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

Good day, and welcome to the QNB Group's Second Quarter 2022 Results Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Elena Sanchez. Please go ahead.

Thank you. Good afternoon, and good morning, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to QNB Group's Q2 2022 Results Conference Call. It is a pleasure to have with us in the call from QNB, Mr. Ramzi Mari, Group Chief Financial Officer; Ms. Noor Mohammad J. Al-Naimi, General Manager, Treasury; and Mr. Mark Abrahams, Assistant General Manager, Trading for Treasury. The call will begin with a presentation from QNB on the economic environment of Qatar and the recent results, Q2 results, and then we will open the floor for Q&A. I would like to hand over the call now to Mr. Mark Abraham. Please go ahead. Thank you.

Thank you very much, Elena, and the EFG Hermes team for hosting the call today. Before we begin, it is very important to mention that this call is for analysts and investors only, and any media should please disconnect now. I will begin by giving an overview of the macroeconomic environment in Qatar. Then I will cover QNB's financial results for the 6 months ended 30th of June 2022; and finally, open the floor to questions and answers. The ramp-up in preparations for the 2022 FIFA World Cup are driving 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 67.5% in June 2022. This signaled sustained improvement in business conditions. Ticking 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. Qatar's post-pandemic economic recovery is now in full force. While the banking sector remains resilient, presenting significant growth, ample liquidity, adequate levels of capitalization, high asset quality and robust profitability. In the medium term, tailwinds for investment in increasing hydrocarbon production will drive economic growth with 6 new LNG trains planned. 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 financial results for the 6 months ended 30th of June 2022. Key financial results are as follows: Net profit before the impact of hyperinflation was QAR 7.8 billion or USD 2.1 billion, very robust growth of 15% compared to the first half of last year. The accounting for a noncash hyperinflation adjustment impacted the profits. Nonetheless, and despite the challenging conditions, reported net profit after the impact of hyperinflation was QAR 7 billion or USD 1.9 billion, up 4% compared to the first half of last year. Robust revenue growth resulted in an increase in operating income to QAR 16.3 billion or USD 4.5 billion, up 20%, demonstrating QNB Group's success in maintaining strong growth across the range of revenue sources despite the strong market volatility. As a result of higher revenue growth, QNB Group has continued to reduce the cost-to-income ratio downwards from 22.9% in first half of last year to currently 20.2%. Total assets are at QAR 1.124 trillion or USD 308.8 billion, up by 6% from the same period last year. This was primarily driven by growth of 3% in loans and advances to reach QAR 766.1 billion or USD 210.4 billion. QNB Group remained successful in attracting deposits, which resulted in an increase in customer funding of 4% from June 2021 to reach QAR 794.8 billion or USD 218.3 billion. This improved the group's loan-to-deposit ratio to 96.4%. QNB Group was able to maintain the ratio of nonperforming loans to gross loans at 2.4%, 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 addition, the coverage ratio on Stage 3 loans is at 123%. Total equity increased to QAR 102.6 billion, up by 5% from June 2021. The bank's capital adequacy ratio at 18.9% is comfortably higher than both QCB and Basel III requirements. Just before we begin our Q&A, though we welcome all questions and we'll address them broadly. In the interest of everyone's time, we would suggest that any detailed questions on the specific intricacies of the application of IAS 29 and hyperinflation should be taken one-on-one with our Investor Relations team. We will now turn to Q&A. Thank you.

[Operator Instructions] We will take our first question today from Amit Mamtani of Goldman Sachs.

So I have 2 questions. Number one, it seems that the NIM trend is driven by Turkey, whereby the Turkish banks have benefited from wider lending spreads. What is your outlook here given that deposit costs have started increasing recently and spread should tighten? And number two, post solid core 2Q results, excluding the impact of inflation accounting. What changes are you making to your full year guidance?

Now at the beginning of the year, we talked about an increase in NIM between 4 to 5 basis points during 2022. And -- as of June, we are 3 basis points higher than December. By end of the year, we expect to be between 6 to 7 basis points from last year. So we are going to achieve a better number in terms of interest. I agree with you that some of that is impacted by Turkey. But at the same time, we are seeing an improvement in NIM at the overall level within the group. In terms of guidelines for 2022, after the impact of hyperinflation, balance sheet will be around 3% to 5% growth. Profit and loss after hyperinflation, 4% to 6%. Before hyperinflation, it will be 14% to 15%. This is the updated numbers as we stand.

We will take our next question from Bajaj Bhat of Citi.

I have 2 quick questions to ask you. The first one is on provisions. So if I look at the segmental disclosure, it feels like that the Qatari business provisions have come down quite materially, especially in the Corporate segment during the quarter. And is it fair to assume that you're kind of now returned to some normalized level of provisioning within the Qatari business, whereas outside that, especially Turkey and Egypt, it appears that provisions are higher, probably due to hyperinflation in your accounting, but is kind of this thesis largely correct? That's my first question. The second question is on lending growth. So lending growth continues to remain slightly muted, both in Qatar and outside Qatar. Just wanted to understand what are you thinking and seeing around a pickup in lending that might come on back of the infrastructure projects in Qatar or kind of the secondary impact of the LNG expansion. When should we expect lending growth to come on back of these kind of catalysts.

In terms of provisions, I'm looking at the details of the numbers that are in front of me. I'm not seeing a drop in provisioning within the group, if we -- within the head office. If we look at, for example, number, excluding QNB ALAHLI and Finance Bank. Cost of risk in June was 76 basis points, which is exactly where we stood in March and marginally higher where we were in December. So the level of provisioning at the group level, excluding Turkey and Egypt, still exactly the same. I agree with you that there was a material increase in provision in Turkey, which is normal because we want to take as much buffer to protect the entity for the longer term, especially that this year is a good year in terms of performance for Turkey. In terms of lending growth, at the beginning of the year, we were talking about 5% to 7% growth. Now we are talking about 3% to 5%. So definitely, we do not expect the growth to be as much as we were hoping for. This year is a world cup year. And the focus is in finalizing the projects that we -- that started 3 to 5 years ago. And we don't -- we are not seeing a lot of new projects other than the expansion of the North Field project. This is -- now we expect this to continue until the end of the year. But this will reflect profitability on the next year where we expect much better growth in loans in 2023. And our expectation is that next year, we will go back to the 5% to 7% growth in loans.

That's great. If I could please maybe ask 1 follow-up, quick question. This one is on the hyperinflation accounting. So just from a modeling perspective, I'm thinking about how to build my model into the future. Is it fair to assume that some sort of hyperinflationary net monetary charge like you had in the second quarter will continue to appear in the near future till the time Turkey is out of this hyperinflationary mode. Is that a fair assumption?

I agree. But the overall implication of that number will be much lower. Because the capacity of the group -- number one, we do not expect it to be as much as it is now because the number you saw now is for 6 months period and at the time when the inflation in Turkey is extremely high. So it will continue. You will continue to see it. But the magnitude of the number, we don't see it to be as you saw in June.

We will take our next question from Sunil Jain of JPMorgan.

This is Sunil Jain from JPMorgan. I had a question on whether these hyperinflation-related charges, will they have any impact on your dividend outlook. In the past few years, I believe your payout has ranged between 35% to 40%. So is it fair to assume a similar range this year and the medium term? So that is my first question. And my second question is related to your noninterest income. And in Q2, we saw good strength in your fee income and also income from FX gains. So I just wanted to check, is this related to hyperinflation? Or is it underlying growth? And what are the drivers behind this?

Hyperinflation impact is a noncash impact. And that's why from a financial perspective, we don't see it as impacting the payout ratio for the group on the longer term. The recommendation that we are going to send to the Board in the year-end is for them to -- for the Board to ignore the implication of hyperinflation and not to impact the payout ratio because technically, this is a non-cash impact, and that's why it should be ignored from a dividend payout ratio. For noninterest income, definitely, Turkey has an implication because of hyperinflation. But at the same time, Egypt did a one-off major profitability of FX due to the devaluation of currency because of the FX position within the entity. Qatar is still doing very well in FX income and in fee income. So inflation has a share in the growth. But the other 50% of the growth is coming from the normal operation within the group.

[Operator Instructions] We will take our next question from Chiro Ghosh of SICO.

This Chiro Ghosh from SICO. I have 2 very quick questions. First one is about the loan growth. Overall loan growth in the Qatar economy. How are you seeing it? I mean, is there still high demand or has the high oil prices actually now starting to impact an increase in the repayment? That's my first one. Second one is, there was some disturbance, I don't know whether you answered it or not that Turkey NPL ratio seems to have been quite good. I mean in this environment, still [ counter inflationary ] you'll expect capital ratios to go up. If you can throw some light on what is the asset quality scenario?

Loan growth. If we look -- I think your question is focused on Qatar total stand-alone. Now if we look at Qatar numbers, QNB number, growth in loans in Qatar was close to 0. There was a drop of around 1% in public sector loans, and there was an increase of 1% on private sector loan. So overall, the movement is not very strong. We expected at the beginning of the year that if all the prices continue to be 70% and above. We are not going to see material increase on public sector loans. On the contrary, we might start seeing a drop in public sector loan, and this is what we have seen in June, and we expect this to continue until the end of the year. Overall, gross loans in 2022, as we expected will not be strong, and we expect it to be between the 3% and 4%, much more than that. In terms of asset quality in Turkey, now this year, we have seen a material drop in NPL numbers from 3.1% to 2.1% because when there is inflation, many people that are more capable of repaying some of the loans they took a long time ago. And this is what we have seen in Turkey. A lot of customers repay their long standing loans. And that's why this helps us in improving coverage ratio from 122% to 137%. Now this is for 2022. However, for 2023, we expect there will be pressure on NPL again. And that's why we are building more and more provision at this stage in order to ensure that any implication on that on 2023 will be managed.

I'm just asking this 3% to 4% loan growth, which you shared, this is for Qatar or for the group?

No, no. That's for the group as a whole. Qatar -- I don't think Qatar will be more than 2% to 3%.

We will take our next question from Rahul Soni of Avalon Global Research.

Am I audible?

Yes. Go ahead.

So on Slide #18, where you have shown the breakup for NPL, sir I want to understand over December 2020, your SME and retail [ NPL ] portion and portion of NPL has come down, while the corporate portion of NPL has gone up. So why there is this -- we have seen this increase in the corporate loan?

The quick answer is the second evaluation.

Yes, sorry.

It's [ smoke tested ] devaluation because most of that book is in Turkey and the devaluation in Turkey impacted the numbers.

Okay. And on disparity I have observed, while this -- your NPL and PCR ratio for ALAHLI Bank while the NPL is higher at 3.7% the coverage ratio is low 103%. While the same for the Finance Bank, the NPL is low, 2.1% while the PCR is higher at 137%. So why there is a disparity between the 2 data?

The main reason is that we are more relaxed on NPL numbers in Egypt, and we are happy with the coverage of around 103. Whereas in Turkey, we still believe that 2023 will have -- will might have some pressure on NPL, and that's why we want to build much more provisioning this year for Turkey. And at the same time, this year, we are enjoying a significant growth in profitability in Egypt, which give us a lot of room to build more and more on the coverage ratio.

Okay. And 1 last question, if you allow. On Slide #15, while this net interest income and operating income over June quarter 2018 to 2020, '22 have achieved a CAGR of 8% to 9%, while at the same time, net profit has remained more or less flat between QAR 1.8 billion to QAR 2 billion. So why the profit has not grown in line with the NII and operating income?

Because we want -- we have been managing the overall growth and profitability through increasing our cost of risk and improving our coverage ratio. If you look at the coverage ratio in '18 and compared with this year, I think there's an increase of around 20% on the ratio. And all this is done in order for the group to continue and to improve the buffer that they have in terms of provisioning.

We will take our next question from Waruna Kumarage from SICO Bank.

I have 2 questions. The first question is a follow-up on your answer to a previous question on the Qatar loan growth in 2023. You mentioned that you expect a pick up. I want to know whether this will be associated with the North Field expansion or any other projects in Qatar? That's my first question. Secondly, on Turkey, the hyperinflation accounted, just have a small clarification. If you could tell that some of the net monetary losses were offset by the gains you could have recorded from CPI linkers in the securities? So those are my 2 questions.

The answer for the second part is yes. On the first part, the loan, definitely, North field expansion will have a positive contribution to overall growth in loans in 2023. At the same time, the country will go back to investment in the economy, whether it was infrastructure project or other projects. So this year was slow because the forecast was mainly in finalizing World Cup projects. But next year, we will go back to normal operation, whereby new investments in the country, whether it was related to the North Field or not.

Okay. Just a small follow-up on the second question. On CPI linkers. Is it possible for you to at least give like a ballpark figure how much would have been the impact of CPI linkers positive impact?

In order not to spend too much time on this, can you please drop us an e-mail on this, and I will ensure that the investor team -- Investor Relations team will respond to you immediately?

Okay.

[Operator Instructions] We will take our next question from Anastasios Dalgiannakis of Al Faisal.

Yes. Basically, I wanted to ask about Egypt. Now the CDS, the 10-year CDS where Egypt has moved to deep distress territory. 1,200 basis points, far in excess even from Turkey. But you mentioned that you are quite happy with the coverage. NPL coverage ratio. Could you give us a little bit your own outlook and the macroeconomic outlook for Egypt.

The focus on QB on Egypt is on local operation, it's not -- CDS is an implication of how the international market look at Egypt. But for us, we deal with corporate, we deal with [indiscernible]. So CBS is not really directly related to that business. When I mentioned that we are more relaxed on the book on Egypt. This comes from the agreement that we have seen that we have seen for the last 8 or 9 years of operation in Egypt, we now know them -- we know Egypt market very well. We know with whom we have been dealing. Our market share is still 7 -- 6% to 7%. We are focusing more on Tier 1 customers because we are the leader in the private sector on that market. A coverage ratio of 103 is materially better than most of the coverage ratios in the Egyptian market. That doesn't mean that we are going to continue at that level. If we see that at any time that there is pressure on NPL and Egypt. Typically, we will go back -- at some point of time, we were close to 125% in Egypt. This is a continuous process. But today, we are much more relaxed in the book of Egypt than we are in Turkey, and that -- and this is reflected in the coverage ratio in each country.

We will take our next question from Mohamed Musa of [ Hassana ].

You mentioned that you've been managing your P&L through providing more to the reserves. I'm wondering where you see a level of coverage where you think it's reasonable to stop building excess provisions? Is there a specific kind of 2-, 3-year target?

Well, I would say, Mohamed, this is a very interesting question. I've been the CFO for QNB for around 20 years. And for all that period, we have been building more and more provisions. And unfortunately, every 4 or 5 years, we are under material challenge that sometimes impacts that buffer. So we go back to taking more and more in order to prepare ourselves for the next challenge. The last 3 years, with the corona, definitely, there were major challenge, not to QNB but the overall banking sector around the world. And this impacted the buffer that we had before, and that's why we are going back to building now on the buffer. Will this going to stop, I don't think this is a matter for 1 year or 2 years. This is a continuous process. But I agree with you, you're going to see the number at 150%. I don't think you will see it at 150%. But the issue here is that if you look at the coverage ratio for Stage 2 loan, at QB, it's 7.5%. I know that many people will see that 7.5% coverage ratio at Tier 2 -- at Stage 2 loan is very good. But still, this will show you that there's still a lot of room to take that ratio up. Of course, this ratio will never be 15%. And not a bank in the world will have 15% coverage on a Stage 2 loan. But again, there is still always a room for QNB to be conservative and the other issue. I've always said to the investors is that what should be expected from QNB is for us to grow at the same level as the peer group in the region or higher. We don't want to grow at 20% or 15% when the peer group is growing at 5% and 7% because this will put a major challenge on QNB to be able to maintain that momentum of growth. We want to grow same to the peer and higher than the peer, marginally higher than the peers. This is the target that we have.

Great. This is particularly important for us because we've been seeing very strong revenue growth, but that revenue growth has been partially eaten away by more and more reserving, so it's the reason why I asked.

No. I fully understand where you are coming from. Because for example, this year, we are seeing a growth in operating income of 20%. And suddenly, when we look at the net profit, it is 5% or even 4%. And that was the case for many years now. We are doing this in order to ensure to the investor that there will never be a negative surprise to the investor. Regardless of what happened to the market, we will ensure that QNB continue to grow strongly and steadily better than the peer group in the region. And in this what we expect our investors to expect from us as an executive team.

We will take our next question from Aybek Islamov of HSBC.

I want to ask you about the funding strategy, in particular in Qatar domestic operations, core domestic. What is your focus right now? Is it, again, more on domestic deposit collection or more international? If you can elaborate on this would be great.

Aybek, Mark here with you now. We've maintained a very balanced strategy, both internationally and locally. Obviously, with the very high hydrocarbon prices at the moment with the revenue in the local market, there are more opportunities for QNB at the moment and the other local banks to look in, I think, longer term, both local currency and foreign currency funding in the domestic market. So I think that's probably more of an immediate focus for us at the moment. But obviously, for a bank of our size and our footprint globally as well, we have a very, very diverse funding sources in that regard. As always, we've been working very hard to extend the tenor of our funding. That's what rather well for us over the last couple of years. So now where we have a period of high increases in interest rates, I think we're, to a degree, we're less impacted by the increase in funding than some of our peer group in that regard. But no, it's very much a balanced view domestically and overseas. But I think at the moment, though, there are evident opportunities growing in the local market.

And what's your mix of customer deposits in your core operations outside of Turkey?

I don't have the numbers to hand again. I think they should have one if you can just shoot an e-mail over to the Investor Relations team that can give you a breakdown of those numbers.

We will take our next question from Sunil Jain of JPMorgan.

I just had 1 final question on your segmental breakdown where the net interest income, the NII, in your Qatari segment has reduced, while that in your international segment, that showed a strong growth in the second quarter. So can you just throw some light on the NIM trends which you are seeing in Qatar and also in your international segment?

I think I briefly covered this. When I say that we are seeing steady momentum in terms of margin at head office and an improvement mainly and mostly in Turkey. We are not seeing major drop in NIMs in the head office. Actually, I can say we are still around the same ratio. And we expect this ratio to improve in the next 2 quarters because there's usually a lag because we always told investors that an increase in Fed rate positively impact net interest margin at a group level as a whole and in Qatar, in particular. However, we always need to realize that there is a lag of 3 to 6 months period until we see that benefit materialize. And that's why we expect the increase in Fed rates that we have seen in the last 6 months to start improving margin for the group, mostly in the last quarter of the year.

We will take our next question from Nikhil Phutane of QNB.

Just a follow-up question on your other operations. You did mention that you need -- to a certain extent, you are comfortable with the provision coverage ratios. Just 1 quick on LDR. I mean LDR is quite low as against your other operations. So do we foresee that, I mean, going forward, that ratio could improve.

An LDR of around 60% in Egypt, this is the norm in the market. I don't think this -- this ratio will continue between the 60% and 65%, not more than that.

We will take our last question today from Edmond Christou of Bloomberg.

Edman Christou from Bloomberg Intelligence. Just want to follow up on the asset quality metrics here. I think there have been a talk earlier in the year that the Central Bank is supervising or reassessing the Stage 2 exposure for the Bank of Qatar. I just want to hear from you, if you do expect the share of Stage 2 to pick up in the year, I think it's around 6.8% now. We talked probably about 7% before, I don't know if you expect it to be even beyond 7% for the end of the year? And how this tied up with the coverage ratios. So you are at 123% coverage ratio on Stage 3. We do understand that the limitation on the accounting standard. So if we don't see a downgrade into Stage 3, should we expect this to beef up the Stage 2 which is around 7.5%. I think a few years ago, you were guiding around 9% for Stage 2 coverage that will make you comfortable in the long term. Just so you will give some guidance on this? And the second one, I just want to understand on the inflation adjustment. So the consensus is around 70% inflation in Turkey. Up to June, we are on 40%. So we have another 30% to go. What is the assumption -- if this is your assumption? Are you able to give any nominal value in terms of the charges? Or can you just confirm that assumption, so we can calculate it also?

For the first question, the ratio of Stage 2, 6.8%, as you mentioned, at this stage, I still believe that we are going to be around 7%, not more than that. We could marginally exceed the 7%, but not materially. Coverage ratio again, as you mentioned, 7.5%. I think we are going to continue between -- I don't see us reaching 9% at this stage. But 8%, it's a number that we might reach by end of the year, not more than that. On the detail of implication fiber inflation, Edmond, again, please drop us an email, and I will send you all the details by our Investor Relations team.

Perfect. Just a follow-up on the first one. So if I understand it correctly, we should see improvement gradually in the cost of risk in the second half, correct? Or the...

Well, I will be fair enough with you. It really depends on how the engine is running. If we are going to continue to see a growth in revenue of -- as we have seen until June of close to 25% cost of risk will not drop. Cost of risk will continue to be at that level because in order for us to manage the overall growth on profitability. One thing that we need to be very clear about is that there's a lot of question focusing on why our cost of risk is hard. But none of you is appreciating the impact that we are having in terms of being able to grow our operating income by 25% and being able to grow our overall revenue for the group by 20%. What I always mentioned, QNB will not grow by 17%, 18% with the overall average in the market in the GCC is growing by 7% to 8%. Because this is very risky for QNB. In QNB, the executive team in QNB, their average life in QNB is more than 20 years. We do not look at profitability of 1 year or 2 years, and then we run and leave. This is where we are, and this is where we are going to end up our career. We look at the overall growth for the group at the longer term. We want to give our investors steady, strong growth year after year. We don't want major fluctuations in profitability. As long we are successful in growing our revenue by about 15% to 20%, and we are successful in decreasing our cost-to-income ratio as we have seen from close to 30% to 20%. These are major achievements that we need to be giving a lot of credit for. We have been doing a very good job. However, we are not going to show major pickup in profitability for 1 to 2 years and then pay the price at a later stage. We will continue to manage that growth. We will continue to push our revenue to continue to grow. We are going to continue to manage our cost-to-income ratio, but at the same time, overall profitability growth will be managed in order to ensure that we have a protection in case anything happens in the longer term. This is the methodology. This is a strategy we have been running on for the last 15 years, and this will continue. QNB represents more than 50% of the banking sector in Qatar. And that is extremely important for QNB not to show any negative surprises because negative surprises for QNB, that means this would reflect negatively all the banking systems in Qatar. And that's why we need always to be extremely conservative, build on the reserves that we have, ensure that we don't give our investors any bad news. We know that this is expected from us, and this is we work in order to ensure that this happens. Thank you.

Thank you. I will now turn the conference back to Ms. Elena Sanchez for any additional or closing remarks.

I would like to thank Ramzi and Mark for their time today and for all the answers. And thank you, everyone, for joining the call. Have a good day.

Thank you, everyone, and see you on con call for the third quarter.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.