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

Good afternoon, good morning, everyone. My name is Aybek Islamov. I'm MENA Financial's Equity Research Analyst at HSBC. I'm very glad to welcome everyone to Qatar National Bank's Third Quarter 2024 Earnings Results Call. With us today, we have Mr. Ramzi Mari, the CFO; Ms. Noor Al-Naimi, Head of Treasury; Mr. Durraiz Khan, Senior Vice President, Financial Consolidation; and Mr. Aves Akram, AVP and financial consolidation. With no further ado, I'd like to hand over the call to Mr. Aves. Please go ahead.

Thank you very much, Aybek and HSBC for hosting our call today. This is Aves Akram speaking from financial control. I will be filling in for Mark Abrahams today who is away on business travel. Before we begin, it is customary to remind that this earnings call is for investors and analysts only. And any media personnel should disconnect now. I will begin by giving an overview on the macroeconomic environment, then I will cover QNB's financial results for the period ended 30th of September 2024 and finally, open the floor to questions and answers. The global economy is set to expand moderately in 2024, growing at a similar pace as last year and within its long-term trend of around 3.1%. The macroeconomic environment is benign despite electoral political uncertainty in the U.S. and existing geopolitical challenges. Given the progress in bringing inflation under control, central banks and advanced economies are front-loading a significant process of monetary easing, taking policy rates from restrictive territory towards neutral and accommodative levels by mid-2025. This should support stable global growth and the reduction of financial vulnerabilities, particularly in emerging and frontier markets. Still elevated oil and gas prices fuel robust fiscal and external revenues in the GCC, resulting in either large twin surpluses or the execution of large investment projects. This adds to the momentum created by structural reforms and the continued expansion of international tourism. GDP growth in the GCC remains favorable, mainly based on population growth, a large pipeline of CapEx projects and robust FDI inflows. Also for Qatar, the macroeconomic environment remains positive. With total exports of USD 96 billion and central government revenues of USD 63 billion over the last 4 quarters, Qatar benefits from large fiscal and current account surpluses of over 5% and 15% of GDP, respectively. Importantly, Qatar continues to lay the foundations for GDP growth over the medium and long term through new projects. On the hydrocarbon front, tailwinds from investments in increasing gas production will drive economic growth with eight new LNG trains planned under the flagship North Field expansion project. One of the largest capital expenditure projects in the region and industrial engineering projects in the world. These investments to be executed in three phases are expected to increase Qatar's LNG production by 85% to 142 million tonnes per annum by 2030. Qatar is also ramping up efforts to diversify its economy and increase private sector engagement. On the non-hydrocarbon front, the country further consolidated its position as a regional and international hub for business, investments, commerce, tourism and culture. This accelerated the execution of the Qatar National Vision 2030 and assisted in the ongoing transition towards a knowledge-based economy. The North Field expansion project will also include an equivalent expansion of Qatar's refining, downstream and petrochemical capacity. Positive spillovers from these projects will combine with diversification efforts and structural reforms to boost economic activity and spending in the broader manufacturing and services sectors. According to the median consensus estimates, GDP growth of 2.1% and 2.6% should be expected for 2024 and 2025, respectively. As a result, the economic expansion continues in Qatar, while the banking sector is resilient and healthy, presenting significant growth, ample liquidity, adequate levels of capitalization, high asset quality and robust profitability. I will now move on to QNB's financial results for the 9 months ended 30th of September 2024. Key financial results are as follows: Net profit was QAR 12.7 billion or USD 3.5 billion as a robust growth of 7% compared to last year. Robust revenue growth resulted in an increase in operating income to QAR 30.5 billion or USD 8.4 billion, up 5% demonstrating QNB Group's success in maintaining growth across the range of revenue sources. QNB's cost-to-income ratio remained strong at 22.4% which is one of the best ratios among large financial institutions in the EMEA region. Total assets are up QAR 1.279 trillion or USD 351 billion, up by 8% from the same period last year. Loans and advances reached QAR 905 billion or USD 248.6 billion, up 11%. QNB Group remained successful in attracting deposits which resulted in increase in customer funding by 11% from September 2023 to reach QAR 909 billion or USD 249.8 billion. The group's loan-to-deposit ratio remained stable at 99.5%. QNB Group's ratio of nonperforming loans to gross loans stood at 3%, 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 100%. Total equity increased to QAR 113 billion, up by 4% from September 2023. The bank's capital adequacy ratio at 19.5% is comfortably higher than both QCB and the latest Basel III reform requirements. Earlier this quarter, QNB announced a buyback of its shares for up to QAR 2.9 billion. All regulatory approvals are in place and the buyback execution is in progress. We will now turn to questions and answers.

[Operator Instructions] So we have our first question from the line of Rahul Bajaj. Rahul, please go ahead.

This is Rahul from Citi. I have three questions actually, if I may, please. The first one is on cost growth. And I see that cost growth has been quite heavy in 2023 and also in 2024. Part of it, I understand is because Turkish lira has kind of stabilized and you're seeing much more kind of flow-through from Turkey happening in terms of cost growth in your numbers at the Group level. Now assuming Turkish lira remains at a stable sort of relatively stable rate going forward, should we expect cost growth to continue be in the double-digit mid- to high-teen range going forward? on a Y-o-Y basis? Or you expect it to come down in the single digits kind of growth rate. So that's kind of my first question on cost growth trends. The second question is on margins. And I mean highly anticipated rate cut in Turkey in November or maybe early next year, which could possibly put some upside kind of tailwinds for your margins at the group level as cost of funding goes down. And at the same time, you would probably see downward pressure coming in the group -- the domestic business with rates coming down. So how should we think about margins with these two opposing factors, your Turkish rates coming down, providing some tailwinds as opposed to domestic margins going down? Will both of these kind of largely offset each other, and we should expect margins to remain pretty much where they are or you should -- we should expect net decline going forward, a gradual decline going forward in terms of NIMs. So that's my second question. And third short one, just on guidance, if you could update us on any update in terms of guidance that will be useful.

So in terms of cost growth, you're right that the cost growth has been at a very elevated level in both 2023 and 2024. And if you basically break down the growth coming in the cost lines, in the 9 months 2024 compared to 9 months 2023, almost 80% of it is coming in from Turkey. The rest 20% is Qatar and international branches and Egypt. So Turkey is the driver for cost growth and everyone knows the reason is it's a hyperinflationary economy continues to be a hyperinflationary economy. And until the time it remains, the inflation is slowing down. But till the time it remains hyperinflationary, the cost pressures are going to be there. The good thing is that in Q1 and Q2, the -- because of earlier rate hikes, the net interest income was under a lot of pressure in Turkey, which was also impacting the Group's cost-to-income ratio. That has improved a lot in Q3 and will continue to improve in Q4. So from a Group perspective, we would expect from an overall cost-to-income ratio -- the cost growth will be there, but it will not impact the group's cost-to-income ratio significantly going forward as long as margins improve which leads us to your second question as to how margins will perform in Q4 and going forward. Even if the rate hike does not happen as a base case, we expect -- so rate cut does not happen in Turkey. As a base case, we are expecting the margin improvement that has happened in Q3 to continue to have momentum in Q4 and benefit us in Q4 as well. And obviously, we have given you guidance as to how -- what is the interest rate sensitivity of the Group for the rate cuts in the future for the U.S. Federal Reserve, it is relatively lower. And we should also keep in mind the contribution of the Turkish business versus the contribution of other Qatar and other related businesses. So the impact for Turkish business will be positive. The impact of rate hikes on an overall basis is marginally lower on the other businesses, primarily the Qatar business and that's how we expect the margin to slightly go down once the rate cuts come in, and we'll try to manage it very aggressively by focusing on the cost of funds. Your third question is on the guidance. On the guidance, we have an update on the guidance and this will be our second update or upgrade of the guidance for this year. So we are now upgrading our loan growth guidance from 5% to 7% to now 5.5% to 7.5% for the full year. Our other guidance -- asset growth guidance remains 4% to 6%. Deposit remains 5% to 7%, profitability guidance remains 7% to 9%.

We'll move to the next question from Olga Veselova.

Good day. This is Olga Veselova from Bank of America. Can you hear me?

Yes.

One question is the use of capital. Do you see potential for further buybacks or additional dividends and generally, how do you think about excessive capital estimate given that your minimal requirement is not very low, and then usually you would be using 1.5, 2 percentage points management buffer on top of minimum. So give us some feel how do you think about the use of capital in the future. This is my first question. My second question is about fee income. A significant portion of your fee income is coming from international operations. And I assume most of this is coming from Turkey. So question is how much of your fee income in Turkey is driven by CPI and given that inflation is going down next year, which trends in fee income you would expect in Turkey next year? And second -- and third question is domestic cost of risk. If you can separate for us cost of risk domestically in the third quarter versus second quarter. And do you see potential for much better cost of risk in the next couple of years given the strong macro setup.

Thank you, Olga. In terms of use of capital, we don't have anything further to announce than what we have already announced an interim dividend. We don't have any changes to announce on the dividend policy. We already have announced the buyback, and we are more or less similar to the buffers that we've already announced on our total capital level which is now a minimum 17%. So there's nothing additional to announce on that side. In terms of fee income coming in from international businesses, particularly Turkey, it is not just a factor of, of course, inflation has helped in nominally raising the fees. But even if you go back to pre-inflationary days, that business -- Turkish business knows exceptionally well are much better than us and trying to get a higher portion of their total revenue from noninterest income. And that trend, barring any changes in regulations, we would expect it to continue. In terms of the cost of risk guidance. In terms of what we've announced for the growth and for our subsidiaries, we already give numbers. Expected amount -- your question is, is there any expected material improvement in next year? Our view is that our current year guidance for cost of risk is between 80 to 90 basis points. And for next year, we expect it to be marginally lower, 75 to 85 basis points. So nothing major, not a step-up improvement but slight marginal improvement. We expect it to happen.

Moving on to the next question from Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. I have again 3 questions to add to that. So I saw that the asset quality in Turkey has deteriorated. In hyperinflationary environment, you expect that the real estate prices to actually go up and support the collateral value. So if you can throw some light why is the asset quality deteriorating in Turkey. Second thing I observed that the Zakat number has -- if you can throw some clarification on the Zakat number wise, there is so much variation on that one? And third is I want to get a better sense of the loan growth within Qatar. So the loan growth appears to be quite strong domestically. If you can give us some kind of outlook for next year, specifically the domestic market. These are my three questions.

In terms of asset quality deterioration in Turkey, this was expected, particularly when the interest rate benchmark rates are at 50% level. And this is something that we had known that the -- Turkey as an emerging market is not a less than 2% NPL market, and we had been preparing buffers for it in our P&L for the last 2 years. It's primarily coming in from the consumer segment. The asset quality deterioration, not from the corporate segment, but it is something that is a function of very, very high interest -- nominal interest rates in that particular market. The second question in terms of taxes are volatile. Principally, it comes in from our Turkish market because there have been certain changes in tax regulations at the start of the year. And one thing that we should keep that in mind is that the hyperinflation loss that we report in our growth financials is not reported by Turkey in their stand-alone financials and it's not deducted for tax purposes. So this is something that you should also keep in mind that effectively increases the effective tax rate that we pay for in Turkey because of non-admissibility of hyperinflation losses. In terms of your third question on loan growth in Qatar, it is broad-based. It is not one particular sector or a particular segment coming in from multiple sectors, a range of our clients. So there's not 1 thing or 2 things that we can point out at what's causing this growth.

Just one thing on the Zakat part, what is the sustainable Zakat or what do you think -- what would you recommend?

We are at historically effective tax rate has been between 13% to 15% range for the growth on an effective tax rate basis. And maybe there is some -- if Turkey increases the tax rates or the hyperinflation loss is higher the effective tax rate, of course, will be impacted because of that.

And do you have come out any guidance for the loan growth for 2025? Or it's too early?

No, 2025, we don't have any guidance now. We will provide guidance as part of our Q1 call.

Our next question is from [indiscernible].

This is Vikram from NBK Wealth. So I think the names got interchange, anyway. On the buyback program, is this a program unique to QNB? Or should we expect other companies to follow? I mean is this a nationwide or exchange-wide initiative? That's the first question. The second question is on the corporate tax. So in 2025, the 15% corporate tax, is this applicable to all the Qatari companies or only applicable to multinational companies?

Thank you, Vikram. The buyback program is based on the two FMA regulations, and this is something that is particularly not unique for QNB and any company which wants to meet those regulations and you can't speak for other companies can use the buyback program as long as it's allowed under their statute. In terms of corporate taxes, what we know is that the commitment is to follow the Pillar 2 taxes, which are applicable only to multinational companies, which made a minimum revenue threshold, on those companies, the Pillar 2 taxes will apply.

Okay. So only the company is meeting a certain revenue threshold will pay this taxes? Other companies are accepting?

And having multinational operations.

Okay. And for a bank, how do you arrive at the revenue threshold? Is it net interest income or only the interest income?

It is gross income, only interest income.

Is the interest income plus fees and other noninterest income. So you're not allowed to deduct the interest expenses to arrive at the revenue threshold?

My understanding is no. Not only gross cost income gross fees.

Our next question is from the line of Naresh Bilandani.

It's Naresh Bilandani from JPMorgan. First, just following up on Vikram's previous question, just keen to get some update on the tax rate implementation in Qatar. And just Durraiz, I want to understand what measures do you have in place to be able to mitigate this pressure that could come from taxes? I sense there's an expectation building up within the investor base that QNB has traditionally been very steady in the bottom line growth that it delivers to shareholders. And that into the next year, the Group has enough levers to be able to mitigate the EPS pressure that could come from tax. So would you be able to throw some color on that, that would be super helpful. That's one. Second is the understanding is that next year, the regulatory in Turkey will allow local accounts to be shifted to a hyperinflation accounting base. Since you merged the accounts at the group level on IFRS, will this affect your accounts in any manner into the next year? Or is that not going to be the case?

I'll take the second question first. Hyperinflation has been doing it since it's when the threshold of hyperinflation was crossed. If it happens in Turkey, nothing is happening for the Group level, it's just their own local reporting will change, and you will see how inflation numbers reported in their own financials. It still remains to be seen whether it will actually happen and whether it will have tax implications for them. In terms of the tax rate, that is -- that you've mentioned, which are expected to come to a plan next year, 15% of taxes on our Qatar-based income is quite a significant amount. And expecting us to actually offset it largely is not a Fed expectation. We will be provide -- whether we will be able to absorb 100% of the 15% or we will have other levers at play. We will update you on a next day on a quarter-by-quarter basis, but the expectation that we will be fully able to absorb the impact on day one is not fair.

And pardon me, if I understood you right, next year's cost of risk is expected to be only slightly more benign as compared to the current year. And pardon me if I heard that right. So that typically is an area where you carry excess provisions. So that could be one area which could help mitigate this pressure. But it seems to me a preliminary comments that, that trend is not going to change materially into the next year. Is that a fair assessment?

Yes.

Next question is coming from Andrew Brudenell.

Yes, so it's Andy Brudenell from Ashmore. So I just had a couple just on the buyback. My understanding of the regulations as they stand, is that the shares are not cancelable, like at the treasury level? Is that correct? And my understanding is you have 2 years to put them back into the market. Is that correct? Or are you -- I'm wondering if the fact that you've now finally done this, is that an indication that this regulation has changed or is going to change?

In terms of the buyback, at this time, we are focused on executing the buyback. It is we're the first company to do. It is a learning lesson for us in Qatar as well as everyone else as well. We have had discussions with the regulators on how this can be evolved to make requirements to potentially keep the shares for a longer term at a treasury level. But still, what we have right now focused on is executing the buyback as we have announced. And make -- our expectation is that the regulations are evolving at this point in time.

Yes. Okay. But what I said is actually the current rules, right?

Yes.

Okay. All right. Understood. And then just one, maybe it's a bit pedantic. But [ see ], about the guidance on the loan growth but not on the income growth. Is that Turkey sort of cost of risk or Turkey general uncertainty related? Or am I just being greedy?

No, it's simply coming in at the very tail end of the year. So there's not a lot you can push up if you improve your loan in Q3 and Q4.

We have our next question from a guest. Well, I cannot pronounce the name, but let us unmute the line. Would you please announce your name and your company name and ask your question.

It's [indiscernible] from Bloomberg Intelligence. So my question is around the customer deposits. June, July was quite weak for the private deposits and do you think any pressure from this? And also to what extent going forward could oil prices offset liquidity if there are some geopolitical risk pressure and whether you see any signs of outflows from the nonresident deposit accounts?

I'll take the second question first. The nonresident deposits have been quite stable, quite sticky despite a lot of geopolitical pressure, which has been ongoing for almost more than 12 months now, and we don't expect any significant change in that regard. In terms of how the liquidity is going to perform, depending on how the oil and gas prices are, it does play a role, but not a very large role. Our deposits have been increasing at a group level. We are up 7%, 8% in Qatar and also up in international operations. So we -- from a deposit or from a funding perspective, we do not have any areas of concern.

Our next question is coming from Bijoy Joy. Bijoy, please announce your company name and your question.

This is Bijoy here from QIC. My question is on the buyback. So is there a price cap on the buyback? Or is it more of you will continue to participate over a period of 6 months regardless of the price?

We have internal limits in place, but I would rather not specifically answer to your specific question. What we will do is -- what we understand is the market will be public -- will be disclosing all the transactions that we are conducting shortly on a regular basis. And you can basically go through that data to whatever that you're looking for.

Understood. Also on the retail NPLs, so we've seen the retail NPLs have started trending up. So can you just throw some light exactly where this is coming from?

Retail NPLs that we disclosed in our investor presentation slide, the bulk of -- vast majority of it actually is coming from Turkey. And we have touched upon earlier, in an earlier question that in Turkey, the benchmark rates are above 50%, and this is putting some pressure on the retail loans, which are coming in, in form of retail NPLs.

Understood. And if you can also throw some light on the loan -- expected loan growth, which sectors would contribute in the domestic market?

For this year and for the next year as well, our expectation it's going to be broad-based and supported by the North Field expansion, particularly the ancillary projects and services around those expansions.

Understood. And just to get some understanding on the pricing trends in the market. So is it very competitive? Or do you -- given the loan trends in the market has been quite muted over the last couple of years. So is it very competitive? Or...

QNB is a very dominant franchise in the local market. So what you particularly see for other banks usually does not have as much as an impact on QNB compared to others. For any large transactions, we are one of the prime banks to execute so we don't see those pressures impacting us that significantly compared to they would be impacting a smaller bank.

Understood. And do you also see that deposit trends will be positive over the next year as well? Do you expect to support the loan growth, the money supply is expected to go up?

Both works in a similar manner, right? So we would expect both loans and deposits to continue to grow. At what percentage we will be able to tell you in our next quarterly call.

We don't appear to have any further questions on the last session, we have a follow-up from Olga Veselova.

It's a small question. Durraiz, in summer, there were media articles about potential state support to Qatar real estate sector. Do you hear anything about this?

No.

So while we don't have any further questions, I think, Durraiz, I'll address one of mine. We'll be curious to know how you see the market environment currently given the oil prices being weak lately. I recall that during the previous conference calls, QNB always referred to oil prices being more positive for the year. Growth outlook for the asset growth outlook. Is it the case at the moment? Or is it too early to make that comment? And secondly, with regards to the real estate market situation, how is it affecting the competitive landscape? Is it more in favor of Qatar National Bank? Are you seeing QNB gaining market share given that other banks are possibly more risk-averse given their high exposure to commercial real estate? What are your thoughts?

The movement in the oil and gas prices is quite recent. And for it to -- as we've always explained, for it to reflect in government's budget, there's always a time lag between 4 to 6 months because of the way contracts are -- the gas contracts are structured. So at this, it's too early to say as to what impact it is going to have on the wider loan book. In terms of market share of our bank compared to how others are doing, we do not see -- we have not seen any major changes in this regard. Our market share has been fairly stable in the last few quarters.

Understood. We have one follow-up question from Chu Ghosh.

Sorry, Durraiz, just one quick question on the FX income side. So we have seen a lot of volatility. What would you believe -- which are the driver and how sustainable are these?

If there is volatility in Turkish lira and the Egyptian pound, the FX income grows a lot in the periods where there is low volatility, for example, particularly this quarter was -- Q3 was one of the lowest volatility that we have recently seen. So FX income is suppressed primarily because it relies only on client flows.

So this is kind of the lowest level. I mean most likely it will be equal to or greater than this, most likely?

Because there was very low volatility in both exchange rates.

All right. Well, no further questions from the audience. I think on this note, I would like to close today's conference call. I would like to thank the management of Qatar National Bank for their participation and their insights as well as the entire audience for participating in this call. Durraiz, any final remarks, over to you.

Thank you so much for the call, and we'll hopefully see you in our Q4 call. Thank you.

Thank you.