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

Good day, and welcome to the Qatar National Bank First Quarter 2021 Results Conference Call. This call is for investors and analysts only, and media should please disconnect now. Today's conference is being recorded. At this time, I would like to turn the conference over to Rahul Bajaj. Please go ahead.

Thank you. Good morning, good afternoon, good evening, everyone on the call. This is Rahul Bajaj from Citi Research. We welcome you all to Qatar National Bank's First Quarter '21 Results Conference Call, being jointly hosted by Citigroup and QNB Financial Services. On the call, we have the QNB management team with us to give us a view on first quarter performance and take investor and analyst questions. On the call, we have Mr. Ramzi Mari, Group Chief Financial Officer. We also have Ms. Noor Mohammad Al-Naimi, General Manager of Treasury; and Mr. Mark Abrahams, Assistant General Manager, Trading and Treasury. At this moment, I will hand over the call to Mark to take it forward. Over to you, Mark.

Great. Thank you very much, indeed, Rahul, for hosting the call, and welcome, everyone. Before we begin, I would just like to highlight and repeat the fact this call is only for investors and analysts, and any media should disconnect now, please. I will begin by giving an update on Qatar in light of COVID-19, followed by a brief overview of macroeconomic environment in Qatar. Then I will cover QNB's financial results for the quarter ended 31st of March 2021. And then finally, open up the floor to Q&A. Qatar has taken all necessary precautionary measures to protect the society, its population and economy from COVID-19. Whilst the impact of the COVID-19 pandemic provides uncertainty, Qatar's economy has weathered the storm and activity is rebounding as business resumes. Moreover, Qatar's COVID vaccination program is progressing fast as more than 30% of the population has now had at least one dose of the vaccine. Qatar's nonenergy private sector economy continued to expand strongly over the second half of 2020 and the first quarter of 2021 as coronavirus-related restrictions were lifted, according to the Qatar's Financial Centre's Purchasing Managers Index. The top line PMI has been comfortably above the expansionary threshold of 9 months and has been accelerating in recent months, clearly signaling sustained improvement in business conditions in the nonenergy private sector segment of the economy. Moving forward, private sector growth will be boosted by the continued structural reforms, including ownership liberalization, the promotion of foreign direct investments, labor reforms 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. Qatar is going to go from 77 million tonnes per year to 110 million tonnes by 2025 and then up to 126 million tonnes by 2027. Positive spillovers from our increased hydrocarbon production will combine with diversification efforts and structural reforms to boost activity in spending in the manufacturing and services sectors. I will now move on to QNB's quarterly financial results for the 3-month period ended 31st of March 2021. The financial results were as follows: net profit was QAR 3.3 billion or USD 0.91 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 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 significantly reducing the cost-to-income ratio from 25.6% last year to currently 23.4%. Operating income maintains at QAR 6.7 billion or USD 1.8 billion, clearly demonstrating QNB Group's success in maintaining growth across the range of revenue sources, even in these challenging conditions. Total assets remain over QAR 1 trillion at QAR 1.042 trillion or USD 286.4 billion, up by 8% from March 2020. This was driven by growth of 2% in loans and advances to reach QAR 720.6 billion, or USD 198 billion. QNB Group remained successful in attracting deposits, which resulted in an increased customer funding by 6% from March 2020 to reach QAR 749.6 billion or USD 205.9 billion. This has also improved the Group's loan to deposit ratio to 96%. The group was also able to attract high-quality wholesale funding. The group issued a $1 billion 5-year bond in January. This deal attracted strong interest from around the world from key global investors reflecting our investors' confidence in QNB Group's financial strength and its position as the largest financial institution in the Middle East and Africa region. And also clearly demonstrates our standing as a high-quality regular issuer and confirmation of our successful strategy of becoming a leading bank in ME-Asia. Despite several challenges and headwinds from the global pandemic, QNB Group was able to maintain the ratio of nonperforming loans to gross loans at 2.2%, 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. In addition, the coverage ratio on Stage 3 loans is standing at 110%. Total equity increased to QAR 93.5 billion, up by 5% from March 2020. The bank's capital adequacy ratio is standing at 19%, comfortably higher than both QCB and Basel III requirements. The group is very well capitalized and comfortably exceeds other regulatory liquidity and leverage ratios. With that, I will now close, and we will turn to questions and answers. Thank you.

[Operator Instructions] We will now take the first question from Waleed Mohsin from Goldman Sachs.

A couple of questions from my side. First, if you could comment on the funding situation in Turkey, particularly the access to the swap market and the impact it's having on margins, growth and asset quality? Secondly, if you could talk about the trends that you're seeing on asset and credit quality, particularly in Egypt and Turkey, especially in the Stage 2 bucket?

Mark, if you can comment on the liquidity situation in Turkey?

Yes, certainly. Obviously, with the surprise announcement recently of the change in the governor, there was quite a significant spike up in the offshore FX forward rates, and also the CDS levels as well in Turkey. From a QNB Finansbank perspective, we've always been very, very prudent and run very, very conservative liquidity measures anyway. And from the bank's perspective, there was never, at any point, any requirement for a single dollar or Turkish lira funding from the group here in Doha. And since that time, we've been in daily contact with our colleagues in Turkey. And as I'm sure you've seen, there's been a significant reduction in the volatility of the offshore market as I think there's a sense of stability of return to this market. So there was no undue panic at that time. There was a natural spike up, I think, on that unexpected news. But in terms of the funding of QNB Finansbank specifically, and I think the broader economy, things have definitely stabilized and calmed down, and that's reflected very much in the London FX swap market and the current reduction back down in the CDS market.

On asset quality in Turkey and Egypt. If we start with Egypt. Now Stage 2 loans in Egypt moved from around 8% to 9.5% because we've seen some accounts that need to be shifted from Stage 1 to Stage 2. But in terms of NPL ratio in Egypt, it's still stable around the 2.4%, 2.5%. We don't see, until today, in Egypt, major pressure in terms of NPL. However, we wanted to increase their Stage 2, and I think reaching 10% at this stage. And the way the economy is going is a good idea from a conservative point of view. But if we look at the overall number in Egypt, their coverage ratio maintained around 111%. Stage 2 coverage increased to 14.2% from 13.7%. And the cost of risk is still stable around 110%. So the number doesn't show any momentum of weakness in the book. But from -- we still believe that we need to be conservative in Egypt, and that was reflected in the Stage 2 loans. If we shift to Finansbank, their Stage 2 loans did not materially increase. It's still stable around the 9%. Their coverage ratio, again, stable, close to 100%. NPL ratio marginally grew from 4.5% to 4.6%, nothing material. Their Stage 2 coverage also increased to 11.7% from 11.3%. And the cost of risk in reality dropped to 145 from 175. So whether it was in Turkey and Egypt, we can summarize by saying, we still enjoy a very strong coverage ratio. We are not seeing strong momentum of weakness in the book. However, QNB has taken a very conservative approach in building their provisions. We want to maintain a strong coverage ratio, and we want to continue to grow coverage of -- in Stage 2 and Stage 3.

Got it. Just a last follow-up. Any of these events, I mean, how is this changing your growth strategy in Turkey and Egypt? And what I mean by that is, obviously, the unexpected turn of events in Turkey, which has pushed up the cost of funding normalizes a little bit with the normalization in the swap market, but still pushing it up? And number two, I mean, rates remaining relatively elevated in Egypt, which has meant that capital expenditure seems to be pushed out by 6 months or so. So has it changed your kind of growth outlook for Turkey and Egypt, these 2 factors?

Growth in Egypt this year in terms of balance sheet, we don't see it as strong as what we have seen in previous years. That's why we are still anticipating for 2021 asset growth to be 10% to 12% only; loans not to grow by more than 7% to 8%; deposits will continue to be between 10% to 12%. For Turkey, in terms of balance sheet, we agree that there is vagueness in how interest rate is going to go forward, and we fully appreciate the impact of the changes that took place. Still, we believe that Turkey will continue to grow in terms of balance sheet between the 15% to 17%, which is higher than what we anticipate in Egypt this year. Overall growth in both countries will be lower than what we have seen in previous years. So we have taken a very careful approach in growing the business, whether it was in Egypt or Turkey this year until we see the overall economical implication.

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

This is Chiro Ghosh from SICO Bharat. So I have 2 questions. The first one is related to this gas expansion and the hydrocarbon production that has been planned in Qatar. So can you please tell me in which year do you -- excuse me, in which year do you expect the borrowing demand to come from? So would it be in 2022, '23 or later? That's one. And second is, with such a spike in interest rate in Turkey, aren't you expecting NPL ratios to go up? So if you can throw some light on that.

Let's start with the first question about borrowing for gas for the North field. I don't think we can -- this is a QP decision. I don't think we can comment exactly when they are going to start borrowing for this project. We know the cost. We know that there will be some borrowing. But when they are going to -- how -- what is the structure we are going to use, I cannot comment on. And then...

But most likely not in '21, right?

Excuse me?

But most likely not in 2021, right?

No, it could be -- this is a very large project. The borrowing will not be 1 year or 2 year. Borrowing will extend until the maturity of the project, which is 2025. So there could be a part of that borrowing happening in 2021. In terms of impact of high rates on NPL ratio in Turkey. Definitely, having rate at this level will have implication on some of their accounts. And this is why we are watching very carefully the inflow of NPL. Now we will help especially during last year and early this year, in terms of some banks, especially public banks were pushed -- were aggressive in lending. So some of that lending to the private sector were used to repay some of the loans in the private sector. And that's why we have seen many of the loans, which were -- had deferred installment for the last year being repaid as a result, which helped in managing the NPL ratio. Going forward, we need to be very careful, and we will -- we are monitoring the NPL inflow very carefully.

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

Do you still expect cost of risk to be between 65 to 75 basis points at the upper end in 1Q. I just want to see if anything had changed with rising interest rate in Turkey? And also, could you give me some color on the domestic book in Qatar in terms of staging. I believe most of the staging that happened in 1Q is related to the international market. If you could kind of give some flavor on the corporate in Qatar. The second question is on the margin. We talk about 4 to 5 basis point decline in margin this year. Does it look optimistic to you with rising interest rate in Turkey? And where do you see domestic margin given the yield curve right now?

Okay. Several questions. I'll try to remember to answer all of them. Cost of risk March is 74 basis points. Expectation for the year, as I mentioned in January, to continue to be between 70 and 75. I don't see us reaching 80 basis points that we have seen last year. So cost of risk this year will drop between the 5 maximum 10 basis points. Margins we have seen a drop of 1 basis point during the first quarter. However, if we look at margins for Egypt and margins for Turkey and especially Turkey, there was a major drop in margins, especially in Turkey. And this is something that we discussed in the first -- in December, when we said that there will be a major hit to net interest income in Turkey because of the increase -- or the rapid increase in interest. It will take around 3- to 6-month period for Turkey to be able to absorb the implication and move forward. And we go back to seeing net interest income at normal level. Unfortunately, what happened in the first quarter in Turkey, again, made things more complex because we don't see -- no one can expect what the central bank is going to do in terms of managing the interest. Will it be a gradual drop? Will it be a sharp drop? So with that vagueness, it's extremely difficult for us whether here and at the group level or in Turkey, to estimate what will happen in net interest income. And that's why we need to be -- to wait and see what will happen. Even in Egypt, there was a drop in net interest income but it's a marginal drop because of a suspense -- suspending interest in -- for some accounts. But what would be the impact -- overall impact on the group, I think we are going to see another 4 to 5 basis point drop on interest margin. So I will not be surprised if we end up the year around the 245 basis points, which still is a very strong NIM for a bank at our size.

Okay. And just a follow-up on the asset management -- the reduction in the asset management. Is this -- what's the reason for this in terms of deposit and loan? And how should I think about in terms of fee generation going forward?

Growth in loans in the group was only 2%, which we -- it's a rarity for QNB to show this low level of growth in loans. The main reason for that is that mid-March a couple of large loans matured and they were repaid. The total amount is around QAR 11 billion. And this impacted the overall growth in loans in the group, especially in Qatar. However, looking at the pipeline for loans within QNB, especially in the Qatari market, we are seeing very strong pipeline. I still confirm the guidelines we gave on growth in loans at the beginning of the year. We still expect 5% to 7% growth in loans. So the momentum for growth in loans especially in second quarter and going forward will continue to be much better than what we have seen in the first quarter.

We will now take the next question from Aybek Islamov from HSBC.

This is Aybek Islamov from HSBC. Just a couple of questions really. I mean, looking at the first quarter net income, it looks like a pretty good start to this year. When you think about the guidance of net income growth you gave earlier, which I believe it was between 4% and 6% increase in net income. How do you feel about your guidance after you reported first quarter results? That's my first question. Second question is, in your financial statements, you have unrealized translation losses on foreign currency, obviously, given this depreciation in Turkish lira and also some unrealized losses through other comprehensive income on debt securities. How do you think it will evolve? And is there a chance you may recycle some of it in your income statement?

Debt securities will not impact P&L. -- I don't see that impacting the P&L. Going back to the main question on overall growth in net interest income. I still believe that growth in net interest income for the year will continue to be between the 4% and 5%. I totally agree with you that we have been able to manage net interest income and interest margin very well during the first quarter, even with the drop in Turkey and Egypt. But I think a growth of 5% overall for the year will be a very strong growth in terms of net interest income for the group. Aybek, is there anything else I missed in your question?

Yes. I also wanted to ask you about net income guidance you gave at the start of the year. I think it was between 4% and 6% for net income growth, EPS or net income. How do you feel about this guidance now that you've reported first quarter results?

No, I think today, I'm very confident that this can go up to 5% to 7%. And we are very optimistic that we'll be on the high side of the guidelines. Just to continue on this. Definitely, first quarter gave us very good signs that this should be a better year than what we originally anticipated. And this is clearly reflected in how we manage our cost to income ratio with materially improved to 23.4% from 24.3%. This is much better than what we anticipated. The group is managing the cost very carefully. Growth in net interest income is better than what we originally anticipated because we were very worried about the hit that will come from Turkey. The hit took place but the group were able to manage the cost of funding much better than originally anticipated. And that's why positively reflected on the new guidelines. At the same time, we are not seeing major pressure on NPL. The conservative approach we have taken in the last 2 years are paying off now. And that's why we are anticipating that cost of risk will drop from the 80 basis points that we have seen last year. This can summarize how we are looking for the year 2021.

We will now take the next question from Naresh Bilandani from JPMorgan.

It's Naresh Bilandani from JPMorgan. Mr. Ramzi, just 2 questions, please. One is, if I take a look at the presentation, you've kindly highlighted that the mix of U.S.-denominated -- U.S. dollar-denominated loans has increased to 61% compared to 55% at the end of the last year. If you can please throw some color on what drove this change in the mix, and if this could have any impact on your net interest margin given the rise in the U.S. bond yields? That's one. The second is, my question is on the Qatari segment. If I take a look at the segmental financials, I see that the fact that your investment growth has been flat -- overall lending growth has been flat, but assets have grown quite sharply. And now I assume this is probably sitting in excess liquidity because of the loan maturities that you saw in the first quarter. Do you believe that this could potentially offer a positive surprise in the domestic segment loan growth in the latter part of the year, given that we have seen a very solid start in the public sector loan book as we are seeing at the system level?

Absolutely. I will tackle your second question first. The mix in the balance sheet, of course, materially changed in the first quarter because the liquidity in the group was materially better. I've been in the bank now for more than 21 years. I don't recall when our loan to deposit ratio was at 96.1%. But I need to tell you, as a CFO, I'm not very fond of 96.1%. I think a normal ratio for a bank at our size should be between the 98% and 99%. Why? Because I need to have the best trade-off between a strong liquidity and a strong profitability. 96.1% definitely impacts net interest income for the group. This liquidity was reflected on the growth that we have seen on cash and due from banks, which grew from 24 -- grew by 24% from March last year and 12% from December. So major increase in cash and due from banks, which have a major small margin, which does not exceed 25 to 50 basis points, in terms of margin. And that's why I said I'm optimistic because I know that the pipeline for loans is materially stronger. This will be reflected on a much stronger growth in loans second, third, fourth quarter, and that's why we are going to move growth in net interest income from 2%, which we have seen in first quarter to around 5% to 7% by year-end, which will help overall net interest income for the group. Now in terms of mix of loans in terms of currency, I mentioned that we have 2 loans maturing in March, both amounting to around QAR 11 billion. Both of these loans were Qatari riyal loans. And at the same time, some of the loans that we gave during the first quarter were dollar-based because they were given to some companies that enjoy a cash flow in dollar. And that was the reason why the mix changed. Going forward, I think we will go to -- we will go back to where we started the year in terms of the overall mix.

[Operator Instructions] We'll take the next question from Hootan Yazhari from Bank of America.

I wanted to maybe delve a bit deeper into when, in particular, you felt the cost optimization was most effective and where you take the most encouragement in cost control? And what the outlook is for your cost base going forward, given activity hours are picking up again? Are you going to start to see a resurgence in cost pressures? Or do you think there are further cost optimization projects that you can undertake to continue the favorable trend in cost-to-income ratio through to the end of the year? My next question is with regards to the M&A market. Obviously, a lot of fallout last year. Valuations in the banking market have become a lot more attractive. How are you thinking about M&A at the moment? Is this still in the agenda? Are you closer to doing something? Are you less inclined to do something given the risks have also changed commensurately. Would just love to get your thoughts on your views with regards to QNB and M&A.

M&A is always on the table. However, we are extremely careful at this stage because we know that the amount of risk that all banks are facing. So doing a proper due diligence at this stage might not give you the perfect result. And that's why -- even though it's always there in the back of our mind, but definitely it's not a priority at this stage. And that's why am I looking at anything today? No. The focus is now on the group, increasing the efficiency of the group and managing the risks that still we're seeing especially in international operations. This is priority #1 at this stage. In terms of cost control, one thing that we have benefited from COVID-19 is vitalization of digital channels. Definitely, we materially benefited from what we have invested in the last 5 years in digital channels in shifting many of our customers to these channels instead of going to branches. That's why there was a material drop in number of branches in Turkey. We were -- we closed around 50 branches. There was also a material drop in the number of staff in Turkey. We limited the growth in number of branches in Egypt because now, again, we want to focus more on digital channels in Egypt. And there will be new initiatives that we will announce in Egypt very soon that will show to what extent we are giving this importance, especially in the Egyptian market. In Qatar, again, different initiatives have been taken in terms of the number of manpower, focusing our investment on digital channels, reducing number of branches. All this added up to where we see cost to income ratio. This initiative is a continuous process. And shifting more and more customers to our digital platform will increase, and we have seen that the acceptance of the customers to these platforms is much stronger today than it was 12 months ago, which help us -- which is helping us and encouraging us to invest more in these channels in order to generate more business through these channels that will allow us to go back and rethink our cost again to -- with the idea to reduce this further.

Understood. Very clear. Just on the -- your lack of appetite for M&A. One of the areas maybe you can address is your strategy with regards to the Saudi market. And what you're thinking there, obviously, given the opportunities that could potentially be emerging for you and the huge demand for capital in that market? How is QNB looking at the Saudi market? And could that potentially be something that you would look to do M&A and if the opportunity arose in the future?

Doing an M&A in the Saudi market with the limitation on foreign ownership will be extremely difficult. However, the Saudi market is extremely important for QNB. We already have a license for a branch. The branch is there -- started there. We are now moving very quickly in order to start operation in Saudi Arabia again. We are very optimistic about Saudi market, and we believe it will be one of the most important markets that we are going to have going forward after, of course, Qatar, Egypt and Turkey. However, doing an acquisition in Saudi Arabia, I don't see that happening because, as far as I remember, the maximum ownership you can have is 40%. So I don't us -- as we always said, if QNB is going to be interested in anywhere, in any market in the world, we would only interested if we can get 50% and above to allow us to consolidate, and this would not be -- this option is not available in Saudi Arabia.

As there are no further questions, I will hand the call back over to your host for any additional or closing remarks.

I want to thank everyone on the phone call. Ramadan Kareem to all, and hopefully, we will see you in the conference call in the second quarter. Enjoy the rest of the day.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.