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

Hello and welcome to the Qatar Islamic Bank conference 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, everyone. I want to welcome you to QIB's first quarter 2024 financial results conference call. So on this call from management, we have the bank CFO, Gourang Hemani. And as usual, we will conduct this call with first management reviewing the company's results followed by Q&A session. I will turn the call over now to go Gourang. Please go ahead, sir.

Thanks, Shahan. Welcome everybody to QIB's quarter 1 2024 results call. We are pleased to announce a net profit of QAR 955 million, which is 5.5% above Q1 of last year. Total assets of the bank have reached QAR 192 billion, up 7.7% versus first quarter 2023 and 1.5% against December 2023. Financing assets have reached QAR 124.7 billion, up 6% versus first quarter 2023 and 1.9% against December 2023. During the same point of time, the total deposits of the bank have reached QAR 123 billion, up 4.4% against Q1 2023 and 1.8% against December 2023. On the asset quality front, the NPL ratio of the bank has remained steady at 1.7%, same as December 2023. And the Stage 2 ratio was also almost flat at 18.3% in quarter 1 2024 against 18.5% in December 2023. The capital adequacy ratio of the bank computed under the Basel III.5 guidelines issued by Qatar Central Bank is now at 20.7% against 20.4% under Basel III guidelines as of December 2023. On the profitability front, the net operating income of the bank after deducting payments to unrestricted investment account holders is QAR 1.6 billion, up 6.5% against Q1 of 2023. Total expenses of the bank have remained almost flat at QAR 287 million against QAR 285 million in Q1 of 2023. The bank has taken advantage of the good operating performance and build financing provisions of QAR 365 million, up 15% against Q1 of 2023. The cost to income ratio of the bank stands at 17.8% against 18.8% last year same period. The bank, as a result of the higher financing provision that they have built was able to improve the coverage ratio for Stage 3 from 87.5% at the end of December 2023 to 92% at the end of Q1 2024. The bank was also able to marginally improve its Stage 2 coverage ratio to 5.4% against 5.1%. These actions taken by the bank reflects the bank's strong risk management framework as well as the conservative provision policy, whereby, it will continue to build provisions as and when its strong operating performance allows it. The bank's net financing margins were maintained at about 3.65%, up against 3.5% in Q1 2023 and flat against the full year of 2023. We would like to summarize by saying that effective Q1 2024, the bank has adopted the revised FAS 1 implemented by, introduced by AAOIFI, adding new disclosures, including other comprehensive income and change in certain terminologies including introduction of terms like quasi-equity, et cetera. However, we would like to add that these are just disclosure changes with no material changes in the way these are treated by the regulator or the bank in terms of the way -- the behavior of these accounts go. We'll now hand it over back to Shahan for any Q&A. Thank you.

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

This is Chiro Ghosh from SICO Bahrain. Very quick 3 questions. The first one is on the margin side. On a quarter-on-quarter basis, it appears that the margin has contracted a little bit. So if you can give some color why is it happening or how do you see for the rest of the year? That's my first one. Second is on the loan growth. So in the first quarter, I think quarter-on-quarter, the loan growth was quite decent. The consensus is like in Qatar, the overall loan growth will be around 4% to 5%, but it appears that you might actually beat it. So if you can give some kind of guidance, how do you see the loan growth for the rest of the year? And the third one is, the provision story seems to be quite strong. How much more provision can you take considering your NPL coverage is already so high. So these are my questions.

On the first question, I think looking at margins on a quarter-to-quarter basis sometimes can be a bit challenging because there could be some -- especially when you include investment income, et cetera, there could be mark-to-market gains, et cetera, that are included. Overall, as we had told at the end of Q4 2022 results call, we had said that we expect the NIM to remain flat against -- on a full year basis against what we have seen in 2023. And I think we are still holding the same guidance at this point of time that the NIMs will remain around 3.65%, especially around that level that we have seen in last year as well. As you've seen that the interest rate environment is very difficult to predict the way it stands with the kind of inflationary numbers coming from U.S., and it looks like more that the rate hikes appear to be more deferred rather than the way people were expecting maybe a quarter ago. So we say the NIM will remain flat at this point of time. That's the guidance we have unless and until there is a significant change in the interest rate environment going forward. On the loan growth side, I think yes, we've seen 1.9% growth. We can -- however, we maintain our guidance that we have said year round. We expect the growth to be about 5% to 6%, anywhere around 5% range. For the full year, I think a lot depends on where the public sector credit growth heads toward. As of now, we have not seen much drawdown on the public sector side. If that remains the same, I think we will see the loan growth we still see at this point of time. We want to maintain the forecast that we have maintained. If there is any material change, I think we'll be in a better position as we head into Q2, Q3 as we keep moving forward. On the provision side, I think it's just that we continue to remain prudent as we have mentioned. I think we had told in the Q4 results call that our Stage 3 coverage ratio has dropped to 87.5%, which is below the levels that we are happy with. And I think a large part of the provision that we have built has been allocated to bring it up to 92%. We've also tried to address the concern; some investors were raising to say that why is our Stage 2 coverage ratio is so low. So we continue to work towards building the Stage 2 coverage ratio as well. So yes, as long as we have decent operating performance, and we are still able to generate decent net returns, we'll continue to build provision if required. However, in general, we expect -- we don't expect on a full year basis, the provisions to be significantly higher compared to last year. The Q1 increase is more driven by the fact that we wanted to improve the coverage ratio to 92%. Hope this answers your question, Chiro.

Just one small follow-up on the first one. So if interest rates remains longer, then also your margin will be flattish or will it positively impact --

Yes. No, I think it's -- most of the impact is already included. We don't see much change because of this. I think if the interest rates do drop, I think we want to see how the cost of funds starts reacting to it. But at this point of time, there's too much of volatility to be really be able to predict and give you a better guidance on it.

Your next question comes from the line of Aybek Islamov from HSBC.

So I want to circle back on the net interest margin. I think what surprised me in the first quarter is that the funding costs are up and the asset yields are a bit weak, right? And I've heard your guidance again for 2024 and I think that implies that your margin should start to improve sequentially for the rest of the year. But would you agree with the statement? Is that what you're factoring in? Do you expect your margins to sequentially get better for the rest of the year? And if that's the case, what would be the drivers? Is it the asset yields or do you expect the funding cost to ease? That's my first question. Secondly, could you comment on this implementation of Basel III reform in Qatar? I believe there are some elements which were not implemented yet, in particular, the risk weights on net open currency positions. Can you give some color on this? And what kind of impacts do you expect to see on your CET1 ratio in 2024? That's my second question. I think, thirdly, can you talk a little bit about the taxation in Qatar? What kind of corporate tax rate you would expect to see next year? Is it 9%? Is it 15%?

I think I already covered on the NIM side. As I said, we had told at the end of Q4, our full year guidance was that the full year NIMs will remain for 2024 to be aligned with what we expect in -- what we had in 2023. If I'm not mistaken, our financing NIMs -- financing less deposit NIMs were about 3.62% to 3.64%. And I think Q1 is also at the same level. So as I said, we are expecting the NIMs to remain at the current levels that we have so that we are -- on an overall basis, we'll be at similar levels of 2023. On your second question, on the Basel III.5 guidelines, I think we had told in the past as well that we were waiting for the guidance from QCB on various aspects. They have come back to say that they have not made any decision on how they are going to implement any, if and how they're going to implement any risk-weighted charge on dollar position just to give you a -- just to put in perspective. I think they are evaluating vis-a-vis what other regional regulators are doing. They're also trying to evaluate the impact on banks and how it would have an impact on the overall banking system as a whole. In general, for us, I think we have significant cushions of 6% above -- almost 6% above the QCB minimum that is required. So we are not worried even if it comes and how it comes. So we don't see any major impact on the capital adequacy for QIB even if it is implemented, whether in a one-shot basis or a phased manner or if it is not implemented at all. All we know is that they have come back saying that they have not made a decision on it and to continue with not taking any capital charge for dollar position. Your third question on taxation. I think we have -- we are still waiting for updated guidelines coming from General Tax Authority. We have not received anything compared to what we had told at the end of Q4 2023. So I'm unfortunately not in a position to provide you any further details or guidelines on it or guidance on it in terms of the implications of the tax at this point of time. We still need to wait. There are a lot of moving parts, and I don't want to make any comment, which could be -- may not be aligned with what the reality could be.

Your next question comes from the line of Andrew Brudenell from Ashmore.

Yes, a lot of what I was going to ask has been covered. Maybe just on the loan side. I wonder if you could give us a little bit more color, please, on how you see certain exposures within real estate, hospitality, how do you see those evolving at the moment? Has there been any incremental good news to your minds or is it still much the same? And then maybe related, could you just talk a little bit, as you highlighted that the Stage 2 loan book is pretty big. I know it's not as big as some, but it's still a reasonably big number. Could you maybe give us a breakdown of what's in there and you're clearly covering yourselves in case some of that slips into Stage 3. So could you talk a little bit about what those sorts of things might be? What sort of areas, please?

As I said, the loan growth, I think I already covered. There's nothing much more I want to add on it. We are expecting around 5% growth for the year, it will come from various sectors and --

Sorry, not growth. I'm worried about asset quality. Sorry. Asset quality and where are the risks and areas within real estate and hospitality, any changes?

There's no major change in terms of what we had seen. And if there were any major deterioration, you would have seen it in our asset quality indicators. As you have seen that our NPL ratios and the Stage 2 ratios both have remained flat versus Q1 of 2023 --

Right. No improvements either though, right? So still a very big Stage 2 loan book.

The Stage 2 loan book --

There's no improvement.

I'll come to one at a time. You were asking more on the overall asset quality. I've answered you that the asset quality has remained fairly stable. In terms of the Stage 2 asset -- Stage 2 large portfolio, I would just like to add to it that in Qatar, any upgrade from Q2 to -- Stage 2 to Stage 1 requires QCB approvals. We have requested approvals from QCB because a lot of them have -- are fairly decently performing. However, QCB, as we all know, is a very extremely conservative regulator and it takes -- we want to see a much more longer period before which they will allow any upgrades from Stage 2 to Stage 1. So it's not that the -- many of the assets are fairly decently performing. However, it requires a longer cure period from QCB's perspective before they can allow any upgrade from Stage 2 to Stage 1.

Sorry. That's really interesting. So are you able to tell us like what -- as far as you are concerned, as a management team, how long has what percentage of Stage 2 been doing well enough that you've asked it to be moved back? And what sort of time frame do you think regulator may want --

I think there are a lot of ongoing discussions, and it's very difficult for me to put any quantification of the number because at the end of the day, it's more about an assessment between management's beliefs --

No, I understood. But --

I know it will be interesting, but there's only as much I would be able to share with you at this point of time because these are discussions between the bank and the regulator, which is very difficult to be able to really put forward without having the full picture of it. So I don't think so it's a forum where we'll be able to discuss it. In general, you wanted a point of view. I have given it to you in terms of where does our asset quality stand and where does the outlook at this point of time. All I can say is we are fairly comfortable with the names that are there in Stage 2. Will there some will be slipping to Stage 3? Maybe yes, but we don't expect any significant migration from Stage 2 to Stage 3 like we have not seen that happening in the past as well. That's all I can pass on at this point of time.

Your next question comes from the line of Adnan Farooq from Jadwa Investment.

I have a couple of questions. First is the outlook for fee income. Fee income was lower quarter-on-quarter. I understand there can be fluctuations on a year-on-year basis. But how do you see fee income growing this year? The second question is on your expenses. On an absolute level, they seem very controlled. In the past, you have mentioned that the bank will not shy away from investments and maybe we should expect a slight pick up in expenses. How do you see that happening? And the last is just a follow-up on the real estate and hospitality market in general. Have you seen any signs of improvement or any guidance regarding -- if you can give any color on the market performance of the real estate and hospitality market or the commercial real estate market, that would be really helpful.

I think I missed your first question. So I'll take -- answer the second and third and then we'll come back on the first one. On the cost to income ratio side, I think, yes, we had mentioned that we do not shy away from investing and we continue to invest. But at the same point of time, we try to ensure that the investments that we are making in technology, et cetera, helps us in controlling other costs, especially when it comes to improving efficiency in terms of staff related expenses, et cetera. So we have a very -- I think, as a bank, we have a very, let's say, disciplined approach in terms of spending where every spend needs to be well justified, and I think we continue to work on it. Overall, so far, we see that the cost remains -- cost has been fairly well controlled. And I think the overall [ will ] has been at about 17.8% range cost to income ratio. We don't expect any significant deterioration. But however, in the senses, we continue to see how we can maintain and manage this at the current very, let's say, very efficient level that we have. On terms of the hospitality side, I think we see -- I think Q1 of this year has been fairly decent from the hospitality industry perspective. I think there were a number of events that is there. When you see things like Ramadan and Eid are also very, let's say, a busy season for hospitality sector. So I would say Q1 has been fairly decent. The question would we need to look into the medium-term to long-term basis is to see how well they sustain it, especially when it comes to summer period, et cetera. So as of now, there seems to be the occupancy rate and the overall hospitality sector did quite well within the -- same as the real estate market as well in the Q1 of this year. We'll see how the momentum keeps going on. if you don't mind repeating, can you repeat the first question so that I can answer it again, please?

Sure. So just before that, how is commercial real estate? Similar to hospitality, you would say?

Commercial real estate, we've always said that it's not something which is new. It's been there under pressure for 3 to 4 years, not much has changed on that front at this point of time.

My first question was with regards to fee income. How do you see fee income --

Yes. I think we should still see a very decent single-digit growth coming on the fee income side on a full year basis. So let's see how the year goes. We have been working on a number of initiatives to be able to work and improve on our fee side, especially on the corporate banking side, and so on the investment banking side, et cetera. So we do expect that we should be able to maintain the good momentum that we have seen on the fee income over last few years to continue this year as well.

Sorry. Can you repeat? You said fee income should grow mid-single digit or double digit? Sorry. I didn't catch it.

Mid-single digit.

Mid-single digit.

Your next question comes from the line of Salome Skhirtladze of Bloomberg.

I think most of my questions have been answered. The only one left is related to the government side. Could you comment on the share of the government activities in the Q1 loan and deposit growth? And whether you noticed any increased activities across the private sector?

As I said, during the first quarter of this year, there hardly was any increase in the government sector. In fact, the government sector lending dropped marginally compared to December, but just a couple of hundred millions. So nothing significant when it comes to -- we are not expecting any major change in the government-related business for this year. I think we will continue to see the same trend that we have seen since 2022 onwards, whereby the government is not really going to pressurize the domestic banking system for its short term needs. I think the government is -- has got significant revenue streams at this point of time and their major spending that they did during the FIFA time, which was at that point of time, managed through more short-term borrowings are now being handled on a much more strategic and a long-term manner and really doesn't require them to really come to the domestic banking sector to a large extent to fund their spend. In terms of the deposits, I think the government sector deposits have increased compared to December of last year. I think in December, our share of government deposits was almost about 30% and now, it stands at about 32% to 33%, around that range. So I think we continue to see government injecting liquidity into the system through higher deposits with the banks like QIB and other banks in the system.

Just one more question. Do you see any ongoing pressure from the private sector deposits including the non residents or it's like it's already hit its bottom last year?

As I said, on the non resident deposit, I think we have already taken a stance whereby we continue to reduce our non resident deposits on a consistent basis. At the end of Q1, our non resident deposits were 11%, down from 13% at the end of December. So we continue. Now in fact, the non resident deposits are a very small portion of the overall deposit basically if you want to take them. And some of these are strategic non resident depositors who have been maintaining relationship with us and deposits with us during all periods of time, whether it be during the point of time where there were some regional disagreements or even prior to that as well. So we are not worried about the non resident exposure at this point of time.

Your next question comes from the line of Fatema Alshakar from SICO Bank.

This is Fatema Alshakar from SICO Bank Bahrain. I just have 3 questions. I know you have already given some color on it but my first question is about loan growth for the full year of '24 and full year of '25. Do you think it will mostly be driven by North Field project and other public sector projects or are we seeing a demand from private sectors too and if yes, from which sector? My second question is regarding the bank's consumer business. I can see that continues to improve. So if you can just give us some color on the developments in this sector and how do you see it going forward? And my last question is regarding any guidance for the full year on return on equity expectations. If you can just give us some light on that also.

On the first question, in terms of the -- on loan growth within the system, I think the North Field expansion is going to be one of the key drivers. However, it is not going to be directly the banks have not been participating and will not participate. It will be more the private sector role in the North Field expansion that is going to drive -- that is going to be one of the key factors, whether it be in terms of contractors and subcontractors or it can -- it also will be driven by the service providers including LNG vessels and other services, other logistics that are going to really work on it. Other than that, I think we'll have to still wait and see how does the private sector and public sector partnership model, which the government really wants to take it forward really materializes and keeps going forward. As of now, I will say that the 2024 growth we have projected to be around 5% driven predominantly by the private sector. 2025, I think a bit too early for me to comment on it. And I think we'll address it as we keep going down -- going into the subsequent quarters of the year. The second question on the consumer loan side and the high net worth side, I think we -- we've always mentioned that our dominant position as the largest Islamic bank and the second largest bank and the largest private sector bank in the country does allow us to have access to each and high net worth individuals, especially the Qatari population, and that continues to be one of the major drivers that helps us continue to build our loan growth momentum. On the third side -- on the return on equity side, I think, overall, we expect the return on equity to be overall in the levels of last year or maybe slightly maybe marginally lower given the fact that we are going to have a much larger capital base compared to what we had last year. So I think overall, our return on equity for 2023 was about 17.3%. I think we should be almost around 17% range, if all things go okay. Let's see how it goes.

Your next question comes from the line of Lee Beswick from QNB.

Sorry, just referring to something you mentioned earlier regarding U.S. dollars and Basel III.5 or whatever it's called. Could you just confirm because I thought I heard you say that even if even if the Central Bank decides to implement the new rules, that you won't be affected anyway. Is that what you said earlier specifically on foreign banks?

No, I didn't say that we will not be impacted. I said we have significant cushions of 6% above the QCB minimum to be able to absorb it quite easily. So you don't know how it will be implemented, to what extent because there are various discussions that we understand are going on. First of all, whether they want to introduce it or not because just to put it in context, dollar positions were never subject to capital charge in the past. They are still not subject to capital charge even in very many, many of the neighboring countries as well. So I think the regulator wants to take a much more, let's say, make a much more, let me put -- choose the right word, let's -- they want to make a much more informed decision in terms of when they want to -- if they want to implement, how they want to implement and when they want to implement. So as of now, they've said, we do not add it and they will come back to us if there is any change in their strategy or the thought process as we go down the year.

And secondly, just on the Stage 2 loans that we talked about earlier. Also, again, am I right in thinking that the way you talked about it was that the majority of those Stage 2 are sort of come upgrade, when, we have no idea. But at some point, you would expect majority would move up 2 to 1 and only a small amount would down from 2 to 3. Is that correct?

Yes. The way it stands at this point of time, we are not expecting any major downgrades coming from Stage 2 to Stage 3. When and how they will get upgraded, I think it's a process, which we have to follow and very difficult for me to comment. However, I think it would be also very wrong for me to say that nothing will move to Stage 3 as well because eventually, some way migrate either from Stage 1 to Stage 3 or Stage 2 to Stage 3. But as of now, we are fairly happy with the quality that we have in the Stage 2 at this point of time.

[Operator Instructions] And there are no further questions at this time. So let's hand back to Shahan.

So great. If there are no more questions, we can wrap up this call. I'd like to thank Gourang for giving us an update on the first quarter results, and we'll pick this up again next quarter. Thank you.

Thank you, everybody. Hope to talk to all of you again at the end of Q2. Thank you very much. Bye-bye.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.