Qatar National Bank (Q.P.S.C.) (QNBK) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the QNB Group FY 2020 Financial Results Conference Call. Can I please request that all media personnel, please disconnect from this call. This call is for investors and analysts only. My name is Dee, I'll be coordinating your call today. [Operator Instructions] I'll now hand over to Jaap Meijer at Arqaam Capital, Head of Research. Jaap, please go ahead.

Thank you, Dee. Good afternoon, everyone. Happy New Year, and thanks for joining us today. This is Jaap Meijer, Head of Research at Arqaam Capital. And on behalf of Arqaam Capital, I'm pleased to welcome you to QNB's Full Year 2020 Earnings Conference Call. With me here today from QNB management are Ramzi Mari, the group CFO; Noor Mohammad Al-Naimi, General Manager and Treasury; and Mark Abrahams, Assistant General Manager, Trading and Treasury. I'll now turn the call over to Mark, who will take you through the results and the macro backdrop. Mark, over to you.

Thank you very much, Jaap, and good afternoon, everybody, on the call. Before we begin, I would like to just reiterate the earlier statement, this call is for investors and analysts only. So any media personnel, please disconnect now. I will begin by giving an update on the actions taken by Qatar in light of COVID-19, followed by a brief overview of the macroeconomic environment in Qatar and the outlook. I will then cover QNB's annual financial results for the year ended 31st of December 2020, and finally, open the floor to Q&A. Qatar has taken necessary precautionary measures to protect the society and economy here from the impact of the COVID-19 pandemic. The Ministry of Public Health has secured supplies of Pfizer and Moderna vaccines and commenced its inoculation campaign. Public health officials have committed to provide vaccines free of charge to all Qatar residents. The government's QAR 75 billion stimulus and support package in response to the pandemic includes targeted measures to defer taxes on fees, defer loan payments, boost concessional financing for small- and medium-sized enterprises, investments in the local equity market and provide additional liquidity to the banking system. As a result of these proactive measures, Qatar's economy has weathered the storm relatively well compared to peers, and commercial activity is rebounding strongly as business resumes. Qatar's nonenergy private sector economy continued to expand strongly over the second half of 2020 as coronavirus-related restrictions were lifted, according to the Qatar Financial Centre's Purchasing Managers Index compiled by IHS Markit. The top line PMI averaged 51.9 in Q4, signaling sustained improvement in business conditions in the nonenergy private sector segment of the economy. Qatar has clearly demonstrated its ability to combine a prudent fiscal policy with the effective delivery of a large public program of capital expenditure to execute upon the Qatar National Vision 2030 and the 2022 FIFA World Cup. This is laying the foundation for continued GDP growth over the medium- and long-term through both diversification and stronger private sector growth. Moving forward, private sector growth will be boosted by continued structural reforms, including ownership liberalization, the promotion of foreign direct investments, labor reforms, the permanent residency program and several initiatives to support SMEs as well as self-sufficiency in strategic sectors. Tailwinds for investment in increasing hydrocarbon production will drive economic growth going forward. Six new LNG liquefaction trains are planned to increase Qatar's LNG production by 64% to 126 million tonnes per annum. Supporting the North Field expansion, Qatar has reserve capacity for over 100 new LNG carriers worth over $19 billion. Positive spillovers from increased hydrocarbon production will combine with diversification efforts and structural reforms to boost activity and spending in the manufacturing and services sector. I will now move on to QNB's annual financial results for the year ended the 31st of December 2020. Net profit for this period was QAR 12 billion or USD 3.3 billion. Considering the global economic conditions, QNB Group, following its conservative approach towards building adequate reserves against potential loan losses, has opted to increase its loan loss provisions by QAR 2.6 billion for this year compared to last year, which will assist in protecting the group from any adverse experiences in the portfolio. This has impacted the reported profitability. In addition, QNB Group has continued on its operational rationalization exercise, which has resulted in reducing the cost-to-income ratio from 25.9% last year to 24.3%. Operating income increased to QAR 25.4 billion or USD 7 billion, up by 1% compared to 2019, demonstrating QNB Group's success in maintaining growth across the range of revenue sources even in these challenging conditions. Total assets surpassed QAR 1 trillion at QAR 1.025 trillion or USD 281.6 billion, up by 9% from December 2019. This was driven by a growth of 7% in loans and advances to reach QAR 723.8 billion or USD 198.8 billion. QNB Group remained successful in attracting deposits, which resulted in increased customer funding by 8% from December 2019 to reach QAR 738.7 billion or USD 202.9 billion. This improved the group's loan-to-deposit ratio to 98%. The group was also able to attract high-quality wholesale funding, demonstrated via QNB's highly successful inaugural and the region's largest $600 million green bond by a financial services issuer. The group also issued a $600 million Formosa bond in January and $1 billion each in February and May of last year. Coupled with the groundbreaking $3.5 billion dual-tranche transaction in November, these deals clearly demonstrate global investors' confidence in QNB Group's solid fundamentals and strong financial performance. Despite several challenges and headwinds from the global pandemic, QNB Group was able to maintain the ratio of nonperforming loans to gross loans at 2.1%, a level considered to be one of the lowest among financial institutions in the Middle East and Africa region, reflecting the high quality of the group's loan book and the effective management of credit risk in these conditions. This year, our total equity increased to QAR 96.9 billion, up by 2% from December 2019. In line with QNB's dividend payout policy, the Board has recommended a dividend payout of QAR 0.45 to the General Assembly. The bank's capital adequacy ratio at 19.1% is comfortably higher than both the QCB and Basel III requirements. The group is well capitalized and comfortably exceeds other regulatory liquidity and leverage ratios. We will now turn to questions and answers. Thank you.

[Operator Instructions] Our first question is from Rahul Bajaj from Citi.

Two quick questions from my side, if I may, please. First, I want to talk about the loan deferrals. Just wanted to understand where does loan deferrals now stand in Qatar and your 2 key markets of Turkey and Egypt? If I recall correctly from the third quarter call, the deferred loans are or were less than 2% of your loan book. Any update on that? And how these loans are performing post the deferral period in case the deferrals are over that would be useful to kind of understand where we should think or what we should think about provisioning in 2021. My second question is around cost. So yes, 2020 has been able to kind of tighten the screws on cost and get the cost down. If I recall correctly, there was a 2021 guidance of 3% cost growth that was given earlier in one of the earlier calls. Just wanted to understand where do you see normalized kind of cost level in 2021 and going forward? And is there room to reduce costs further?

Loan deferral -- first of all, this is Ramzi. I would like to thank everyone for joining our con call today. Loan deferral -- at the highest point in 2020, total amount of loans that were deferred was around 8% of the overall portfolio for the group. Of course, that number materially dropped. As we stand today, the loan deferral balance is less than 0.5%. So technically, the balance is going to 0 very soon. Now in terms -- the progress in how these loans are performing, so the deferral, it will be very difficult to give a clear momentum in -- at this time because most of these loans, the deferral was until December. Now in January, the loans will go back to normal repayment. So it will take another 3 months to see exactly how these loans will progress. But in anticipation, if you have seen in the fourth quarter, we were very conservative in the NPL. We were very conservative in building provisions in order to ensure that even if there were weakness, which we don't expect, we already have cover for that. Cost. Cost, there was a major improvement in cost-to-income ratio in 2020. This year, we don't expect cost to materially increase, and we are trying to cap it around 3%, but we need to wait and see how inflation will progress in different countries where we operate. But we strongly believe that cost-to-income ratio at current level of 24.3% is a strong place where we want to be. Can we reduce cost more? There is always room to reduce cost more. However, we need to look at this very carefully based on how the business will progress. Because our priority is not to reduce cost, our priority is to increase revenue. And this is how we want to manage our cost-to-income ratio, not by cutting cost but rather by investing in the profit center, investing in our IT platform to ensure that we grow our revenue. That's our priority.

Okay. Just one quick follow-up, if I may, please. On your previous answer on loan deferrals, when you said that 0.5% of the loans are still under deferral, can you give us a view where are these loans? Are these in Qatar, Egypt or Turkey?

The bulk of these are in Qatar, and these are SME. And the number is much -- is lower than 0.5%. These are mostly SME loans that were -- we extended it until June 2021. But the number is very, very small.

Our next question is from Chiro Ghosh from SICO.

This is Chiro Ghosh from SICO. I have a couple of questions. First one is related to the deposit mix. So what I observed that over the last 7, 8 quarters, the ratio of public sector deposit is reducing and the corporate sector deposit is increasing. So I just want to get a sense, is it a conscious strategy? And how sticky are these corporate deposits? Or why did the bank purchase a public sector deposit? Why is the bank moving to this strategy? That's my first question. Second is related to the asset quality, and congratulations for a very good set of results especially in this market. So I observed that the recoveries have been quite good in 2020. If you can throw some light on from where is this recovery is coming from? And also, I see that the asset quality in your international operations like in Turkey has also improved, Egypt has been quite stable. So if you can throw -- if you can give us some ground reality of these 2 countries.

Now in terms of the mix of the deposit between public sector and private sector, we always look at the overall portfolio of our funding based on cost. Everyone's target to increase their market share and public sector funding, and that sometimes impacts costing. QNB has the capacity to diversify their funding sources. And every time we have an opportunity to be able to capture a higher market share in a lower cost base of the deposits, we tend to not to compete on public sector funding. Is it a strategy? It is not a strategy. It's a part of the overall management of our balance sheet and our cost of funding. In terms of asset quality, now definitely, there was an impact on asset quality during 2020, and we have seen that NPL ratio moving from 1.9% to 2.1%. And I still believe that, that ratio might increase, and that increase will probably come mostly from outside Qatar. And that's why we were extremely conservative in the way we have built the provision, especially in Turkey. Turkey was very, very conservative in 2020. They increased their coverage ratio from 90% to 101% even though their NPL ratio did not increase. Reality, it's dropped. And mainly because -- until today, we are not seeing a major inflow of NPL interest, but we are keen to be very cautious in how things will progress, especially in Turkey. I think a coverage ratio above 100% in Turkey is sustainable, and we will continue to be very conservative in Turkey. NPL ratio for the group might touch the 2.3% this year. But again, we need to wait to see how things will progress during the first quarter, second quarter of this year.

So just to continue on the previous question. So first one, you are saying there are circumstances when your private sector deposit cost might actually be lesser than public sector, if I understood it correctly. There can be circumstances. But...

It depends on the source and -- it depends on the source. If you talk about government agencies, sometimes some of the funding can be higher than private sector. It depends on the maturity, it depends on the currency, different factors.

Okay. And about these 2 countries, especially Turkey, you are not seeing any massive rise. But you might see, right? That's what you're trying to imply, right, about Turkish...

Until today, what we have seen in 2020, we were expecting a major jump in NPL ratio in Turkey. We have not seen this in third quarter, neither in fourth quarter. We have seen marginal increase in NPL in Egypt from 2.2% to 2.3%, but nothing to worry about, especially that their coverage ratio is still more than 140%.

Because -- I asked because in Turkey, I saw your NPL ratio has in fact come down in -- over the last 1 year by 40 basis points, which is -- it depends on what we are reading in the media at the end.

Agreed. Please always remember that the portfolio in Turkish -- in Turkey for QNB Finance is different from others. We do not have large exposure in foreign currencies to large corporates that might hit your NPL ratio at a large percentage at one point of time. The portfolio in QNB Finance is highly diversified and in Turkish lira, which allows us to enjoy a marginally lower NPL than the market.

Our next question comes from Waleed Mohsin from Goldman Sachs.

A couple of questions from my side. First, starting with Turkey. I mean we've seen that the Turkish banks are actually guiding for -- or putting out pretty strong guidance for 2021. And Ramzi, you mentioned that QNB Group has been very conservative with provisions. If you look at the guidance that they're providing, they're looking at high teens to even 20% local currency growth, and they've seen a sharp fall in cost of risk during 2021. The only negative factor being margin compression given relatively high rates. So just wanted to get your thoughts on 2021, given that you start from a very strong base in terms of where your provision sits, 18 bps out of 80 bps is general provision that you booked this year, your overall NPL coverage 136%. So how do you see the outlook for Turkish provisions as well as loan growth during 2021? And then secondly, on Egypt. In terms of -- we've seen some gradual normalization interest rates in Egypt. What do you think, where are we in terms of the capital expenditure or loan growth cycle in Egypt, especially given kind of the second wave of COVID-19? So your thoughts on the operating outlook for Egypt and Turkey would be very helpful, both in terms of growth and asset quality.

In terms of guidance for Turkey and Egypt, I think this is the first time where I'm going to say that we expect growth in Turkey this year to be higher than that of Egypt. The guidance for 2021 for finance bank in the balance sheet, it will be between 15% to 17%, profit and loss 12% to 14%. QNB ALAHLI balance sheet between 9% to 11% and profit and loss between 10% to 12%.

Got it. And just a question from me...

These are the time lines -- yes. Go ahead. Go ahead.

I just want to ask on funding in Turkey. Just wanted to ask on funding in Turkey, after the normalization in rates with increase in rates from 10.5% to 17%, what trends are you seeing? I mean are deposit rates priced close to this rate? Are you seeing any pressure on local currency? Is there an improvement in dollarization in Turkey? Or are you still seeing the same pressures as they were pre the increase in rates?

No. Definitely, the pressure is much lower on the currency, it's -- on the Turkish lira currency. But there will be a major pressure in the next 3 months on the margin in Turkey, for all banks in Turkey, because there will always be a gap between 3 to 6 months between repricing of loans and repricing of deposits. And that's why we expect the first quarter to be very challenging for Turkish banks in terms of margin. But that will gradually start to improve, and we should go back to normal by the fourth quarter. So the major challenge that we will see in Turkey this year is in net interest income in the first quarter. But allowing banks -- one of the reasons why banks weren't able to manage their margins last year is the restrictions that the Central Bank put in -- on hedging. Usually, Turkish banks are very, very efficient in how they hedge their net interest margin. But by putting some limitation on the capacity of banks to do that, this is why they were hit in the fourth quarter and they will be hit in the first quarter of this year on net interest income. But now Central Bank -- the Minister of Finance and the Central Bank reduced the limitation on hedging, which will allow banks to go back to be able to manage their interest margins much more efficiently.

Our next question is from Aybek Islamov from HSBC.

A couple of questions from me, please. The first one I think relates to your group NII in mid performance. I think in 2020 you were able to cut your funding cost quite substantially, right, and your NII growth you registered 4%. What's your outlook for 2021, your ability to manage funding costs lower versus the interest income that you earn? That will be quite useful to hear from you. And the second one is your provisioning policy. So it's been quite conservative already 2020. I'm looking at your loan loss reserve to loan ratio, it's all-time high compared to your multiyear history. And you just mentioned that you still expect NPL ratios to grow but mostly outside of Qatar, right? So what do you think would be the pressure on the cost of risk? Do you need to maintain the same level of cost of risk as you did in 2020? Or do you think there is room for cost of risk to decline, right? And last year, I presume your cost of risk was predominantly driven by the collective provision expenses, so some color on these 2 will be very useful.

Okay. Margins dropped last year by around 8 basis points, and this is very close to the number or the guidance that we gave at the beginning of the year. There are several factors that impact margin, not 1 and not even 10. And that's why it is extremely difficult for any CFO to give guidance on how much we will move within a 12-month period. It will be very difficult for the group to continue to reduce cost of funding, and I think it will gradually start to go up during -- after first half of 2021. But what I would say is we were successful last year in growing our net interest income, and we were always successful even to be able -- in managing our margin in a way to ensure that we see constant growth on net interest income for the group. To make this short, I would say that margin will continue to be under pressure in 2021, and I think that there will be a drop of around 4 to 5 basis points. And this will continue. The more the balance sheet for the group grow, the more pressure we are going to see on margins. I mentioned just 5 minutes ago that Turkey in the first quarter and maybe second quarter will be materially under pressure. We might see a drop of around 25% in net interest income in the Turkey stand-alone alone compared with Turkey stand-alone last year. So this will impact the group's margin for the year. But overall, we still believe that we will be able to continue to grow our net interest income between the 3% and 5%, and this is what we are targeting for. In terms of provisions, cost of risk 2020 were 80 basis points. It was around 5 basis points higher than the guidance that I gave because we feel that the fourth quarter it will be a good opportunity for the group to be very, very conservative, and that's what we have done. How do we see cost of risk progressing for the group? I don't see cost of risk for QNB dropping from 80 to -- back to 45 basis points that we have seen in 2016, '17, '18 or even '19. I think the drop will be gradual. I doubt this year cost of risk will be 80 basis points. But I will not be surprised that it will be between 65 and 75 basis points. And I think if we are able to end up -- end with around 70 basis points, this will be very good. We need -- all of us, we need to understand that the impact of COVID-19 would not end in the first quarter of this year. We still see the pressure on some of the corporates in moving their business back to normal. This will take time. And that's why we prefer to be conservative in managing our cost of risk.

Our next question is from Naresh Bilandani from JPMorgan.

It's Naresh Bilandani from JPMorgan. Sorry, I joined a few minutes late, so apologies if you have already answered this question. But could you please highlight the reason for strength in your investments book in the fourth quarter? I mean -- because I see the investments were largely all booked in Qatar in the Qatari segment, was this the reason for this strength in the fourth quarter NII in the Qatari segment? Or is there any other dynamic that I'm missing? Now I appreciate the guidance that you've provided, but just for a better understanding, would you please be able to throw some light on how should we see the margin in the loan book evolve in Qatar only specifically for 2021, that will be super appreciated.

The growth in investment in the third quarter and fourth quarter of 2020 is a reflection of the need of the customer. Many private sector customers or even government agencies want to diversify how they fund their operation. And they believe doing that through issuing local bond will be a good opportunity for them to be able to have more flexibility in how they fund in their business. Historically, we were not very, very active in that business, but we believe now that this is important. We were comparing the percentage of investment for QNB, overall the balance sheet for peer group, and we are materially lower than the group. And that's why in this year and in the future, you will see more involvement in QNB on some of the issues, whether it was local or international, in terms of investment. And this is natural progress for the balance sheet -- for QNB balance sheet to be -- to put us in line with how the peer group is managing their overall business, and at the same time, managing the overall margin for the group. In terms of guidelines for QNB Group as a whole, because I did not give group as a whole, and then I will talk about Qatar. The group as a whole will be -- the balance sheet will be 6% to 8% and profit and loss will be 4% to 6%. And that's why Qatar stand-alone, in terms of loans, it will be between 5% and 7% -- the overall balance sheet 5% to 7%, and profit and loss will be between 2% to 3%.

Understood, Mr. Ramzi. So now this is what I'm thinking. If you think of the loan growth, I think you said that it will be somewhere in the range of around 5% to 7%. My understanding is that the public sector loan growth, if I take a look at the system data that has been running at a significantly faster pace, even if I assume and think for a moment that lending and investments book in tandem -- and don't try to differentiate, I mean, growth could come on either portions of the balance sheet. A mid-single-digit number, considering the fact that we are going to see a strong hydrocarbon pipeline -- growth pipeline in Qatar, that still seems relatively on the lower end of what I was initially starting to expect. Do you believe that there is a scope for an upside risk to this growth guidance as we move further into the year? Or you believe that 5% to 7% of growth guidance that you've given for Qatar, if I understand right, that is looking very realistic at this stage?

Okay. If we look at the guidance that I gave last year, I said margin will drop by around 7 to 8 basis points, and that did happen. I mentioned that we will continue to be able to be very conservative in provisioning but be able to improve our operational income. And to an extent, I was right because we grew our operational income by 1%. I also mentioned that we are going to be able to improve materially our cost-to-income ratio and we were very successful in that regard. I mentioned that we are going to be extremely conservative and build more on cost of risking and coverage ratio, and we were able to increase it from 100% to 107%. The one that I missed last year is the overall growth in the balance sheet because I was talking all about 6% to 8%, and the actual growth was higher than that percentage. I tend to be conservative in the guidance that I gave in the balance sheet because considering the structure of the overall balance sheet of QNB, which is mainly corporate, is highly dependent on different factors that can push the growth materially higher than the guidance that I give or lower than the guidance that I give, and that's why I prefer to be conservative. If things in terms of COVID-19 improve by the end of June, I think the growth in the balance sheet will be materially higher than what I gave. But let's wait and see. Let's start with 6% to 8% for now, Naresh, and then we will build on that quarter-on-quarter.

We currently have 1 more question on the line. [Operator Instructions] Our next question is from Sawsan Abdullatif from SICO.

This is Sawsan from SICO. I just have a quick question on the NPL. Which sector were the main contributor to the increase in corporate NPL in 2020? And for this year, you mentioned that you expect NPL to go from 2.1% to 2.3%. So from where would you say it will come from?

It's different from one country to another. If -- some of the growth will come from Qatar and it will be mostly from medium-sized corporate. There will be an increase in Egypt. Again, it will be mostly retail/small corporate. And of course, Turkey, it will be mostly SME.

Okay. And for the increase in 2020, which sectors contributed?

I think it will be a continuation of the same momentum.

Our next question is from Waruna Kumarage from SICO.

[Technical Difficulty] normalize in 2021? Or are you expecting to grow the book...

Hello, Waruna. I'm afraid your line is pretty bad, and we can't hear what you're asking. I'm going to go to the next question. Our next question is from Aybek Islamov from HSBC with a follow-up question.

Just a follow-up question from me. Speaking of the GCC landscape where the relationships with -- well, between Qatar and the rest, which you see are normalizing, what are your thoughts about the impact on the Industries, say, airlines, capital markets, the capital flows, inter-GCC capital flows in particular? So yes, that will be very useful to hear from you.

I think this is a very important progress that took place early this year and it will have a very positive impact on the region and in QNB, in particular, considering that we operate in most countries in the GCC. The most important -- Aybek, the most important issue here is the sentiment. I don't think that you are going to see a direct large impact on QNB considering the size. But definitely, there will be a much positive impact that will progress -- that will be gradually progressing. The most important impact will be in our operations in Saudi Arabia. We had our branch open. It was ready to go, then things went bad and that's why the branch was dormant for 3.5 years. The potential for QNB in Saudi Arabia, considering the relationship that we have with many customers, allow us to be extremely optimistic about the long-term future for that branch. Immediately, once the news are out, we went back to building on the capabilities that we are going to have for that branch in terms of setting the IT infrastructure, improving the team. And I think we are -- beyond June of this year, we are going to see very good momentum for this. There will be different industries that will be directly impacted. Mostly, of course, the aviation, tourism, hospitality. But again, the impact will not be immediate, it will be gradual. And hopefully, by end of this year, we're going to start to see a much more positive impact on the operations -- overall operations for QNB and for the banking sector in the GCC.

And in terms of the capital flow in particular, for example, pre-GCC crisis, I think GCC banks [ who have ] big depositors with big-time institutions, financial institutions, do you expect this to change rapidly? Or do you think this will also be a gradual condition?

It will be gradual. Today, QNB, we have seen how we managed our balance sheet in the last 3 years. We have seen how we were able to reduce loan-to-deposit ratio last year to -- from 99.2% in '19 to 98%. So we are not in a hurry to attract new funding from the GCC. We need to be selective. It's extremely important that the money is that within our parameters in terms of cost of funding. And once we were able to meet that, but we will -- of course, we will be able to look at some of the opportunities. But that we are not in a hurry to generate funding from the GCC for now.

We have no further questions, so back over to our speakers.

Okay. Thank you very much for your time today, Jaap. I think we are -- you know where we are. We're available if you need us for anything at all. But I think that's everything from the QNB team today. Any further questions, please do ask. Thank you very much. [ Jaap, do you have a last question ]?

Thank you very much.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines.