank call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Shahan Keushgerian to begin the conference. Shahan, over to you.

Thank you, Gavin. Hello, everybody. I want to welcome you to QIB's Fourth Quarter 2022 Financial Results Conference Call. So on this call from company's management, we have the bank's CFO, Gourang Hemani. So as usual, we will conduct this conference with first management reviewing the company's results followed by a Q&A session. I will now turn the call over to Gourang. Please go ahead.

Thank you, Gavin. Thank you, Shahan. Good day, and welcome all to the Qatar Islamic Bank 2022 Annual Results Call. 2022 was a historic year for the State of Qatar. The FIFA World Cup 2022, the world's largest sporting event, provided an opportunity to introduce Qatari culture and traditions to the rest of the world, and its flawless execution enabled Qatar to, again, showcase its ability to deliver on the world stage. As you all know, 2022 started with strong positive COVID reopening for global economies, further adding inflationary pressures that reached historic highs and resulted in sharp and unprecedented monetary action by central banks across the globe. From the regional and economic perspective, Qatar economic perspective, hydrocarbon prices on an average were much higher in 2022 compared to the previous 2 years, amid the sharp demand recovery and other geopolitical events. Improved fiscal position and higher state revenues translated into improved liquidity in the Qatari banking system, but it came at the cost of contraction in the public sector credit facilities. As regards to QIB, we were again able to successfully navigate through the fast evolving economic environment with net profit attributable to shareholders exceeding QAR 4 billion for the fiscal year 2022 compared to QAR 3.55 billion for 2021, marking an increase of 12.7%. With the basic earnings per share of QAR 1.62 compared to QAR 1.42 as at 31st December 2021, the QIB Board of Directors proposed a dividend distribution to shareholders of QAR 0.625 per share, that is 62.5% of the nominal share value, subject to the approval of Qatar Central Bank and QIB's General Assembly. The total assets now stand at QAR 184 billion as at 31st December 2022 and financing assets at QAR 119 billion. Customer deposits were QAR 122 billion, resulting in financing-to-deposit ratio of 95%, reflecting the bank's strong liquidity position. The total operating income of the bank net of the funding cost reached QAR 6.4 billion, representing an annual growth of 6.5%, while the operating expenses were managed at around QAR 1.1 billion with an annual increase of 2.5%. As such, the bank was able to further improve its efficiencies and bring down the cost-to-income ratio from 18.1% in 2021 to 17.4% in 2022, which is the lowest in the Qatari banking sector and one of the lowest in the region as well. QIB was able to manage the ratio of nonperforming financing assets to total financing assets at 1.5%, lower than 1.8% as at 31st December 2021, which is one of the lowest in the industry, reflecting the quality of the bank's financing asset portfolio and its effective risk management framework. QIB continues to pursue conservative impairment policy, maintaining a healthy 95.4% coverage on its nonperforming financing assets as of 31st December 2022. The bank also continued to create precautionary impairment charge on financing assets for QAR 1.2 billion for the year 2022 to further strengthen its ability for any -- to manage any potential long-term impacts of the pandemic and continued inflationary conditions on different business industries and segments. The total shareholders' equity reached QAR 23.3 billion, with total capital adequacy ratio under the Basel III guidelines reaching 19.9% and common equity Tier 1 ratio at 15.8%, both up 1% compared to last year and well above the regulatory minimum requirements prescribed by Qatar Central Bank and Basel Committee. With this, I complete the brief introduction of the annual results. We'll start with the Q&A session. Back to you, Gavin and Shahan.

[Operator Instructions] And your first question comes from the line of Chiro Ghosh of SICO Incorporate Company.

This is Chiro Ghosh from Bahrain. First, congratulations for a great set of results. So my first question is related to the asset quality. So in contrast to your other peers, your assets has been quite resilient. So just wanted to get a sense that as we are seeing it or we might see some deterioration in domestic asset quality going forward as your other peers have seen. That's one. And second of all is, what would be your outlook for the loan growth going into 2023? Are you seeing project pipelines again picking up? These are my 2 questions.

Thanks, Chiro. I will not be able to comment on my peers' asset quality. But from our perspective, I think we follow extremely conservative risk management, try to identify any potential problem assets and try to adequately provide for them. As we said, we're just coming out of the COVID. I think with all the various incentives and other benefits that were being provided to the lenders going away and with the higher -- with the interest rates moving up, putting pressures on the debt servicing for certain corporate and retail customers, we believe that we might have some more time to see the impact. So very difficult for me to guide you on where the NPLs are, but all I can say at this point of time, we have identified all the potential problems and try to adequately take care of them. We did on a conservative basis, on our own, downgraded few customers from Stage 1 to Stage 2, which you would have seen in the results for the Q4. That was a change compared to the Q3 results. As regards on the loan growth for the coming 2023, again we're just coming out from a very slow period, so the pipeline continues to remain a bit slow. The government has been paying majority of their short-term facilities that they have from the banking system in general, including QIB. But that's almost behind us. So now what we should start seeing is that we should see some pickup happening. Not sure whether it will come in Q1, but I think from Q2 onwards, we should see a better credit growth coming. But we still are very, let's say, conservative in our plan. We believe that the industry asset financing book would grow, at least on the private sector side, by around 5% to 8%, anywhere in between those. And we expect to maintain our market share on those and have planned our growth in a similar way as well.

Just one quick one, is a technical question. The Stage 2 deferred profit I see is around QAR 7.3 billion. How should we see it? I mean is there anything concerning in that?

The deferred profit is all about the profit that the customer has to pay over the life of the financing. So it's not something that is due today. The best way to look at it would be the net exposure rather than looking at it as a gross and the deferred, because we as an Islamic bank show the lifetime profits, which the conventional banks don't reflect on their gross numbers.

[Operator Instructions] Your next question comes from the line of Waleed Mohsin of Goldman Sachs.

A couple of questions from my side. First, if you could comment on the trends that you're seeing on the margin side. And the reason why I ask that is loan growth was relatively muted for most of 2022. So want to understand what kind of competition you're seeing on the private side? And on the funding side, there was a push to increase the share of resident deposits. So if you're seeing any pressure on the deposit -- cost of deposits, that would be very helpful. And then my second question is a follow-up on asset quality. So you mentioned you did take some precautionary provisions. If you could talk about sectors where you took provisions or if you could talk about sectors which are seemingly vulnerable or worrisome, that would be very helpful.

Waleed, sorry, can you just repeat the first question that you asked?

Yes. First question, I was asking about pressure on margins, if any, both on the lending side and the deposit side?

Fine. On the NIM side, I think, as you've seen, as the market interest rates keep going up, the cost of funding usually is the first to react. And then the asset pricing, as we've always been saying, on the lending side, there's always a lag effect. But as we kept going into the end of the year, we did a lot of catch-up and that's what is reflected. I think overall, if you take our 2022 NIMs and compare it with the 2021, in fact, we've been fairly stable, in fact, been able to improve them marginally as well. So from that perspective, I think we've been fairly quite -- we were expecting that the NIMs would come further under pressure. But so far, they seem to be holding up, and we don't see any reason at this point of time where they will be significantly impacted as we keep going. As you said, and on the question that what would be the impact on -- the balance sheet has really -- the financing assets have come down and how do we see the impact of it. But if you see the most of, as we had been telling and we have been repeating and if you look into comparing to our exposure in the government sector for 2021 and 2022, you'll see that that's where there have been a major repayments, not only for QIB, but across the entire banking sector. In general, yes, as I've been saying that these do not look good from the top line perspective. But from the NIM perspective, they actually are more beneficial because these facilities were anyway very low-priced facilities. So with the way the interest rates have moved up, I think those repayments have kind of helped in improving the NIMs and overall the net profits as well. So carrying some of those facilities at those levels would have actually been detrimental to the NIMs and to the profitability. So we are not so, let's say, concerned from the profitability perspective of those -- of the reduction in the financing. But yes, optically, it doesn't look good. So it's something that we work on. We worked hard on improving and making up for the loss on the government sector on other sectors. So we've seen growth in the private sector, which has been our predominant, let's say, strong play, both on corporate side and the retail side. So we continue to work on those. On the funding bit of it, the reduction in NRDs, I think as it was not a pressure to reduce the NRDs. Yes, the sector NRDs were always high. But as QIB, we were far better placed, as we had been telling in the past as well, right? So what we saw was the improved liquidity inside the Qatari domestic market helped us repay some expensive nonresident deposits, right? So nonresident deposits come along with the country risk that you would have to pay, which you avoid when you deal in the banking with the domestic sector. So that also has been another player in helping in maintaining -- keeping control on the cost of funds and maintaining the NIMs. Yes, there is -- there are pressures, sometimes domestically between certain players. But as we've been telling, we've always been one of the most liquid banks. Our -- if you take our financing-to-deposit ratio, stands at 95% compared to the domestic loan-to-deposit ratio in the sector is general somewhere in 120% range. So from that perspective, we always have a bit of, let's say, ability to not aggressively participate in certain domestic competitive deposits because we still are able to take care of our funding needs and as well as the regulatory requirements. On the third and final question, on the provision, as I said, if you look at it, majority of the allocation for the new ECL that we have created this year, has been allocated to Stage 1 and partly to Stage 2. Stage 3, we've seen recoveries happening because of reduction in certain -- especially in Q1. We were able to recover some of the nonperforming financing in Q4 as well. We were able to achieve certain of those reductions through recoveries, and that's how it allowed us to keep -- to bring down the NPFs. So effectively, there was not -- no major incremental NPF generation during the year, while we saw some recoveries and that helped us bring down. Where we have created the provision, I think it's more about we've used the ECL modeling to allocate provisions in Stage 1 and Stage 2, nothing specific in terms of any industry or such. It's been widely distributed across all the sectors. I think we still have the, let's say, uncertainty in terms of where do we eventually land, especially if the interest rates move up, continue to move up sharply and what does it impact the credit capacities of the various borrowers as well as if there is a recession globally and whether it's going to be a mild recession or a very deep one, we'll have to go and see. So as I said, we've always maintained our stand as a bank that if we are able to generate good operating performance, we will not shy away and create -- from creating new provisions. We will continue to build because we believe building balance sheet strength through adequate provisioning is as critical as showing operating performances on year-on-year basis. Does that answer your question, Waleed?

Yes. Very clear. Very comprehensive.

Your next question comes from the line of [ Nikhil Paswan of CBFC. ]

Thanks for your presentation and better-than-expected results, sir. I have just got 2 questions. One, again, got to do with your deferred income. I just wanted to know what is the nature of your deferred income. I mean are -- will you able to execute the services for this? Second, it has got to do again with provisions. Well, as compared to international banks, say, Middle Eastern banks normally always maintain a high provision coverage ratio of, say, around 120%, sir, given the fact that it's a single [indiscernible] source economies and the risk is high. So in that context, just wanted to check, I mean, do you think so in the event of delinquencies do take place, how will you be able to safeguard, I mean, your profit? Again, another way of looking at it is your dividend payout, which can also get reduced in a normal year in case suppose you maintain a buffer on your coverage. And also, of course, it will help in your regulatory ratios. So yes, these 2 points.

On the first question, on the deferred profit, I think it's just the way an Islamic bank is required to account for. So for any fixed rate financing and wherever we need to gross up the financing for the lifetime of the profit and put it as -- and reflect it as a deferred profit. So it is the profit that we will recover over the life of the financing, as I was mentioning even earlier. These are netted off in a conventional bank because you don't recognize the future profits and gross it up. It's an accounting thing for an Islamic bank. If you want more details, please reach out. But all I can tell you, it is -- the way to look at the Islamic bank's financing as well as to, say, its exposure, it should be done on a net basis to make it more comparable with a conventional bank. On the second question of NPF, well, I think we have a coverage ratio on the Stage 3 financing of 95%. I think it is one of the best in the market. I think we have only 1 peer in the market who is higher than us. So if you look from that perspective, we've always been extremely conservative. In terms of our ability to absorb any potential future credit events happening in terms of a default, et cetera, what you need to look into it is in terms of the buffer that are there in the overall ECL. So if you are looking at the NPF and want to compare it with the overall ECL that we have on Stage 1, Stage 2, Stage 3, then the coverage stands at almost 300% -- or north of 300%, I think; if I'm not mistaken, something like 310% or 313%. So from that perspective, we are fairly well covered. On a Stage 3, on a like-to-like basis, it's 95%, which is extremely healthy. And I think we have been as conservative as we can. You can't exceed beyond 100%. What you said about 120%, not possible under IFRS 9. You can only cover Stage 3 up to 100%. And the balance, if you want to maintain buffers, you will need to maintain it in Stage 1 and Stage 2 portfolio, which we are doing. If you want to look at the strength of our balance sheet, you would need to compare our ECL coverage on Stage 1 vis-a-vis the rest of the industry, where you will see there is a significant strength of our portfolio is reflected out there.

Your next question comes from the line of Vikram Vis of NBK Capital.

Can you hear me?

Yes, we can hear you, Vikram. Go ahead.

Gourang, I had a question about the asset quality review which is being conducted by the Central Bank. We heard from a few sources that this asset quality review is focused on Stage 2 loans, which for certain banks is a higher proportion of loans as compared with other regions. Would it be possible to take us through the asset quality review? And can you tell us whether this is complete? Or this is an ongoing exercise, which can spill into 2023 as well? That's my first question. The second question is, there used to be a period where you used to have very low cost of risk, 50 basis points and lower. Are you in a position to go back to those cost of risk levels? Can you tell us, going forward, what is the sustainable cost of risk target for your bank?

Thanks, Vikram. On the first question, I'm not aware of specific Stage 2 asset quality review because I would not be able to comment on that. As far as I can tell, which could be happening for any other entity, I would not be able to comment on that. From our perspective, I can tell you is that every year, in the last quarter, the auditors conduct a credit review on behalf of QCB based on the guidelines and the parameters defined by QCB. And the report is submitted to QCB based on which our year-end provision numbers are finalized. So the numbers that you see for us, for Stage 2 as well as for Stage 3, are the ones that have been approved and endorsed by QCB that they agree that we are adequately provided in terms of the -- and adequately categorized our credit portfolio. So there's no specific Stage 2 asset quality review that is pending for QIB at this point of time. In terms of your second question on cost of risk levels, can I go back to 50 basis points, 60 basis points. I can go back to if required because if you want to look at the true cost of risk, if you want to take the Stage 3 or if you want to take a part of Stage 2 as well, it would fall within those levels that you are talking about. However, as we have said, it's not about can we or is it a question of will we. The will-we would be determined by the same thing, which we keep reiterating, to say that if we have good operating performances, we will continue to build provisions. And that's something that we are very clear. We are not focusing on a year-on-year results, but we are focusing on a strong medium-term trend on a sustained profitability management. Hope that answers your question, Vikram.

Your next question comes from line of Waruna Kumarage from SICO.

I have a couple of questions. The first question is on the loan growth in 2022. In terms of sectors, one of the major sectors contributing was real estate. So I was wondering what kind of -- I mean, in terms of growth, which areas of real estate, is it like commercial real estate or any other segment which was driving this? That was -- in terms of gross loans I'm talking about. And the second question is on your guidance on the loan growth of 5% to 8%. Will it come -- I mean are you expecting kind of a broad-based growth? Or do you expect this government lending, which took a step back in '22, to come back in '23?

Answering to your first question, if you look at the loan growth that happened for us in 2022, the reduction predominantly came from government overdraft and other facilities. And the growth came in from real estate, personal banking, services sector. So it was a broad base. Real estate will always be there as a part of our portfolio because that's one of the core components of the Qatari economy, right? So if you want to take out the hydrocarbon out of the -- hydrocarbon-driven growth out of the equation, I think real estate will continue to be a core part of the opportunities, especially when in 2022, 2021, when there was a massive push going towards expansion to Lusail and other areas, especially. So those will continue. And if you look at it traditionally, Islamic banks, including QIB, real estate always has played a significant, let's say, portion. We have worked a lot to bring its concentration down. If you still believe it's only 23% of the gross loan, so it's still not very significantly large, then this 23% would include personal, residential, mortgages, et cetera. So it's not something which is very, let's say, out of the normality. So we will continue to look into good quality. Which sectors? I think we are -- we do not -- we have not been a big fan of the commercial real estate, especially the office spaces, et cetera. But we believe that always there have been opportunities on the residential side, on the retail side, et cetera, revenue-earning assets, and that's what we continue to focus on. On the second question, whether the 2023 guidance, I think the guidance predominantly comes from private sector point of view. On the public sector, we do not believe that government is, again, going to come and significantly increase the short-term borrowings that it used to have, given the fact that what we have heard as a part of the budget -- for Qatar budget, et cetera, where they want to reduce the overall debt-to-GDP ratios, et cetera, we believe that we will continue to see -- we will not see much action on the pure government-related borrowings. What could happen would be we'll have to wait and watch how does the government-related entities come into the play, especially when the LNG expansion happens and how they are going to approach the domestic banking sector for this credit needs or are they going to work towards -- more towards international funding of it. So I think that's a bit of a -- still, we need to find out as we keep moving forward. But as of now, we are not projecting any major growth happening on the government side of it. Most of the growth is coming from the public sector side -- private sector side.

Just 1 follow-up question on the real estate exposure. You mentioned that like residential mortgages -- like personal mortgages are also part of it. I mean will you be able to quantify that? And secondly, in terms of going into now '23-'24, '22 was a good year because of FIFA. There was a lot of demand for the real estate, especially for hospitality and all that. So are you in any way worried that -- are there any worries you have in the future of the real estate market?

I don't have the breakdown of the mortgages as of now. You can reach out to us, and we'll be happy to provide to you on a one is to one. You have our contact details, and we're happy to provide you on that. On the second question of, are we worried about the real estate? Apparently, no. I think we are -- we do keep looking out. And as I said, we keep tracking the various assets that we -- that are there in our portfolio or in the market for any new opportunities if they are coming, to see if there are adequate, let's say, servicing capabilities on those assets, et cetera. However, as I said, it's a big change. There was a lot of real estate, especially on the residential side, that the government has taken under its umbrella as a part of the 2022 campaign. And then we'll need to wait and watch what happens or how are they going to release those inventories or how they're going to manage those inventories, et cetera. So a lot of, let's say, questions that we will be looking forward to and monitoring it, but difficult for me to be able to give you a ready answer. But yes, we continue to remain quite conservative, as I've been saying, right? I'm sure you all know how to look into -- how we have been behaving as an organization in terms of our conservative provisioning approach. And that would go in to show you that if there be a need or if there is a situation whereby we are obliged to recognize any nonperforming financing, we are adequately, let's say, well positioned to be able to absorb those. So there's no reason for us not to recognize any nonperforming assets, if they were really there on the portfolio.

Your next question comes from the line of Jagadish Soni of Island Global Research. Your next question comes from the line of [ Nikhil Paswan of CBFC. ]

Again, a follow-up question, sir. This is regarding, again, your loan composition that you have mentioned. Now you've mentioned about government, we can watch and approach in terms of your inventory, which is what will be getting released. You've also acknowledged that real estate has been developed quite high and the real estate indicator, for example, Qatar is moving down. So not much activity to look from that point of view. Second, you also mentioned about LNG expansion likely to come in the second half. So my question is, how you see in the coming 2 quarters in terms of your loan book growth. I mean, what -- is there any other drivers which you can look forward to? Because commercial also you mentioned is a space you're not going to be looking to that extent. So just wanted to have an idea, sir.

All I mentioned was that the question which answered on the real estate bit was to say on the asset quality bit of it. But will the opportunities not exist in real estate market? There would always be opportunities even in this market as well. There are lot of projects that were in pipeline. Some of them were postponed, given the fact that they did not want to have a situation whereby they were partly completed, et cetera, et cetera. So there will always be opportunities in the real estate. There will always be -- as I said, hydrocarbon would be there. In order to say where exactly it will come from and which quarter, it's extremely difficult to give you on a time line perspective which will follow what. All we are saying is that Qatar being where it is at this point of time, with the kind of revenue generation that it is going to see from the hydrocarbon sector, not only based on the current oil prices but also from the fact that it is going to have an almost 60% increase in LNG expansion and with a ready buyer in form of Europe already there, I think overall, macroeconomic-wise, Qatar is very well placed. And I think there will be adequate opportunities coming up within the domestic market because at the end of the day, the government will continue to pursue diversification of its revenues by investing outside, but we believe that they're also committed to investing inside Qatar and developing it further. So there will be opportunities coming up. So we are not worried in terms of the medium-term horizon. But it's just that when you come out from a lull, like the way we had because of the World Cup, where the activities were focused on the sporting event rather than other activities, it always takes some time for the machinery to start rolling back in its original shape and form. So that's what I was saying. What I was saying is that Q1 might still be slow, but Q2 onwards, we should start seeing the normal business coming up all over again.

There are no further questions at this time. So I would like to hand the call back to Shahan.

Okay. Thank you, Gourang, for the update, and I'd like to thank all the participants for joining in, and we'll pick this up again in the first quarter of 2023. Thank you.

Thank you, everybody. Thank you very much.