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

Good day, and welcome to the Qatar National Bank Fourth Quarter '21 Results Call. 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 Fourth Quarter 2021 Results Conference Call being jointly hosted by Citi Group and QNB Financial Services. On the call, we have QNB management team with us to give us view on the fourth quarter performance and also take investor and analyst questions. The group from QNB is led by CFO, Mr. Ramzi Mari. We also have Ms. Noor Mohammad Al-Naimi, General Manager for Treasury; and Mr. Mark Abrahams, Assistant General Manager of Trading and Treasury. At this moment, I will hand over the call to Mark to take it forward. Over to you, Mark.

Thank you very much, Rahul and the Citi team, for cohosting our Q4 2021 earning call today. Before we begin, I would like to highlight that this call is for investors and analysts only, and any media should please disconnect now. I will begin by giving an overview on the macroeconomic environment in Qatar. Then I will cover QNB's financial results for the year ended the 31st of December 2021 and then, finally, open the floor to Q&A. The ramp-up of preparations for the 2022 FIFA World Cup are driving a strong growth in Qatar's nonenergy private sector. Indeed, the Qatar Financial Centre's Purchasing Managers' Index has been indicating expansion since July 2020 and has even accelerated in recent months, averaging 62.3 in Q4 2021. Sorry, whoever's got the line open, can they mute it, please? This signals sustained improvement in business conditions. In addition, Qatar has clearly demonstrated its ability to combine a prudent fiscal policy with a large program of capital expenditure for the effective delivery of both the Qatar National Vision 2030 and the World Cup. Kicking off in November of this year, the World Cup will be the largest event ever hosted in Qatar and will boost economic growth, particularly in transport, communication, media, hospitality and other services sectors. World Bank estimates that Qatar's 2022 GDP growth is expected to be over 4%, the highest in the GCC region. Qatar has taken all necessary precautionary measures to protect its population and economy from COVID-19. Qatar's vaccination program has administered more than 4.7 million doses of the mRNA vaccines, with over 86% of the population now fully vaccinated and booster shots progressively being offered to the general population. This has helped Qatar significantly in reducing the impact of the pandemic. In the medium term, tailwinds for investment and increasing hydrocarbon production will drive economic growth, with six new LNG trains planned that will increase Qatar's LNG production by 64% to 126 million tonnes per annum. Importantly, the North Field expansion will make innovative use of both carbon capture and renewable energy to minimize carbon emissions and enhance sustainability. Positive spillovers from increased hydrocarbon production will combine with diversification efforts and structural reforms to boost economic activity and spending in the manufacturing and services sectors. Over the longer term, private sector growth will be further 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 entrepreneurship as well as self-sufficiency in strategic sectors. Qatar is, therefore, laying the foundation for continued GDP growth over the medium and long term through investment, diversification and stronger private sector growth. I will now move on to QNB's annual financial results for the year ended 31st of December 2021. Key financial results are as follows. Net profit was QAR 13.2 billion or USD 3.63 billion, up 10% compared to last year. QNB Group has continued on its operational rationalization exercise, which has resulted in reducing the cost-to-income ratio from 24.3% last year to 22.2%. Operating income has increased to QAR 28.3 billion or USD 7.8 billion, up 11%, demonstrating QNB Group's success in maintaining growth across the range of revenue sources even in these challenging conditions. Total assets are at QAR 1.093 trillion or USD 300.2 billion, up by 7% from December 2020. This was driven by a growth of 6% in loans and advances to reach QAR 763.7 billion or USD 209.8 billion. QNB Group remained successful in attracting deposits, which resulted in an increase in customer funding by 6% from December 2020 to reach QAR 785.5 billion or USD 215.8 billion. This improved the group's loan-to-deposit ratio to 97.2%. Despite several challenges and headwinds from the global pandemic, QNB Group was able to maintain the ratio of nonperforming loans to gross loans at 2.3%, a level considered to be one of the lowest amongst 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 addition, the coverage ratio on Stage 3 loans is at 117%. The Board of Directors have recommended to the general assembly the distribution of a cash dividend of 55% of the nominal share value, QAR 0.55 per share. Total equity increased to QAR 100.1 billion, up by 3% from December 2020. The bank's capital adequacy ratio, at 19.3%, is comfortably higher than both QCB and Basel III requirements. The group is very well capitalized and comfortably exceeds other regulatory liquidity and leverage ratios. We will now turn to questions and answers. Thank you very much.

[Operator Instructions] We will take our first question from Waleed Mohsin with Goldman Sachs.

Three questions from my side. Firstly, if you could -- Mark and Ramzi, if you could please talk about the international business, particularly Turkey. I mean what trends are you seeing on the funding side? And you clearly have taken incremental provisions, which seem to be Turkey-driven, so your thoughts on funding and asset quality would be much appreciated on the international business. Secondly, if you look at your coverage ratio, it's one of the best in the region, and you further boosted it during the fourth quarter. So we wanted to get a sense of when can we see normalized levels of cost to risk for the bank and what do you expect those normalized levels to be. And thirdly, if you could just update us on your 2022 guidance. You had provided some preliminary guidance at the third quarter results. But if you could provide an update, that would be very useful.

Look, Waleed, I think your first question on international business and the third question on the guidelines, I think they can go hand in hand. I will start with the last question, which is the guideline. Now based on the budget that was built and where we see the numbers are progressing, whether it was in Doha or international operation, the guidelines for 2022 will stand as the following. For the group as a whole, balance sheet, which is asset loan deposit, will be between 6% to 8%. For the profit and loss, it will be between 7% to 9%. All these guidelines will progress quarter-on-quarter based on what we are seeing on the ground. For QNB and ALAHLI, balance sheet will be between 12% to 14%, and profit and loss, 18% to 20%. For Finansbank, balance sheet will be between 21% to 24%, and profit and loss between 17% to 19%. So in summary, we still believe the main two home operation other than Qatar will continue to grow strongly, whether it was in Egypt and Turkey. Overall, growth for the group will continue in line with what we have seen in 2021, strong progress but steady progress, no surprises, whether it is positive or negative. Seeing -- or talking about the guidelines, I need to refer to what we have seen in the fourth quarter of 2021. Definitely, it was one of the best quarters that we have seen in the group for a very long period of time, which clearly shows the continued strong growth and the revenue stream of the group. And this is where we need to focus. Fourth quarter standalone, we have seen operating profit growing by close to 7%. Very strong growth in net interest income -- net interest income, the fourth quarter probably was one of the best in the history of the group. And we grew in one quarter by close to 7%. Overall growth in revenue was 6%. So fourth quarter 2021 gives us a very strong momentum for 2022, and that's why we are very optimistic that progress and revenue generation will continue in 2022 given the business continues at current level. And this will take us to the second question, which is the coverage ratio. If we recall what I discussed in the fourth quarter last year, when I talked about is that coverage ratio and cost of risk is materially impacted by the strength in revenue. If revenue continued to be very strong, this will give us more room to be more conservative, and this is exactly what happened during the fourth quarter. And that one, in the fourth quarter, we were able to materially improve our coverage ratio. And if we compare December '20 with December '21, coverage ratio grew from 107% to 117%. And this is a number that we don't see probably in any other financial institution in the region. This will continue as long we are seeing very strong growth in revenue. The group will continue to be conservative in provision, and this will continue as long as we see the market not stable. Impact of corona is still -- we are still seeing an impact in businesses, whether it was in Doha or in all other international operations where we are seeing. The number that we are seeing on NPL is much better than what we anticipated. Inflow of NPL is, again, much bigger than what we have -- we were expecting, but this doesn't mean that we should be relaxed. We will continue to be conservative. We will continue to be -- to build on the coverage ratio until we see the market going back to normal. Then this will give us room to be a little bit more relaxed. However, based on the revenue growth that we have seen in the fourth quarter, this will allow us to continue to be conservative and, at the same time, achieve good growth in profit and loss. And this is exactly where we want to be. I hope it answers your three questions.

Yes, Ramzi. That's very helpful. Just one follow-up and linked to the point about the international business. The 7% to 9% guidance that you've given for profits, that's -- there seems to be quite a lot of conservatism or prudence in that number. Is it the FX rate that you're assuming for Turkish lira, Qatari riyal? Is that where you're factoring in the prudence? Is it the provisions, as you said, that's where -- because I mean, if you look at the momentum, as you rightly said, in the last quarter, I mean, you had 6% revenue growth quarter-on-quarter. If I look at your year-on-year preprovision operating profit number, fourth quarter versus fourth quarter last year, you are almost 20% growth. So from that perspective, this 7% to 9% looks very conservative.

Very good question, Waleed. And this just takes us to a point -- a very important point that I wanted to highlight. So everyone need to clearly understand this point, especially in the quarter -- in the first quarter, where this point will be very clear. Last year, the average rate for the year in which we took Turkey Finansbank number were around 0.4. The average this year based on current exchange rate will be around 0.21. So technically, the contribution of Turkey to the group this year will be around 50% of what we have seen in 2021 and more importantly in the first quarter. The average rate we have used in the first quarter last year was around 0.55, whereas it will be 0.21 to 0.22 this quarter. So technically, the contribution of Turkey to the bottom line in the first quarter will not be more than 40% of what we have seen last year. And that's why this is a very important reason why we are talking about profit and loss 7% to 9% this year, whereas it should be 8% to 10% if Turkey number was normal. Saying this, you -- all the investors that have been following QNB numbers for the last 10 years and my guidelines for the last 20 year, all of you know that I tend to be conservative, and we build on this number quarter-on-quarter. But still 7% to 9%, with the impact of Turkey, is a very good growth momentum.

Got it. And then, lastly, maybe derisking, how you're dealing with the volatility in Turkey on the funding and -- the funding side.

Well, again, very simply, managing the process month-on-month very carefully, very conservatively. And one example of how we are managing this, if you look at loan-to-deposit ratio, the loan-deposit ratio for Finansbank in December was 96.5%. For Turkish banks, this is a number that is not known. Turkish bank tend to operate between the 120% to 125%. Now Finansbank is less materially -- less than 100%. And this is how we are managing the operation in Finansbank, very conservatively, very carefully, especially considering that no one knows exactly how this is going to progress. And that's why we manage even the growth in loans very carefully. We'll focus on short-term funding, Turkish lira funding in order to ensure that net impact on the operation is at a minimum. And this is what we have seen in how interest in the fourth quarter in Turkey was progressing. It was one of the best quarters in the history in Finansbank since we acquired them in terms of net interest income. This is how we want to manage the operations quarter-on-quarter, very carefully based on the conditions on the ground. At the same time, build on cost of risk, build on coverage ratio. We started the year with an average coverage ratio of 100%. We ended the year at 122%. So clear conservative approach in how we are managing the operations in Finansbank. Still, we were able to generate a return on equity of very, very strong of close to 20% on Turkey. Again, it's one of the highest return on equity that we have seen for our operation with Turkey since we acquired the entity.

And we will now take the next question from Chiro Ghosh with SICO.

Congratulations for a good set of results, especially the revenue part. So I have two questions. First is you have been giving a guidance that the net interest margin would be under pressure, but you have been fairly resilient, in my opinion. So if you can throw some guidance of how to expect things to pan out towards 2022 and onwards. Another thing is, again, related to Turkey. So I'm just trying to understand it better. So tactically, there are two options for you. One is to go with the USD-based loans. That will protect your value of the -- value of your investment. But then the probability of default by customer will be high. While if you lend out in Turkish lira, then the probability of default is low, but there is devaluation risk for QNB. So how are you trying to tackle this strategy? That will be interesting for me to know.

Okay. Net interest margin, we started the year talking about a drop of about 5 to 7 basis points. We ended the year with a drop of only 2 basis points, clearly showing that we were able to manage our margin much better than we had earlier anticipated. Good momentum from the team in treasury on managing our cost of funding, managing overall liquidity for the group. International operation, whether it was in Turkey or in Egypt, again, in the fourth quarter, were able to manage their net interest margin very, very, very efficiently. And I think all these factors materially help in maintaining our interest -- net interest margin at 247 basis points. What we see -- what we are seeing for 2022, to be honest, I'm optimistic about margin in 2022 because, as we always said, QNB is materially hurt when Fed rate is down, and we start to benefit when the Fed rate is going up. Now how much up, we need to wait and see. However, historical calculation show that 100 basis points can add around QAR 400 million to QAR 500 million of interest overall. But that number is materially impacted on how we are going to continue to manage our cost of funding and how we are going to be able to reflect the increase to our loans. Considering that most of our loans are floating, this gives us a very good indication that QNB will be able to benefit once rates have gone up. In the budget, we only anticipated because we have to be conservative, only two increases during the year. And in the late part of the year, with what we are seeing today, I think there will be more than two increases, and they will be much faster than what we anticipated, which give us again hope that our net interest margin for this year will be very strong. Now...

So this 7% to 9% includes only two rate hikes, right, if I understood it correctly?

Yes. Yes, 2 times, and later in the year. Now on Turkey, how we are able to manage the overall growth on the balance sheet, at the same time managing the devaluation. By taking the best trade-off, since the divergence started in Turkey 3 years ago, we tried to be as far as possible from the dollar loans because their hit on NPL will be huge. So we focus mostly on short-term Turkish lira loans and floating. At the same time, the hedging, all positions that we have in order to ensure that the impact on net interest income will be as minimum as possible when changes take place. And this is how we have been able to manage this by using the best trade-off that allow us to grow the balance sheet and, at the same time, to absorb as much as possible the impact of the devaluation.

Just the back-of-the-envelope calculation when I did, I found that the comprehensive income hit which you had to take did not include a very big amount of hedging, right? So the hedging benefit was not that significant. Am I right?

No, no, hedging is significant in Finansbank. Technically, Finansbank hedge everything in their balance sheet. They hedge the mismatch of the balance sheet. They hedge the mismatch in interest. They hedge their FX positions. And this is why they -- and if you look at the detail of their balance sheet and you look at the detail of their off-balance sheet, you will see there is billions of hedge provision that they have.

Okay. It's quite clear. I understood.

And we will now take the next question from Edmond Christou with Bloomberg Intelligence.

This is Edmond Christou from Bloomberg Intelligence. First question is on the staging downgrade into Stage 2. Can you just give some light on the -- which account, which region that moved the Stage 2 from 6% to 6.6%? And how do you expect this to evolve into next year? I believe you have been doing a lot of proactive downgrades and provisioning against it. Just some clarity on the guidance for next year on this. And the other one on the margin. Very strong margin for Q4. I sense from your conversation that you expect some normalization of margin into the first half of next year before we get the rate hike to filter into the margins in the second half of next year. So what's your expectation on the cost of funding? Will it still be supportive in Turkey? And what's your expectation on the cost of funding in Qatar, given the tapering that's happening and the expectation for rate hike by the second half of next year? The last one, if possible, on the CET1. Very strong capital generation, your CET1 moved from 13.5% in Q3 and to 14.2% in Q4. I'm not be able to reconcile this in terms off -- I did adjustment for dividends, and I added the profit as a cash generation, but I'm still not able to bring the number close to each other. If you can walk me through what is the impact on the lira there and also your capital generation, if there is any one-off.

Now on the last question, Edmond, I don't think I will be able to give you details on the breakdown on the phone. I will let one of the team in financial control to send you the exact calculation of the CET1 on the fourth quarter. Now in terms of margin and cost of funding, please understand that these two go together. We manage interest-bearing liabilities and interest-earning assets still at the same time. So you cannot take them in isolation. What is important here is that how we are -- to what extent our funding or our asset is floating. Clearly, the bulk of this is floating, and that's why the impact of an increase on the Fed rate is material, and it is positive. With the higher the Fed rate in movement, this will add more value to our overall margin. And that's why I anticipate this year, our margin will continue to be strong. And I'm optimistic that we will hopefully be able to maintain the 247 basis points. On the staging, again, if I want to be conservative on Stage 2, I need to move from account to Stage 2 to allow us to take more provisions. Otherwise, Central Bank and our external auditor will not allow this to happen. But some of the movement in the staging from Stage 1 to Stage 2 and even to Stage 3 is, again, to be conservative. But, again, at the same time, we are seeing some accounts, especially at the SME side, will show delay in some payments. And that's why we need to do some staging. What is my expectation in 2022? Again, it highly depends on how strong our revenue will be. If revenue continues to be very strong and cost of risk will be around -- between the 75 to the 85 basis points, that means more staging need to be done. Otherwise, I would not be able to achieve that 75 to 85 basis points of the cost of risk. How -- what is the percentage of Stage 2 to the overall book? Will it continue to be around the 6%? I think it will be more than 6%. I think it could reach 7.5%. But again, all these are a reflection of how strong the revenue momentum will continue to be, how the business will cope quicker to life beyond COVID, but let's wait and see how the progress will be quarter-on-quarter.

Okay. This is very helpful. On the margin for 1H, do you see a lower margin on Turkey or you still expect low cost of funding to be supported?

On where -- sorry, Edmond -- where?

In Turkey -- and the low cost of funding in Turkey, do you expect it to be supported for 1H margin the first half of this year?

From what we have seen in the last quarter, I think first quarter will be -- continue to be strong. Second quarter, we need to wait and see how the progress will be in the first quarter. But fourth quarter margin will continue to be very strong in Turkey.

[Operator Instructions] We will now take the next question from Aybek Islamov with HSBC.

Yes, three questions, if I may. So the first one is I was curious: in a scenario that 10-year U.S. yields rise materially and they started to rise from end of last year, how do you think that will -- may impact your cost of funding, your wholesale funding costs? So if U.S. yield curve also steepens, how will that impact your sort of NIM position? That's my first question. And the second question is...

Sorry, just for me to understand this question, again, you're talking about the Fed rate movement and how to impact -- how it will impact margins?

No. So Fed rate is a short-term rate, right, so we're thinking about Fed rates as short-term 3-month rates. But these are long-term interest rates, like 10-year interest rates, U.S. treasury yields, 10-year yields I'm talking about.

The impact is -- the impact of this is very, very small because most of our loans is maximum 6 months in terms of repricing. So what is important to us is, number one, 3 months, and second, 6 months. More than that, it's not that important.

But on the funding side, is there any sort of type of funding, maybe CDs or long-term wholesale notes, which are sensitive to 5 years, 7 years [indiscernible].

No, we don't have those. What we have is mostly what is important here in terms of materiality. You'll always have some of this, but these are very, very, very small. You have the EMTN one, the EMTN one, which is mostly fixed, and so you will benefit from this. But again, we talk about a balance sheet now of $300 billion. So all this, let's talk about $15 billion to $20 billion, so not [ 50% ] of them are fixed. So technically, even though there will be a major benefit, but the overall materiality is not that -- the bulk, 90% of the funding is 3 months, maximum 6 months in terms of repricing. CD is very, very -- it's even -- the bulk of it is even 1 month in terms of repricing.

Okay, okay. Yes, yes, that's very clear. I'll move to the second question. So I mean you mentioned several times that revenue growth will continue to be strong in 2022, which is great. In terms of -- you said that you will set aside some of your revenues for provision reserves, loan loss provision expenses. What about operating costs, do you see any areas where you feel like you need to increase your OpEx? Any sort of CapEx plans on the operating cost side?

Okay. And the last question?

And the last question, I just want to know your view on the return on equity outlook. Do you feel that in a scenario of rising interest rates and very good provision coverage, can you improve your return on equity 100 basis points, 200 basis points? We can take a 2-, 3-year view here.

Thank you. The second question about operating costs, cost-income ratio during the year materially improved: 22.2% from 24%. So there was a major drop, about 200 basis points in expense ratio, a very strong performance, materially helped by international operations during the year. And how we managed our cost in those. Is this sustainable? I think I remember last time when we talked about it, I said 23% is more sustainable than 22.2%. We continue to manage very carefully our costs. And this is what QNB has done historically. It is extremely important to the group to maintain a very efficient operation because this allow us to be very flexible when hits come. And we saw this happen in 2008. We saw this happen in 2017, where there was shock, big shock in the system, whether it was international or local. Having a very strong efficiency ratio and very low efficiency ratio allow us to absorb these shocks and continue to well perform within the group. And this is -- that's why it's extremely important. Now is there -- to what extent we will continue to invest in CapEx? We were always very active in investing especially in our IT infrastructure in the group. This will continue, whether it was in Turkey, in Egypt or in Doha. But again, this investment will focus on profit generation projects and projects that will allow us to manage our growth in costs. Now going to ROE. During 2021, we were very successful in growing our ROE from 15.4% to 16.4%, so 100 basis points, which is very good. And this is a reflection of the growth in revenue and how we are managing our payout ratio. We could have grown this even higher if we wanted to move to a payout ratio of 50%. We want to continue to have a payout ratio around 40%. As long as we continue to grow the operations around what we have done during 2021, we are going to see our return on equity growing between the 75 to 100 basis points.

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

Mr. Ramzi, it's Naresh from JPMorgan. Just a few questions from my side, please. One is, sorry, coming back on the interest rates. Keen to understand in your numbers, what kind of policy assumptions are you building in from a rates perspective in Egypt and if you are expecting any policy changes in Turkey that could offer an upside or a downside risk to your current expectations? That's the first question. Second is on growth in Qatar...

Sorry, Naresh. Can you expand? Naresh, sorry, can you expand on the first question, please? Because it's not very clear to me.

Yes, please. Just trying to understand policy assumptions that you're building in in your -- so just to put it in other words, what quantity of rate hikes are you expecting in Egypt and if you are building in at this stage any potential rate hikes in Turkey over the course of '22 or these assumptions are based on the current policy situation as is? That's the first question. And my second question is on growth in Qatar. Over the course of '22 and '23, could you kind of provide some insight to what extent will the growth be driven by the gas infrastructure expansion until '25 and '27, as you've highlighted consistently over the calls, or based on incoming tourism and the activity around the World Cup? That would be super helpful.

Now in terms of the first question and what is our assumption about interest rate in Turkey and Egypt, in Turkey, it is close to impossible for you to build a 1-year budget. We run this on a quarter-by-quarter based on the condition on the ground. And that's why we don't tend to be long term in how we are expecting the changes on rates. The budget was built on the conditions that were available during fourth quarter of last year. Quarter-on-quarter, we continue to update these parameters, and the budget will be impacted by these changes. In Egypt, no major changes to where we stood in the fourth quarter in terms of expectations. We do not expect major changes on interest rates from where we were in the fourth quarter. So Egypt is more stable in terms of our expectation, whereas Turkey, definitely, we have to run this quarter-on-quarter. Now in terms of infrastructure projects, now if we take an update from what we'd published just recently on where investments will take place in Qatar beyond 2022, I will give you the most important project where we see more and more investment. We talk about Lusail City, and there was an expectation of close to $37 billion more investment there. We have the airport close to $18 billion further investment, and this is a project until '25. We have in the expressway additional $13 billion of investment; again, completion is '25. We have a local road and drainage, additional $18 billion of investment, and this is out until '26. Whereas for the Qatar Rail, close to $40 billion of additional investment, and this, again, will continue until '26. So overall projects that we talk about which is not connected with the North Field is close to $164 billion. And this will range from the year '22 until '26. So again, major investments in infrastructure projects across the board, whether it was expressways, ports, the airport, the rail, [indiscernible]. If we add the projects that will come ancillary to the North Field, we talk about more than $200 billion of additional investment for the next 4 to 5 years. This will give us a lot of room for growth because this is where we have participated very strongly in the last 4 to 5 years. Naresh, did this answer your question?

That's very helpful, Mr. Ramzi. I was more curious to understand, for the year '22, will the growth be driven more on the hydrocarbon and other infrastructure investments? Or will the growth be driven more by the World Cup-related activity? I think that was the question that I was much more curious to get insight on.

Direct World Cup activities was never an important added value to the operation. Most of the added value we got from the World Cup was the indirect one, the rail, the highways, the infrastructure projects, which is indirectly related to the World Cup, but they are not directly related. So we never participated in stadium. We never participated in -- very small participation in anything direct to the World Cup because the state doesn't need us to finance these projects, whereas we benefit from the indirect project, and this is what we'll continue in 2022. All indirect projects, especially the expressways, the highways, the phases that were supposed to finish in the port, we will benefit from these projects, Naresh, during the year. And this would be the main contributor to the growth in loans during the year more than the direct loan fee because, as I mentioned before, QNB participation directly in North Field expansion is very, very small because these projects tend to be very efficiently priced. And QNB don't participate in this deal because some of this will be less than 60 to 70 basis point margin. We tend to stay away from this project because they do not add value to our margin, whereas we materially benefit from all projects surrounding this project, which is indirect to this project. And this is exactly what we have done during the previous expansion of gas production in Qatar.

That's a very clear point. My final question literally is related to Egypt. Could you also please spare 2 minutes and just throw some light on what will be the growth strategy in Egypt? If you could please provide some key guidance on how the balance sheet will be in the 12% to 14% guidance that you have currently provided, to what extent will this be driven by credit versus the investment book? And if there's some credit, what sectors are you planning to sort of like -- or targeting to grow further?

In the last few years, we focused much more than other banks in Egypt, especially the private banks, in growing the credit. And that was on the account of the investment book. And that's why we have seen a loan-to-deposit ratio growing from around 55% to, at some point in time, 72%. If we have seen in December, the -- that ratio dropped to 61%. In December '20, loan-to-deposit ratio was 72%. It dropped to 61%. There was a little -- a marginal shift in the strategy. We want -- we continue -- we want to continue to focus on credit. But at the same time, investment is becoming very, very important for the group to maintain strong growth and profitability. We have changed management, and the changes that took place in management clearly show the direction we want to -- we are heading in the future in Egypt. We want a new blood. We want to focus on retail business. We want to focus on low funding, especially on the savings and current deposits. And that's why the bulk of the growth we have seen in the fourth quarter and in 2022 on funding will be on CASA. We will give more emphasis to the retail business. We will continue to expand our branch operation. We will give much more focus to digital expansion in terms of digital channels to grow the business. And this is where most of the growth is going to come in Egypt. And hopefully, this will answer your question, Naresh.

And we will now take the next question from Waruna Kumarage with SICO Bank.

I have a couple of quick questions, the first one related to the capital adequacy of Finansbank. What I've seen from the slides that the value of the equity has fallen from quarter-over-quarter. So if I look at the CET1 ratio, currently, are you comfortable with the level that you are in? And my second question is on the impact of foreign currency translation on provision. I think that's one reason why you had to provide a lot in the fourth quarter to counter the effect of foreign currency translation. Is this coming from -- I'm sure this is coming from Turkey, but -- so if that is coming from Turkey going forward, how significant is this foreign currency translation impact is going to have on provision going forward?

The first one on capital adequacy ratio. Now we started the year in Turkey with 13.8%. We ended the year with 15.8%. So technically, their capital adequacy ratio materially improved during the year. And one of the reason of this is definitely the size of the balance sheet because the devaluation reduced the size of the balance sheet. The equity is in Turkish lira, so it's not impacted by devaluation, and that's why they benefit. At current capital adequacy ratio, we still believe that the entity can continue to grow between the 20% and 22% as that we talked about. And that's why we do not see any pressure on capital adequacy ratio for the group. Now asset provisioning, how -- to what extent it contributes to the overall cost of risk in the fourth quarter, of course, it is a factor. Turkey, in the fourth quarter, was extremely conservative in the extent of provision that we have taken. And one of the reasons for that is they were materially enjoyed very strong growth in net interest income during that period of time. And that allowed them to build more on provisioning. If we look at the cost of risk in the fourth quarter, it moved from 126 basis points in September to 184 basis points in December. So there is a major movement during the fourth quarter, third quarter. And as I mentioned, again, we adopt in Turkey exactly what we are doing at the group level. As long as you are seeing very strong opportunistic growth in revenue because of how, overall, the system rate is going, this gives us a good opportunity to be very conservative in building more and more provision. And that's why we have seen a big jump in their coverage ratio during the fourth quarter.

And we will now take the next question from [ Manit Shaheza ] with Avalon Global Research.

Actually, it's a very nice presentation that you have given. On your Egypt operations, you have mentioned in the presentation right now that change of management has brought a very good low-funding business through retail and also, of course, focusing on CASA, which has improved your margins. But just to further highlight, [ ALAHLI's crisis ] continue with increasing your corporate exposure, though the Stage 3 loans that are corporate has increased. Is the management confident that these loans will not get further impairment in future?

Now when you grow your credit, this definitely will reflect on your Stage 2 and Stage 3. And we were very active in the last 5 years in growing our credit in Egypt. And it's natural after -- with the impact of COVID that we have seen an increase in Stage 2, Stage 3. At the same time, there was a major push by the regulator on supporting SME in Egypt. And you know that most banks were -- the contribution of SME were expected to grow to around 20%. This, naturally, in the first couple of years, will reflect on your Stage 1, Stage 2. However, what differentiates us from others is to what extent do you want to be conservative, okay? The strong growth or the strong revenue stream that we have seen in ALAHLI, similar to what we have seen before, allow us to be very, very conservative. Now let's wait and see whether other banks in Egypt will be as conservative as we were. It is a rule of thumb. Once you start to invest more and more on the SME, especially in the first phases, you will see a growth in your Stage 2 and, similarly, Stage 3.

Okay. So you are comfortable with your current provision ratio for Stage 3 loans or you could be seeing much more higher, from [ 7% to 6% ] going up?

Yes, I think in Egypt, the first 6 months of this year, you will continue to see continued growth in provisioning. But beyond the first half, the level of provisioning will stabilize.

And we will now take the next question from Valentina Stoykova with Barclays.

My first question is on QNB Finance. So can you please update us on the primary subsidiary status of the entity, given the volatility in Turkey? And more importantly, if we see assets falling below the 10% threshold of the group this year, will that automatically mean that QNB Finance will lose its subsidiary status? And then my next question is on your issuing plans for the year, both on seniors and sub-debt.

What is the second question, please?

Second question is on your issuing plans.

Issuing plans. Okay. I will let the team handle these questions. [indiscernible] maybe the first question. And Mark, can you [ handle ] the second question?

Yes, sure. No problem at all.

Yes, Valentina, for the principal subsidiary, as we would say, we refer to the prospectus, which says that this determination is done at the start of the year. And as we understand this determination would continue, of course, we don't know what will be the position of the currency during the year. So we will get back to you exactly what is the current percentage is. And at least for this year, we -- it continues to be a principal subsidiary. But as we always say, you have to refer to legal advice because it is specifically mentioned in the prospectus. Mark will take over the second question.

On the issuance side, on sub-debt, I don't think there's any plans to issue for QNB this year. On the senior side, I mean our stance remains the same as it's always been. We're very opportunistic. So we have no formal funding program per se under the MTN program. We have relatively light maturities during 2022, so the plan will be just to monitor the market closely, remain opportunistic both in dollars and other currencies. That's in the public space for large deals. But then also do understand that we remain very active indeed on private placements throughout the year. And obviously, depending on how that goes, that can mitigate our requirement to go to the market for a public deal in the way that last year was a very light year for QNB as well. So primarily opportunistic, no formal plans, but I think you can expect to see us in the seniors space at some point in the coming months.

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

Mark?

Rahul, nothing further from this side. Thank you very much, everybody, for your interest. And please stay safe. And we'll speak to you again next quarter. Thank you ever so much for your time.

Thank you, everyone, and have a good day.

Thank you very much. Bye now.

[indiscernible] today's call. Thank you for your participation. You may now disconnect.