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

Hello, everybody, and a warm welcome to QNB Group First Quarter 2022 Financial Results Conference Call. My name is Bethany, and I will be your operator today. [Operator Instructions] I will now hand over to your Arqaam host, Jaap Meijer. Jaap, Please go ahead.

Thank you, Bethany. Good afternoon, everyone. Thank you for joining us today. This is Jaap Meijer, the Head of Research at Arqaam and on behalf of Arqaam Capital, I'm pleased to welcome you to the Qatar National Bank's Q1 2022 Earnings Conference Call. I have with me here today from QNB management, Mr. Ramzi Mari, the group Financial Officer; Mr. Noor Mohammad Al-Naimi, General Manager, Treasury; and Mark Abrahams, Assistant General Manager, Trading and Treasury. We'll now turn the call over to Mark Abrahams. Mark, over to you.

Thank you very much, indeed, Jaap from the Arqaam team for hosting the call today, and welcome, everyone, for our call. Before we begin, it's very important to mention, please, this call is for analysts and investors only, and any media should please disconnect now. I will begin by giving an overview on macroeconomic environment in Qatar, then I will cover QNB's financial results for the quarter ended 31st of March 2022. And finally, we'll open the floor to questions and answers. Qatar was one of the least affected countries in the world by the economic effects of the COVID-19 pandemic. This was in large part due to the effective management of the economic support measures launched by the Qatari government and the Qatar Central Bank. As a result, the economic recovery is in full force, while the banking sector remains resilient, presenting significant growth, ample liquidity, adequate levels of capitalization, high asset quality and robust profitability. 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 Center's Purchasing Managers Index has been indicating expansion since July 2020 and has even accelerated in recent months, reaching 61.4% in February of this year. This signals sustained improvement in business conditions. Kicking off in November, the 2022 World Cup will be the largest event ever hosted in the region, and will boost economic growth across the economy, particularly in transport, communication, media, hospitality, retail trade and other service sectors. In the medium term, tailwinds from investment in increasing hydrocarbon production will drive economic growth, with 6 new LNG trains planned that will increase Qatar's LNG production by 64% to 126 million tonnes per annum. Positive spillovers from increased hydrocarbon production will combine with diversification efforts and structural reforms to boost economic activity and spending in the manufacturing and service 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 a strong 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 financial results for the quarter ended 31st of March 2022. Key financial results were as follows: net profit was QAR 3.6 billion or USD 1 billion, up 9% compared to first quarter of last year. Robust revenue growth resulted in an increase in operating income to QAR 7.7 billion or USD 2.1 billion, up 16%, demonstrating QNB Group's success in maintaining growth across the whole full range of revenue sources despite market volatility. As a result of higher revenue growth, QNB Group has continued to reduce the cost-to-income ratio downwards, from 23.4% in Q1 of last year to currently 20.8%. Total assets are at QAR 1.108 trillion or USD 304.5 billion, up by 6% from March 2021. This was driven by growth of 6% in loans and advances to reach QAR 763.2 billion or USD 209.6 billion. The QNB Group remained successful in attracting deposits, which resulted in an increase in customer funding by 5% from March 2021 to reach the current level of QAR 788.1 billion or USD 216.5 billion. This has improved the group's loan-to-deposit ratio to 96.8%. 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 very 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 123%. Total equity increased to QAR 97.9 billion, up by 5% from March 2021. The bank's capital adequacy ratio stands at 18.9%, comfortably higher than both QCB and Basel III requirements. The group is well capitalized and comfortably exceeds other regulatory ratios. I will now open the floor to questions and answers. Thank you.

[Operator Instructions] Our first question comes from Rahul Bajaj from Citibank.

Really, 2 questions from my side. The first one is on margins. And if I recall correctly, you talked about a gradual sort of 2 to 3 basis points kind of compression in margins over the next few years per annum. I just want to understand, how do you think about margins now in Qatar, Turkey and Egypt, the 3 main geographies, with the rate hike, kind of the rate projection that we are not talking about, 6, 7, 8 kind of rate hikes this year? And how do you think that will kind of pan out on your margins, specifically in Qatar, but also in Egypt and Turkey, where we are also seeing rate hikes, especially in Egypt? So that's kind of my first question. My second question is on the kind of loan momentum that we saw in the first quarter of the year, corporate lending growth appeared to be pretty weak. I'm assuming there are a bunch of repayments happening there. Just wanted to understand how is the outlook for kind of lending growth on the corporate side and also, kind of on group level? Do you expect these repayments to continue for the remainder of the year? Thank you.

Margins in the first quarter was much stronger than we had anticipated at the end of last year, considering the progress in interest in Turkey and Egypt and in Doha, and in many other jurisdictions where we operate. And that's why we've seen margins increasing by 2 basis points from 247, 249, which is a good momentum, which we are hoping to continue. We always said that an increase in Fed rate by 100 basis points will have a positive impact on net interest income of around QAR 500 million. Of course, there's many factors because this is a model-based calculation. But in reality, there are many factors can impact the net added value of an increase. But definitely, there will be major added value from the increase in interest rates in Qatar or in most of the countries where we operate, considering the structure of the balance sheet that we have built. Based on this and based on the expectation of more than 2 hikes, because in the budget, as I said in December, is that we budgeted for 2 hikes. Now, we are seeing or expecting more than 2 hikes, actually, much more than 2 hikes. But on this, we expect margin to grow this year. The extent of the growth, we need to wait to fully calculate the overall impact. But I can say today -- but I will not be surprised if we see margin growing by 5 to 7 basis points by end of this year, which will be very positive to the overall operating income for the group. Loan momentum, I agree with you, it wasn't as strong as we wanted it to be. Egypt and Turkey continued to show a good number. In Qatar, we haven't seen the growth that we wanted it. We always knew that when the state or oil prices come down, the states need to borrow and QNB benefit. When oil prices and gas prices are high, the state will become very liquid. And some of the loans they have used -- they have borrowed during low oil prices will be repaid, which is natural. We know this. We expect this to continue, but -- we have seen this about 4 or 5 years ago when oil prices were close more than $100. And QNB at that time shifted focus more to international expansion in terms of loans. Now -- and this is probably what we are going to do now. You are going to see more growth in loans coming from international markets to compensate the low growth in loans in the public sector in Qatar. The private sector will continue to be growing. The momentum of growth, we need to wait and see. So in summary, the guideline for loans that I gave at the beginning of the year, which I was talking about, 6% to 8%. Today, I would say it's around 5% to 7%. It's lower by 1%, which is a big number at the group level. As the second issue that we have to realize that the devaluation of 15% in the Egyptian pound impacted the growth of the balance sheet. So when you look at an absolute number of growth in loans, the devaluation, whether it was even in Turkey or in Egypt, impacted the overall growth in the balance sheet during the first quarter. But still, I agree with you that the overall growth in loans, it wasn't as we anticipated at the beginning of the year. Thank you.

[Operator Instructions] Our next question comes from Waleed Mohsin at Goldman Sachs.

A couple of questions from my side. The first one, if you could please talk about what impact you expect from the devaluation and the -- and I would say, the rate hike as well. I mean, you talked about the rate hike impact, but the impact of devaluation on the Egyptian business, both in terms of asset quality or capital and loan growth. And how should we think about the recent developments in Egypt impacting your business? Secondly, on the same question, things seem to have, at least from the outside, normalized in Turkey, currency has been stable and there's been some depolarization in the deposit market. But your thoughts on that front, what's happening on the ground in Turkey? Both in terms of liquidity would be very useful. And finally, Ramzi, if you could please provide an update on your guidance? I mean, you talked about loan growth, but some of the other items like credit quality, et cetera, especially given that we see that you've built up NPL coverage again during the first quarter. There was a small move in Stage 2, but it seems that overall coverage has been strengthened again during the quarter. So your guidance for the year, especially on cost of risk will be very helpful.

I will start with guidance because this one will answer -- we'll give some answer to the first and second question on Egypt and Turkey. Now, in terms of overall guidance for the group, balance sheet, we expect it to be 5% to 7% with that was asset loans of deposits. Profit and loss will be 7% to 9%. In terms of Egypt, no major change from what was the guideline I gave before. Asset, 12% to 14%, loans, 11% to 13%, deposits, 12% to 14%, profit and loss, marginally higher, 18% to 20%. Now, Turkey, definitely, there are major change in the guidance, considering the number that we have seen. In assets, we now move to 30% to 35%; loan, 35% to 40%; deposits, 35% to 40%; and profit loss, 65% to 70%. And it could be even higher than that in profit and loss. So definitely, there are a positive movement on the guidance for Turkey. Egypt is close to the same. And for the group, the balance sheet guidance very marginally lower, whereas the profit and loss is still the same. Now, in terms of the devaluation and the impact on loans, of course, it's still too early to mention. However, the coverage ratio in Egypt, which we always had more than 100%, clearly showed that we wanted to be very conservative in how we manage our business in Egypt. Today, we stand at 110%. This is the ratio we want to keep. NPL ratio marginally grew from 3.4% to 3.5%. I expect it to grow even a little bit higher. But overall, coverage ratio will continue to provide a buffer and protection for the group. We have seen good momentum in terms of business and growth in loans, much better than last year. We have now a new management that clearly show a strong momentum in how they are managing the business, especially how they are managing the overall margin for the group. They are giving much more focus on retail business, which is something we wanted all the time. Margin is extremely an important factor where they focus. The way we are managing cost is also very beneficial for the group. Today, in the first quarter, we have seen cost-to-income ratio materially dropped from 28% last year to 24.5% this year. So from the way that numbers are being developed in Egypt under the new management, we are seeing good momentum, which definitely, we hope to see continue. The growth number this year will be much better than last year. Return on equity will continue to be strong. Cost of risk will be materially higher than last year, because this is the momentum we want to keep in order to ensure that the coverage ratio continues to be strong. Finansbank, definitely, with the market that we are seeing. I cannot say it's stable, but I'm sure -- but what I can say that we are used to what we have seen. And management in Turkey, as I mentioned before, it is something that we have lived with for the last 20 years, so they are used to it and they know how to manage it and the way they manage the overall hedging of the balance sheet, ensure that they are protecting themselves against any changes. We are seeing -- we have seen extremely strong progress in numbers in Turkey. We have seen margin materially growing close to double. And we expected this, to be honest, because interest last year, in the first quarter was extremely weak, and whereas it started to progress in the third quarter of last year, fourth quarter was materially better. First quarter of this year was a continuation of the momentum that we have seen in the fourth quarter last year, which is very good. This will continue, and we expect interest in Turkey to continue to be strong this year, and we need to give credit to the team in Turkey who were able to manage the overall structure of the balance sheet, whereby they will benefit from the situation that we have today. Again, cost-to-income ratio in Egypt materially improved. We've seen a drop from 35% last year to 28% this year, which is, again, a good momentum in terms of how we are managing the overall operating income. NPL dropped from 3.22%, coverage ratio materially improved from 122 to 129. So we can summarize by saying Turkey business this year is a very good story, a good momentum. We have seen the decisions that we have taken as executive management last year and the way we structured the balance sheet, we are now gaining from the hedges that we have built, and we hope that this will continue for the rest of the year. In the overall, for the group, we have seen a much stronger growth in overall operating income. I was talking about 10% to 12% of operating income growth. Now, we are seeing 16%. This is very strong. And this is pushed up to increase cost of risk, and this should not be a surprise to them -- to analysts, because I always said is that if we see operating income growing stronger than we anticipate, the only way for us to be able to manage the overall growth in the profitability is by pushing our cost of risk a little bit higher. And that's why, cost of risk moved from 92% to 97%. And the overall result is that we were able to increase our coverage ratio from 117% last year to 123% this year, which is very good. The only issue that I'm going to have in the coverage ratio is that the resistance of the external auditor on this ratio. Because based on the standard, the coverage ratio should not be more than 100%. However, at this very high ratio, clearly shows that there's not something not correct. You are being too conservative and you are building provision on nothing, which they will not accept. This will push me gradually to increase NPL ratio, because this is the only way for me to manage the coverage ratio, is by pushing NPL ratio higher. NPL ratio in the first quarter stood at 2.3%, the same as 2021. I think this will be marginally -- start to grow in order for us to be able to manage the overall coverage ratio. I will not -- surprised if we see it at 2.5% by end of this year. Waleed, I think this is a summary of the 3 questions together.

No, that's perfect. Very clear, Ramzi. Just one thing. So the -- if the NPL ratio moves up as you stand today, you would expect it to -- Turkey to be the driver or Egypt to be a driver?

Turkey will not be the driver for NPL this year. I think the bulk of that of the driver will be -- Egypt will never be able to contribute the number that I need to manage the coverage ratio. I think it will be the bulk will be from Doha and partially from Egypt, but not from Turkey.

Got it. Thank you much, Ramzi. Very helpful. Thank you.

The next question comes from Edmond Christou of Bloomberg Intelligence Research.

Just a follow-up on the cost of risk. If I hear correctly, you said the cost of risk will be materially higher than last year. And I do understand the concept of building a buffer on the Stage 3 and the limitation from auditor. But I'm a bit surprised that 2.5% is the level you are targeting by the end of the year, not 3%, which I thought it will give you more room to build more buffer. And the NPL of Qatar, this is mainly driven by specific sector where you see the risk proactive downgrade for you? And how much it takes in terms of time for this NPL to go back to stage 2 and stage 3? What is the progress there? The second question I do have is on Turkey. So when you talk about the loan growth of 35% to 40%, if I'm correct, is this organic growth? Or it's a conversion of dollars into Lira loans? I just want to understand how much of that is organic and inorganic. And the last question is on the cost of funding. When I look at the dollar spread for debt, it's around 100 basis points. It hasn't picked up regardless of the tapering or how [ quick ] Fed and interest rate rises. Expectation, I think the oil prices probably has helped on this. So do you expect more assurance on that this year? And how do you see the energy prices and the excess of liquidity within the government helping the cost of funding a local market of Qatar? And what's your expectation on the cost of funding in Turkey? Sorry for asking few questions.

To be honest, you ask some question, some of them is economy, some of them is financial, some of them is liquidity, and I will be honest with you that I got lost. I prefer that to you ask 2 or 3 questions whereby I can focus on them. In terms of the overall issuance that we expect, I will let Mark answer this.

Certainly, Ramzi. Can you hear me, Edmond?

Yes, I can hear you.

Okay. Yes, in terms of issuance, we've got a relatively light refinancing profile this year in light of the volatility of the markets and in line with what I've said before, we are very opportunistic this year. We always have been, we always will be. We don't have a requirement to do x amount per quarter. We never have done. And that's not the way we run wholesale funding. So we have a very, very strong, healthy dollar liquidity buffer. That's even increased for reasons that you said, obviously, because of the current situation, the elevated hydrocarbon pricing. We are finding more significant revenue coming into -- at a sovereign level. Obviously, that is filtering down to the banking system, QNB is a major part of that. So from a dollar liquidity point of view, we're particularly comfortable at the moment. And we remain very opportunistic, indeed, in terms of where we would issue in the future. If we see a window, we can move very quickly. But at the same time, if we feel that spreads are widening out, that overall cost are more expensive, that it's not a market that's good for issuance, you will not see QNB in the market. So I think to summarize, a very healthy liquidity position in riyals and in dollars, as well as the revenues from the state of Qatar. We're also seen to be a preferred safe haven, if you like, for funds on a global basis. So we're being very selective, indeed, taking high-quality, longer-term money, selectively at very, very fair pricing. And then the last part of the issuance piece, I think, again, is that we also run, as well as coming to the market in the public space, we are -- we're an active bank in private placements, too. And that's a major piece of what we do. And because of that being very proactive for QNB, that also further decreases the need for us to go to the market.

Okay. Very helpful.

Going back to your question, Edmond. Turkey, very quickly. This is organic growth. The question about the cost of risk and the growth in cost of risk and how we are going to manage Stage 3, Stage 2, Stage 1. Now, for me to push into the average of 3%, I need to have the best trade-off between managing the NPL ratio, managing the coverage ratio, managing the cost of risk and not showing weakness in the overall portfolio of QNB. If I push the ratio from 2.3% to 3%, many people will look at this, even valeting agencies, as weakness in the book, which will put me under pressure. So that one, I need to overall, manage the growth in NPL in a way to ensure that I manage the coverage ratio without giving a wrong idea to some people that there is weakness in the book itself. So some of the loans from -- will move from Stage 2 to Stage 3, even though they don't need to because I need to manage the ratio. But at the same time, I need to be careful about to what extent I use that tool to manage the coverage ratio. Number two, when these loans that are Stage 3 can move back to Stage 2 or Stage 1, it really depends account by account based on the conditions that we are going to have. But definitely, we are going to see some of these move directly. What -- the way we need to manage that is that -- is to continue to push for a stronger operating income. We're still optimistic that this year will be a very -- a strong year in terms of operating income, which will give us even much more room to increase some of the provisions that we need to take. So I really need to look -- we need to look at this on a quarter-by-quarter basis based on how we are seeing the progress and the operating income. And based on this, we will manage the cost of risk and the overall NPL ratio. I -- hopefully, I was be able to answer the question but [indiscernible].

Yes, very helpful. So I think it's -- I'm correct to assume that Stage 3 is likely to pick up, and you will build a buffer on that as well? You will be strengthening it, as Stage 3 pick up, now, it's about [ at 1% ] .

It will pick up, but it will always depend on how I'm going to see the coverage ratio progressing.

Okay. Sounds good. Thank you appreciate it. Thank you.

The next question comes from Aybek Islamov at HSBC.

Yes. I wanted to ask you about Egypt. So it looks like your subsidiary in Egypt, they had to revise down their dividend. I believe it's upon the recommendation of the Central Bank. Can you please elaborate on the Central Bank action? I think your subsidiary was not the only one to receive that recommendation from the Central Bank of Egypt. Secondly, on the loan growth, well, the start of the year, a bit weak, but when do you expect the loan growth to recover? Is it second quarter? Where do you see the pipeline today, excluding repayments? That's my second question. Yes. That's it.

Aybek, I will start with the second question, which is long. It is extremely difficult for us to project the progress in loans quarter-on-quarter, because it's highly impacted by the action by the State. If oil prices continue to be strong, we will see more drop in the overall exposure to the government, which will impact the overall growth in loans in the group. As I mentioned, you are going to see more growth coming from overseas operations, our branches in Singapore, London, Paris, Kuwait, Oman, of course. But these growth will never be able to compensate any material drop that takes place from the State. So for me to give you a number now, I might be wrong in the longer term because it's highly dependent on actions taken by a party that we cannot control. But the momentum that we are seeing today in loan is not as we have expected in -- when we built the budget. And that's why the guidelines came down from 6% to 8% to 5% to 7%. In terms of Central Bank action and any comments on this, to be honest, I'm not used to comment on actions or recommendation by Central Bank. The drop in dividend that took place in Egypt are based on different factors. It's not only Central Bank of Egypt who will tell us do this or don't do that. At the end, the most in the priority is what is the best QNB ALAHLI. And this is how -- this is how the decision was taken. Capital equity ratio in Egypt today stands at 22.5%, last year it was 22.8%. Considering the momentum of growth in loans that we are seeing, we really need a stronger capital in Egypt because it allows us to continue to grow more than 12% to 14% in loans year-on-year. So whether this the same decision will be done for other banks, I really don't know and I can't anticipate on that.

Yes. Very helpful.

The next question comes from Naresh Bilandani from JPMorgan.

Naresh Bilandani from JPMorgan. Three questions, please. One is, if you could please comment on the improvement in the delivery that we have seen in income from associates since we don't have a detail from the associate investments in the first quarter and the good delivery we have seen, that will be helpful if you can please throw some light there. That's the first question. Second is just to follow up on the question that Aybek posed on the loan growth. I mean, going into the later part of the year into Q4, should we anticipate any temporary pickup in the loan growth given the event that -- the FIFA event that we are going to see in the country? Or will it just be more economic momentum, but not necessarily translating into growth? Even if temporarily, I'm just trying to understand how should we think of the later part of the year from a balance sheet perspective? And the third question is, if you could please throw some light on the point where you mentioned that you would look to increase the NPL/Stage 3 ratio. How does one go about doing that? I know in some of the systems, there's a regulatory requirement that if a loan stays in Stage 2 for a certain period of time, even if it is performing it has to be moved to Stage 3. But just keen to understand this point better from you.

Okay. We start with associates. Income from associates come mainly from 3 parties: HBTF in Jordan, PTI and CBI. They are three, if you look at the individual numbers, they showed materially strong growth in profitability, 2021 versus 2020, and this, of course, will reflect in terms of the numbers. 2020, all of them were highly impacted by the corona virus. '21 was much better for them, and we have seen good progress. Some of them even showed double the number of profitability that they have shown in 2020. In terms of the World Cup, do you expect loan growth in fourth quarter to be higher? Not really. Because any project or any investment that the country needs to do for the World Cup, it had to finish maximum by the second quarter of this year. And that's why I don't see a pickup in the fourth quarter loans just because of the World Cup, because I don't see the relationship between the World Cup and loans. And all projects related to the World Cup or any borrowing related to the World Cup would have been done much earlier than the fourth quarter. NPL. For me to classify a loan on NPL, there is maybe 10 or 12 criteria defined by Central Bank regulation where it shows to tell you when you need to move along from Stage 1 to Stage 2, Stage 2 to Stage 3. It's not only the days of past due. So you are -- you have a lot of room for you to move loans and to justify the movement of some loans to Stage 2 -- from Stage 2 to Stage 3. The regulator usually don't argue with you when you are conservative. They will strongly argue with you if you want to move a loan from Stage 3 to Stage 2 because you need to clearly show that the loan is stronger. However, for me to be conservative and move some loans from Stage 2 to Stage 3, because we have a reason, it's not need to be upon the past due, we can give you more room because every single central bank in the world, like any bank regulated by them, to be conservative.

[Operator Instructions] The next question comes from [ Leah Al Haig ] from Bloomberg.

I just have a question concerning the foreign currency translation reserve, there's a QAR 2.5 billion addition to that. I was just wondering how much of it comes from Egypt and how much of it comes from Turkey. And also, just my second question as a follow-up from before. So how much are you budgeting for the private sector loan growth for this year?

The translation reserve, 2/3 is coming from Egypt, 1/3 is coming from Turkey. The private sector, as far as I recall, I don't have the number in front of me, but I remember it was around 6% to 8%.

We have no further questions at this time, so I'll hand it back to the management team for any further remarks.

I want to thank everyone who participated on the phone. A good number in the first quarter. We are optimistic for the second quarter and for the rest of the year. And hopefully, that we will meet again with good numbers in the second quarter. Please enjoy the rest of the day and see you in 3 months' time. Thank you.

This concludes the QNB Group First Quarter 2022 Financial Results Conference Call. Thank you for joining. You may now disconnect your lines.