The Commercial Bank (P.S.Q.C.) (CBQK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I am Zubair Chaiwalla, Head Capital Management and Investor Relations, and I welcome you all to The Commercial Bank Q2 2020 Results Call. You will be put on mute for the duration of the speakers' presentation, and I will come back to you for the Q&A. I now hand over to Joseph Abraham, Commercial Bank's Group Chief Executive Officer. Joseph, over to you.

Thank you. Good afternoon, everyone, and welcome to our first half of the year results presentation. This time, I'm also joined by Rehan Khan, who's our CFO; and Zubair already. But in addition to them, we had feedback that you would like to hear more about Turkey, a geography which some of you may not be fully familiar with. And therefore, we're joined by the Chief Executive of our subsidiary in Turkey Alternatif Bank, Mr. Kaan Gür, who will give a brief outline on the Turkish economy and what's happening and also, the performance of our subsidiary there. And in addition, the second area that we understand that you would require more information on is the whole digital space and technology and what we're doing to establish and cement our leadership in this area. And this was also highly appropriate because COVID has only accelerated the technology and digital agenda for all banks. And therefore, the work that we've done in the early years is standing us in good stead now. So my colleagues, Amit Sah, who is the Head of our Retail division; and Leonie Lethbridge, who's our Chief Operating Officer, will both present on our digital and technology aspects. So welcome once again. And before I start, I'd just like to wish all of you -- I hope you're all keeping healthy and safe and your families, too, during these unusual times. These are definitely unusual times. And obviously, COVID is a major factor which is shaping the results of all banks and how we are progressing. First of all, I'd like to say that at a net profit level, we reduced by 5% as compared to the same period in 2019. Now this is really an amalgam of various factors at work, and that will be explained in more detail by Rehan, but I'll just take you at a very high level. The first thing is that our net interest income increased by 28% (sic) [ 29% ] on a year-on-year basis, primarily due to, I would say, an improvement in our net interest margin. That's the piece of work we've been doing since last year. And so our net interest margin has increased from 2% to 2.4%, and that's along with the growth in our low-cost deposits and also managing the timing of our repricing of both assets and liabilities has enabled us to improve our NIM and driven the increase in net interest income by 28%. That, to an extent, has been offset by a reduction in our nonfunded income by approximately 17%. This was primarily around some concessions that we made around the COVID pandemic, around fees for U.S. machines, transaction fees on remittances and also lower spends on credit cards and lower earnings due to the restrictions on international travel. The third aspect which is, obviously, and which is prime in most of your minds, will be around our cost of risk and the provisions that we've taken. Now our cost of risk, our approach has been primarily around building up sufficient risk buffers to anticipate future credit losses. And to that extent, we have taken approximately 120 basis points of gross provisions as compared to maybe a somewhat similar figure last year. But the difference is this year, about 45% of that is for ECL, which is really building our risk buffers, whereas last year, about 15% of that was only ECL. So this shows that we are building up our risk buffers. The net cost of risk, of course, is very low this year, and that's primarily because of some significant recoveries that we've achieved this year. So I would say that our approach will be that for the next 2 quarters, we will continue to build our risk buffers at similar levels as the first half so that we are well prepared for the effects of the pandemic because there are 2 factors here. One is the stimulus measures. The first phase of them will roll off at the end of September. So after that, we'll have to see how companies do. And of course, we have to be -- we have all seen a second wave of the virus impacting many economies which had opened up. So how that filters through to the global, regional and local economy, will also have to be seen. So we want to build adequate risk buffers to ensure that we are -- have suitable cushions or risk. That other aspect is around costs, which we continued tight control and management of these, and that's seen the cost income ratio come down to 26% on a normalized basis. And finally, around subsidiaries and associates. Again, all of them have been affected by, obviously, COVID and some of the heightened provisioning that's being taken. In addition, we have taken some impairments. Last year, we took some impairments on our associate in UAE, and we'll continue to take impairments this half year, and we anticipate we will continue to -- in discussions with our auditors, continue to take perhaps a similar level of impairments for the rest of the year so that we bring the fair value of our associates similar to our carrying value. So these are the key aspects. I would say I would be -- these are a decent set of results given the unusual environment in which we are currently operating, and our whole focus has been on building a prudent approach in everything we do. And the last area, which I would say has also shown that is around CET1, which has now improved to 11.5% and our capital ratio, which is 17%. CET1 is particularly important because now we have reached the top end of the guidance we had given. We had said that we want to remain at 11% to 11.5% during the tenure of our 5-year plan. The 5-year plan ends next year. So we've actually achieved the top end. And our hope is and our aim is that this will move towards 12% by the year-end. So we'll be above our target range, and that's exactly where we want to go as we prudently build the bank's balance sheet and capital and risk buffers. So that's just a very high level outline. And now I'll hand over to Rehan, who will speak to you in more detail about the underlying financials.

Thanks, Joseph, and good afternoon, everyone. I'll focus mainly on Slide 5, which gives the quarter-by-quarter analysis. As in the previous quarter, we have shown on the far right the normalized figures as well. So as you can see from Q4 through to Q2, we have adjusted these numbers. This is primarily for the staff share performance scheme. Whereby under IFRS 2, we are -- we need to show the impact of that in both our income and our costs. So for example, in Q2, there is a QAR 14 million adjustment. So you can see QAR 1,090 million becomes QAR 1,076 million, and QAR 293 million becomes QAR 279 million. So I've stripped that effect out in both income and cost, and what that does is allows us to focus on the underlying trend quarter-on-quarter. This is obviously a fully hedged scheme. And therefore, the impact is overall flat in terms of bottom line. And that's why you can see that QAR 499 million profit in Q2 actual reported and normalized is exactly the same as with previous quarters as well. So if we then start with operating income. You can see it's improved by approximately 7% from just over QAR 1 billion to QAR 1,076 million. This -- within this, net interest margin has decreased slightly quarter-on-quarter from 2.5% to 2.4%. And as interest rates have come down, and also the balance sheet loans have fallen slightly. This is primarily as a result of the government paying back the overdraft which is done throughout in the system, and that's improved liquidity in the system also. At the same time, we've seen the mark-to-market positive unrealized come back from the reductions we saw in the first quarter. It's come back -- almost half of that has come back in the second quarter. So that's led to the improvement in operating income. At the same time, as we're aware, there's been lower volumes in the second quarter compared to the first quarter, which has impacted our fees and commission, along with some of the waivers of fees that we have done to support the economy and to support the customers during these difficult times. Costs have operated in a fairly narrow range. As you can see from Q1 of last year to Q2 of this year, it's been primarily flat. We have been investing in technology, in digitization, and you'll hear more about that in Amit's and Leonie's section later in the call. But we've also been very focused on improving customer experience and improving the efficiency of our processing. Overall, what that's meant is that our operating profit at QAR 797 million is the highest that we've seen amongst those 6 quarters and is approximately a 9% increase quarter-on-quarter. What that means is that our cost income ratio continues to fall. As you can see, at the beginning of last year, it was 30.9% for the quarter. It is now 26% for Q2 of this year. And in fact, in Qatar, it is just over 22% domestically for Q2. So we've had significant improvement in our cost income ratio throughout the period. As Joseph mentioned on provisions, there's a few things going on. Although net, it has decreased, on a gross basis, it has increased quarter-on-quarter. We have adjusted our ECL models, our macroeconomic factors, in light of the current situation. And actually, the model that we're using is the most conservative in the banks along with QNB, and that has meant that our provisions on ECL are almost QAR 300 million for the quarter. At the same time, we have seen recoveries come through. So as you are aware, we took a very aggressive stance and increased provisions substantially in 2016. And '17, we wrote off aggressively also. But we've still been pursuing those loans and those write-offs, and we've seen recoveries coming through this quarter, and we've got a pipeline of recoveries in future quarters as well that we're working on. In terms of our NPL ratio, it's constant from the previous quarter at 5%, but our coverage ratio has improved from 84.6% and to 90%. And that excludes the collateral that we hold primarily on real estate loans. And therefore, I would add about 0.2% to that when looking at a like-for-like. So it's about 110% when you add the collateral back into the calculation. And then on the associates, as Joseph mentioned, on UAB, we have been taking an impairment. And we've done that in Q1 and Q2 of this year. We expect to take similar levels in Q3 and Q4, and that will mean that the carrying value and the fair value will be consistent. In terms of CET1 and our total CAR, you can see it's improved from 11.1% to 11.5%, and 16.6% to 17.3%, and this is primarily as a result of the OCI fair value coming back on our bond book. And what we would have seen really in Q1 as a result of the retained profits coming through has come through 1 quarter later. As we mentioned earlier, this is at the top end of our guidance that we gave for our strat plan, where we said we would operate between 11% and 11.5%. We expect to grow this further in future quarters. So we won't stop at 11.5%. And earnings per share, clearly, as a result of the increased profit, has increased also for the quarter. This is on an annualized basis at QAR 0.43. What I'll do now is, as Joseph said, we did get feedback that we would like -- you would like to see some more color on our operations in Turkey and the banking environment there. So what I'll do is I'll hand over to our CEO of Alternatif Bank, Mr. Kaan Gür, for further details on that.

Thank you, Rehan. Good afternoon, everyone. It is a privilege to attend this meeting and to be able to tell you about Alternatif Bank and also about Turkey. If you have any questions, I would be glad to answer during the Q&A session also. This is our first slide about the snapshot about macroeconomics in Turkey. Our expectation for the Turkish economy is positive for the coming period as we expect a V-shaped recovery. Currently, we see that the demand conditions are stronger than expected, driven by the solid stimulus by a loan expansion and actually, government support for the employment, thanks to precautions that taken by the authorities. However, especially weak Eurozone demand and slight tourism revenues since the beginning of this year the current account balance into a deficit around $8.2 billion on a cumulative basis. It seems that current account deficit will be increased during the rest of the year, albeit with a declining trend. We expect at the end of this year around $20 billion current account deficits. Our Central Bank already finalized rate cut cycle and tries to maintain stability through fixed markets. Obviously, reserve management would be crucial for the maintenance of the financial stability. We expect CPI to be around 10.5% to 11% and Dollar-Turkish lira rates around 7% by year-end. On the growth side, following significant contraction by up to 15% in Q2, another significant recovery we hope will take place in second half of the year. That's why we maintain our 2020 GDP contraction around 2.5% and beyond that for 2020, we expect 5% growth in Turkish gross domestic product. This is actually about the Turkish banking sector. Actually, I'm sure that this is large and promising markets with 54 players, a total asset size reaching up to $700 billion, and the Turkish banking system is one of the highest banking penetration rates in the region, which is roughly 75%. When you look into general picture, you can see that at 23 state banks and 5 top private banks dominate the markets with over 75% market share. I can emphasize that Turkish banking sector has a healthy and solid structure with a very hands-on regulators. Looking at the -- this year trends, especially in the first half, the balance sheet of the sector has been reshaping, especially after the pandemic. Regulator recently introduced new ratio, asset ratio, that basically aims to inject bank's liquidity to the sector, rail sector and financial markets instead of chipping idle liquidity. Since the beginning of the year, the loan growth of the sector reached 30% levels, mainly driven by state-owned banks. In the third slide, actually, I would like to talk about our market presence, our repositioning. This is very important for the management, of course. As management, we are committed to maintain our growth performance at a strong pace, in line our 5-year business plan, we are targeting 10th among private banks in terms of asset size by the end of 2021. We are consistently gaining market shares among all key areas, starting from 2018, such as commercial loans, noncash loans, even we are able to reach close to 2% market share levels. Now we are ranked at 11th in terms of, again, asset size among the private banks. According to the first quarter results, I would like to remind you that top 5 private banks represents over 45% of private sector. That's why as Alternatif Bank, we are differentiating ourselves with our advisory banking model. This approach opened up a new avenue to us to build up a new corporate, large commercial customers portfolio and deepen relations with the existing customers as well. Another area that I would like to mention that we are -- feel ourselves quite experts is trade finance. Our success on trade finance has also been endorsed by global institutions such as IFC and EBRD with 3 awards that we have received this year. Our market share in Turkey, Turkey's foreign trade, is close to 1%, while when it comes to trade with Qatar, as you can see here, we have much higher market share, thanks to our strong alliance with Commercial Bank. Let's continue with our first half financials. I'm glad to say that we have continued to contribute to our country's growth and be there for our clients in such a difficult time by all means. Our asset growth was in line with our budget at 11%, while our loan growth, 23%, exceeded the budget figures. During these turbulent times, we have prudently increased our Turkish lira loan share up to 48% versus 43% as 2000 (sic) [ 2019 ] year-end. We have kept our liquidity with high strong deposit collections. We have accumulated our investment portfolio due to higher yields. And in terms of capital adequacy, our ratios are above regulatory limits, owing to recent capital injection by Commercial Bank. Despite the unexpected market conditions and regulations, our gross operating income is broadly stable compared to the year ago, thanks to our noninterest income generation, even with a new cap on commercial fees. Provision side, the provision expenses was the only part that we have not been under strict control due to significant Turkish lira depreciation, and it took its toll on our bottom line. Actually, this is all from my side. Thank you again, and I'm ready to answer your questions. I now hand over to Amit Sah, EGM Retail Banking, to talk about digital transformation in Commercial Bank, which is inspirational for us also. Thank you.

Thank you, Kaan. Good afternoon to everybody. It's a pleasure presenting our digital transformation strategy to this analyst group. Before I'll start on to the presentation, I just wanted to give a little bit about how we think about digital transformation and what our philosophies. To us, digital transformation is not about digitizing transactions or processes. It is more about digitizing behavior and the way people think. And I will share a few examples on how we go about it and how we have been approaching it. It is a constant process with a 360-degree loop with customer feedback coming in very regularly and readopting to make sure that customers, they find it easy to use, but more important, they find it more useful to use this channel versus the branches. I will share some statistics and some data on the products that we have launched, and I will share 2 specific examples of how we have seen, a, the change in behavior, as I had mentioned; and the adoption. So if you look at this slide, this slide essentially talks about the total number of transactions our retail customers did in these particular years and what's the channel split. So 2 points out here. One is, if you see that our transaction levels have almost doubled over the last 4 to 5 years, which shows a much higher customer -- our customer numbers have gone up by about 15%, 20%. Engagement has gone up double. So that shows you that how digital is helping us to get more engaged with customer. Our branches, if it's used to be 9% of the total transactions, are down to 3% this year. The trends being in this direction, no doubt about it that COVID has accelerated that trend for this year. And once the branches are fully open, it may stabilize at 3% and then go down to 2% maybe later. So we are seeing customer adoption, but we are also seeing higher customer engagement because of our digital platform. If you look at the digitally active customers, again, they have almost doubled over the last 4 years. The bottom part of this graph is what we call retail customers. These are your normal white collar, plus the nationals in Qatar. Our bigger success actually or an equally big success has been in this part -- the upper end of this bar chart. This is what is a Paycard customer. Now a Paycard customer is essentially the WPS base, largely the blue-collar base in the country, where we have about 400,000 active customers. If you see, it's not only the educated, well to do, rich people who are using our digital platform. This is the blue-collar workers who have gone from 10,000 in 2017 to 154,000. These are -- 95% of these customers have never had a bank account in their lives, and this is part of our financial inclusion initiative also. Then if you go to the log-ins, again, I see this as a very important engagement metric from roughly about 0.5 million to 600,000 log-ins per month, we now do 2.7 million log-ins a month. And if you see the Paycard base itself is also engaging. Just to put into perspective, the population of Qatar is about 2.6 million to 2.7 million, and the working population would be 1.6 million, 1.7 million. So of course, it's not the entire population logging in, but our log-in percent numbers are close to the population. So even though we are 191,000 or 345,000 active customers, we're getting 6 to 7 log-ins per month per customer. And that, again, I think, is a very important engagement metric. So how have we done that? Every year, and these are just illustrations. This is not an exhaustive list. This is -- there's some illustration on the kind of products we have launched. So in '17, we went in the market with a big digital remittance product, and my next slide talks about it. So I will not get into detail here. Biometric login, a simple thing about easy to use, as I said. When we launched it early in 2017, it used to take 7 clicks to get to your account. Now it takes 2 clicks. And we have seen rapid adoption, and that's, I think, one of the reasons we see 6, 7, 8x customers logging in because it's so easy. You're doing nothing. You're just waiting for something, for a call. You click twice, and you're into your account with full security. We launched something called the e-Gift so that people who want to give gifts, and we've launched is during EId. I remember, in 2017, all mobile cash. You can just send a message to anybody's mobile. They don't need to be a CB customer, and they can go to any CB ATM and withdraw cash at the click of a couple of buttons. Similarly, in 2018, we launched the contactless. We are one of the largest acquirers in this market. And we have led the transformation of the payment ecosystem. Again, I have a slide on this so I won't dwell on it too much. The paperless PIN, which is every account is activated online and the PIN is created online. There are no more papers being sent. We also launched an SME mobile. In 2019, we did some segment-based -- Sadara Youth. It's a fully digitized product, very popular with the youth. This has largely targeted the Sadara Qatari nationals, the youth. Digital account opening, we now open 99% of accounts on a tablet where end-to-end processing is done, including all kind of sanction screening, compliance checks is done. And within 60 to 90 seconds, an account is open and the customer knows the account number, the IBAN is sent. And then we have the travel plan. We have -- so it is fully, again, automated. You can say which country you're going to, for how long and your cards will be enabled or disabled accordingly because there are some regulations around that also. 2020 has been obviously an exceptional year for the digital journey, given the COVID crisis that everybody has faced. During this time, we have come up with 3 or 4 products, which again are market leading. There is a merchant app with a QR code. Now based on QR code, but just based on a mobile message, the ability for margins to get payment from customers has been enabled. Household Paycards. One of the big requirements during the COVID was that people had household, particularly the nationals, had household staff who couldn't remit money home. What do you do? We launched again a fully digitized, on the mobile app. You can go to the mobile app and with a few clicks, open up as many Household Paycards. And Pay card, I would just remind, is what I've spoken about earlier. This is basically a card and a mobile app-based product with no access to the branches. And you could just open accounts over there. You can remittance on their behalf or they can do the remittance themselves. And then we created something called the CB Smart Payroll, which is a worker remittance product, whereby companies can now remit on behalf of their employees, because just taking us 3, 4 months back, half the country was in lockdown, people are not even allowed to go home -- move out of their houses. How would they remit money? Exchange houses were closed. Exchange houses were fully closed. And people out here come to remit money, and their families depend on it. And that's when we launched this product, which again was very, very popular. Now these are just illustrations to show how it's not about just funds transfer, but it's about a 360 approach to customer needs. I'll just take a couple of minutes on the next 2 slides. So I spoke about the remittance business. Now in Qatar, 85% of the population is expat, and they come here basically to remit money back home. The historical, and people who have worked in the Middle East or in Qatar will know, the traditional way of sending money back is through exchange houses. And what happens, I have a bank account, I come to the bank, I go to the ATM, withdraw the money, take the cash, go to the exchange house, exchange house remits some money and brings back the same cash back to the bank. I mean, how inefficient and unproductive for everybody in the game. So we launched what is an industry award-winning product called the 60 second remittance, started with India. We are now, in many cases, in many countries, able to remit money on a 24/7 basis, and the money is credited into the beneficiary account within 60 seconds after going through all kind of AML and compliance checks. This is just a chronology of how we expanded the offering, and this is still a work in progress. Fourth quarter -- end of third, fourth quarter, we have a few more coming up. The volume that you see, this is in millions per year. We used to do less than -- I mean, this is 20,000, so you can imagine, less than 2,000 -- sorry, 200,000. So less than 15,000 -- 15,000, 20,000 transactions a month. We are now doing between 400,000 to 500,000 transactions a month. All these used to be manually where people would withdraw money, go to the exchange house, stand in queues and -- so -- and you can see how this infrastructure we set up really helped during the COVID period. And we have seen a massive transformation from the -- even through the Paycard base and for everybody, and this is clearly probably the most popular product in the country. And I'm not only talking about Commercial Bank customers. It's probably the most talked about product, more so during the COVID crisis. And we expect to do more than 500,000 to 600,000 transactions a month, which essentially means that we probably have between 25% to 30% of market share of remittances in this country. The rest of it is largely with exchange houses. No other bank comes even close to us. So this is an example of how we have progressed in our digital journey and how customers have supported us by adopting these products. I have 1 more slide, and this talks about the contactless ecosystem. So we launched this product in 2018. And again, from very humble beginnings, this year, we will do more than 6 million transactions, which is more than 0.5 million a month. Again, it turned out to be probably one of the best products in the market during COVID time because just the physical act of taking out your credit card, handing it over to the store clock and getting it back and putting it into the machine, putting the PIN during COVID was a no-no. I mean, that -- and it got adopted so easily, so quickly. And we increased the limits. We did a lot of stuff to make it very convenient for customers. And again, because our infrastructure was ready, we were able to launch. We were able to really ramp it up. And again, I think to support the society in making sure that we stay stable and secure. This is what I had to say. I will hand over to Dr. LeonIe, who is our Chief Operating Officer. And as an introduction, I would like to say that all this would not have been possible if we did not have a very robust technology infrastructure to scale up and provide products and services in a very, very short time. And so Leonie, all yours. Thank you.

Thank you, Amit. Yes. So I'd like to speak about the impact of this investment, this digital investment on our cost-to-income ratio, what we have done and therefore, the sustainability of it. So from the chart on the right-hand side, you might expect that transaction volumes are actually a proxy for expense. But actually, they should be treated as a proxy for revenue. Now there are some exceptional circumstances where we've chosen to forego and are foregoing some of the revenue associated with these transactions in light of COVID. But still, the cost-to-income ratio, you can see there, is highly favorable and on a consistent trend downwards. That's because, actually, as I said, the transaction volumes are more a proxy for revenue than they are for expense. And in fact, the expense line is coming -- continues to come down. How have we done that? Going back 2.5 years, we built a new capability called CB Innovation Services. Previously, we had an operating model where we had outsourced our execution capability to India, to a global BPO. And that meant that we had a model where transaction volume was actually directly proportional to cost. 2.5 years ago, we brought that capability into Qatar and have subsequently really strongly enhanced it. So in CB Innovation Services, we have actually broken the nexus, the connection between transaction volume and cost. It's also allowed us to take control of our operating model so that when Amit talks about digitization, he's not just talking about something at the front end. We're talking about an experience that is end in the clients, which means that they have a great experience, but we also have all of the benefits of basically be able to reduce our expense. It's a highly scalable model. The other advantage of CB Innovation Services is it allows us to customize and to creatively pump out exactly the digital solutions that we need. Some of those COVID-precipitated innovations were delivered in less than a couple of weeks. So it's a highly scalable, highly flexible model. But it's not only that. So you can see on the next slide that we've made significant investment in our technology over time and are continuing to do that. So with the kind of transaction volume uplift that we have, we also have acquired a huge amount more data. So in order to process that and to provide great client outcomes, we naturally need very fat pipes, very fat plumbing, if you like, to pump through a lot of data quickly, but also great computing power, and we've invested in those things. Secondly, more data means more opportunity to change client behavior, to understand their behavior and to change it. It means more opportunity to innovate products, and it means more ways of doing banking smarter. So we have also invested in a team and in a capability, both algorithmics, AI, machine learning and robotics. That allows us to capture that data, to analyze it, to personalize the products that we're offering to customers and to change their behavior. With that increased data capture comes increased accountability, and we've always taken cyber security extremely seriously. In the last month, we were able to achieve the payment card industry data security standard certification, which makes us a leader in Qatar for this year. But that is an international certification that attests just to the quality and the depth of our information security controls. It's not simply that we've invested in fat pipes and great data handling. It's also that we've upgraded our architecture. So all of this capability on the right-hand side. We upgraded our core banking system, and that's given us a much more flexible, scalable approach so that we can again innovate more quickly. We've upgraded our -- in fact, replaced our CRM capability. So that allows us to give really personalized service. If we want to have a booking -- client bookings, we can allow access to the branch on a client-by-client basis, for instance. It also means we can address individual client behavior. We've upgraded our credit card system, which is key to that contactless capability and to ongoing credit card products. And compliance is also something that is very important for us. So the sanction screening solution you see there also leverages extremely sophisticated and enhanced analytics. So the question is, how have we done this? It's not simply the technology that we've invested in. It's also the team. CB Innovation Services is really a hub for a really world-class innovation capability. It's a very diverse team that comes from all over the world. We have adopted very agile delivery processes. As I said, some capabilities in COVID delivered in less than 2 weeks. We've leveraged the architecture, which is we've invested in to make it much more open. We are able to plug-and-play with global fintech solutions. And as I said, we've spent a lot of time investing in our analytics capability. Amit's spoken about the kind of solutions you can see there on the right-hand side that allows us to capture that revenue and to do so in a really efficient way and to provide the client the kinds of offerings, for instance, the wealth solutions that our clients are really looking for. So what does that mean for our JAWs? You've seen the CTI outcomes. We're operating on our JAWs in 3 ways. First of all, we're actually expanding a digital market. We're creating it. You've heard Amit talk about it. But it's -- we're creating markets that didn't previously exist. That means we're capturing and creating revenue streams that didn't previously exist. Secondly, by -- with particularly in the COVID context, but not only in that context, we're promoting highly convenient self-service to clients, which also encourages them to actually log on more, to use the services more, but to do so at 0 additional cost for us. And thirdly, we're expanding our STP capability, including as it applies to face-to-face contacts. So straight-through processing, again, means that the revenue streams that we're creating and capturing come at 0 incremental expense. For that reason, we think that the impact on our JAWs is highly sustainable on a go-forward basis. So at this point, I'd like to hand back to Zubair Chaiwalla.

Thank you, Leonie. We will now start the Q&A. [Operator Instructions] We now have our first question, Rahul Bajaj.

This is Rahul Bajaj from Citi. I have 2 quick questions, actually. The first one is on the reversals that you mentioned about in the provision line. Could you give us a sense of the size of these reversals that you're seeing in Q2? And potentially, you mentioned about a pipeline of reversal in the second half. So any guidance there on what kind of reversals we should expect in the second half of the year? And my second question is just around guidance. So you have given a guidance at the start of the year, if I recall correctly. Just wanted to understand if there is any change to that guidance or what you see could go up or down compared to start of the year?

Rahul, this is Rehan. In terms of recoveries, so this was QAR 278 million in the second quarter, made up of a number of names, and was a combination of written-off loans and NPLs. As I mentioned to you earlier, while we were aggressive in recognizing provisions and writing off in 2016, '17, primarily, it continued in '18 as well. But those were the 2 big years of provisions. We continue to interact with those customers, and we have seen the results of strengthening our litigation department and the business and litigation working together to achieve those recoveries. Yes, there is a pipeline. We do expect to continue recovering on a number of names. The timing is always difficult. We're working with both the customer, the courts, et cetera. So it can take a while for them to materialize even in Q1. I did say that there were some recoveries we would have expected in Q1, they went into Q2 because of the COVID-19 situation. So I think they will come through, but timing is always a little uncertain. I think in terms of your second question on guidance, yes, we gave guidance at the beginning of the year. I think, on cost of risk, for example, we've said we were aiming for 60 basis points. We revised that at Q1, given the COVID-19 situation, to 80 basis points. I think we'll stick with that for now as the guidance for the full year.

That's useful, Rehan. Can I have one follow-up, on real estate sector exposure. I see that sector exposure coming down beautifully as per your plan. Just wanted to understand, how do you see real estate sector risks in the market currently, especially given the COVID backdrop?

Yes. Rahul, obviously, we have worked very hard on bringing down that exposure over the last few years. We've derisked considerably in that area. And that puts us in good stead, I think, for the current situation. We are seeing, obviously, still property prices are coming down. There is softness, particularly in the commercial sector. But we've not seen more nonperforming loans emerging as a result of that, primarily because the business is working very closely with each of those customers.

If I may just add 2 parts, Rahul. First part is in terms of the recoveries pipeline for the second half of the year. It's unlikely to be as high as the first half because both are from a timing perspective and the quantum. So I would say probably around half that figure, if everything works out, would be good on recoveries. And the second piece, around the real estate piece. If you remember, we had the blockade in 2017. And amongst the affected sectors were retail and real estate, both commercial and other areas. So that's sort of already baked into the system. And the COVID has, yes, exacerbated it a bit. But most of the banks, I think, including ourselves, have adjusted their approach and exposure to real estate. Also, under the government's support program, there has been some deferral of installments and interest payments for 6 months for affected sectors including some of the retail sectors, hospitality, et cetera. So the true impact, I believe, will come through later in the year. It will be a sort of intersection of how quickly the economy recovers and the economy opens up, overlapping with the reduction or removal of the stimulus measures and the deferment. So that's something which is currently an unknown and uncharted sort of space. So that's why we are keen to build our risk buffers so that we create enough cushion to absorb these impacts towards the end of the year or early next year. So I think that's really the best way to guide for it.

We now have our next question from Vikram Viswanathan.

Yes. I had a couple of questions. The first one is on the associates. You obviously mentioned that we should expect impairments at the same level in the second half, similar to what we saw in the first half. My question is will these impairments continue in 2021? Or would you bring the carrying value closer to the fair value by the time this year ends? That's my first question.

Yes. Yes, Vikram, this is Rehan. Yes, our intention is that by doing these adjustments for UAB, we will be in a position where we have got the fair value and the carrying value to the right level within this year itself.

Okay. Okay. So -- okay. Understood. Okay. And just on the capital levels at this bank, at United Arab Bank, do you have to recapitalize the bank? Or are the capital levels are quite okay in this line?

No. We can see that the capital levels are sufficient as of now and don't anticipate for the foreseeable future any new capital being required in the form of equity. They are looking at, for example, AT1 as something they may do this year or next year. But equity, we don't expect. There was a rights issue 2 years ago in which we fully participated.

Okay. Okay. My last question is on the loan loss recoveries. Obviously, as you rightly mentioned, this is -- this number tends to be volatile over a year. But if we take a longer time frame, maybe 3 years or 5 years, where would you say you are in the recovery cycle? I mean, given the amount of provision you have taken in the last couple of years, you would have estimated a certain amount of recoveries. What would you say is the numbers that we've already recovered? Would it be somewhere in the range of 50%? Another 50% to go? Can you give us some sense of how long this cycle will continue?

I think, Vikram, the best way to look at this is the net cost of risk. Our long-term objective is to get to 50 basis points as the cost of risk. And I think with the guidance we've given is that our -- this was obviously pre-COVID, it was to get to that level by end of next year, and that still remains our intention.

B I mean, if I can just add. Again, it's very tough to say what exactly because it depends on realizations. It depends on whether we can get to some compromise with the market. But I would say we're probably about 60% through the -- and this year, we would see the last of the release. Not easy, but the lower-hanging fruit in terms of recoveries. And then it will get, I would say, it'll get a little more difficult from next year onwards. But at the same time, I believe, as Rehan said, the real area you should look at is the net cost of risk. And as our provisioning levels drop off, then the recoveries become less important. And therefore, we still are aiming for a net cost of risk of 50 basis points is our target for next year. So that's the way I would look at it.

Our next question is [ Mohammad Afifi ].

Congratulation for the results. So my first question is about the provisions and the reversal in terms of how much in Qatar and how much in Turkey? And also what is the CET1 of Alternatif Bank? And my second question is regarding the United Arab Bank. So my colleague in the previous -- the question was about recapitalization. So I want to go back to this. So you were saying that you don't expect that the bank will ask for equity capital issues during the next few years. But in terms -- if they try to raise up equity capital, will Commercial Bank participate? These are my questions. And also for the -- I missed this, for cost of risk expectation for the year-end, how much do you expect?

Okay. Thank you for your questions, Mohammad. Let me try and answer them in the order. I think, firstly, you asked about the provisions and recoveries and what the split is between domestic and Alternatif. I think you saw in Kaan's section what the Alternatif numbers were in terms of provisions. Recoveries are primarily in Qatar at this stage, where the heavier provisions have also been taken. So mainly, I would say, it's Qatar that you should look at in terms of recoveries. In terms of capital, so we obviously look at capital at group level. When you look at just Qatar, obviously, you can try and strip out the impact of the associates. So obviously, it would be slightly higher at Qatar level than it is on a consolidated level. But we obviously monitor capital on a consolidated basis. I think third question was around UAB and capital position. Their capital adequacy ratio is still well above the minimum requirement of the UAE Central Bank, both at CET1 and at total CAR level. And that's why we said we don't anticipate the need in the foreseeable future for additional capital. I think when it does some, it will be when there is growth in the system, and the bank has turned around its financial performance. We obviously have seats on the Board of Directors and play an important part in the strategy of the bank. As I mentioned 2 years ago, they did a rights issue. We participated fully in that. And I would expect that if and when there is a further rights issue, then exactly the same would happen. And obviously, when that last rights issue happened, it was post the blockade and we were still able to participate in the rights issue. I think your last question was on cost of risk guidance. As I said earlier, cost of risk guidance at the beginning of the year was 60 basis points for this year. At Q1, we revised that to 80 basis points, and we stick with that for the full year. I hope that answers your questions.

Our next question is from [ Varuna from SICO ].

I have 3 questions. First one, regarding the cost of risk guidance. I presume this is for -- the 80 basis points guidance is related to the next cost of risk, is that correct?

That's correct.

Yes. So which means that second half -- because in the first half, I believe it is around 50, right? So we can expect second half to be much higher than first half?

Yes. We're saying that primarily because we've had very strong recoveries in the first half, and we're being conservative about the level of recoveries in the second half. As we said, the timing is never certain when those will be realized. So we're just erring on the side of caution there.

Okay. That's useful. And regarding the associates, the impairments. So when I look at the associates contribution, is it fair to assume that on top of the provisions taken at the associate level, you have another overlay of provisions? Is that how it works?

No, the there is no overlay. There is basically 3 parts to this. In the associates income, obviously, NBO, National Bank of Oman, remains profitable. So that's a positive contribution. UAB has made a loss for the first half of the year. So we recognize our share of that loss. And the third part is the impairment that we have done in UAB, which totals about QAR 284 million for the first half of the year.

QAR 284 million. Okay. And on net interest margins, now that -- I mean, you mentioned all the corrections, sorry, the decline in the second quarter as a result of interest rate and lower interest rate environment. But can you -- can we assume that the -- like the worst is behind us in terms of further margin compression? The repricing? Or you think there's more to come up in the second half?

So our net interest margin is 2.4%. We had given a guidance at the beginning of the year for 2.4% actually for the full year. I think it will be between 2.3% and 2.4% for the full year. There may be a small further compression in the second half of the year. It depends on how quickly the economy opens up.

Okay. And what -- and given that -- regarding the outlook of loan growth, I mean, you see a small compression, as you mentioned, regarding this government overdraft repayments. But what is the -- where do you see growth coming in second half? Do you see government coming back into picture?

Yes. Look, I think we had said in Q1 that our guidance would be at the lower end. So the 4% is what we had said was the lower end of our loan increase for the year. We do expect more activity in the second half of the year, as I said, as the economy opens up. But I would still say it will be a very low level of loan growth for the full year on a net basis.

Okay. If I -- so 1 last question for me regarding the digitization, the digital channels, because when -- in that presentation, it was mentioned some of the back-office services, which was brought back into Qatar. So I want to understand that -- I mean, is that -- is the policy -- bank's policy right now not to outsource any of these services and keep it in-house? So are there still some aspects of it, which are done outside the bank?

So the strategy has been to bring back the entire capability and then to develop it in Qatar. So we do not have a strategy of outsourcing or off-shoring. And we'd expect, given the competitive advantage, the fundamental advantage that, that strategy brings to us, that we would see a continuation and a deepening of that strategy.

If I may just clarify, assume you're asking that question from a perspective of costs and whether there are opportunities for costs by outsourcing. Actually, the way we did this was we created a new subsidiary in Qatar called Commercial Bank Innovation Services, and we brought back our off-shored technology and operations into this subsidiary. And this subsidiary has a different cost of operation as compared to the main bank. That's how we're able to get the benefits of an in-house capability, but at an acceptable, let's say, cost of operation. So we find this model is working very well. And in this new world where people, frankly, are moving away from extended supply chains. So to my mind, this is not dissimilar and that having it close to you actually provides nimbleness, effectiveness, speed to market. And we've actually seen the benefits of this greatly, especially when, say, India had its first wave of COVID and Bangalore and many cities were being closed down. We used to talk amongst ourselves and say, thankfully, we don't have that problem of having our outsourced center in Bangalore, as we did 4 years ago, which would have given us another headache on top of all the other challenges during COVID. So we actually see the benefits of having this, both in terms of efficiency and costs and speed to market, and it's something that we will actually build on further rather than take anything offshore.

Is this model unique for CBQ? Or is it something which has been adopted by other banks in Qatar and the rest of the region?

It's quite unique to Commercial Bank, I would say. So that's -- I haven't seen it in any other bank, yes.

That brings us to the end of the Q&A session. Joseph, over to you for closing marks.

Thank you, Zubair. Well, thank you, everyone, for joining us during this time, and I hope this session has been useful to you. We did the session on Turkey and the digital part based on feedback that were given to our advisers, FTI. So we would again appreciate your feedback. If you found the session useful or if you'd like further color or if you like other areas covered during these investor and analyst presentation so that we can make sure we cover all your requirements. So please do give us the feedback to FTI, is it? They'll contact you for maybe feedback on it, and then we're very happy to. And as always, if there are any other questions, we are living through unusual times. So I'm sure there will be questions coming up on many areas. So please feel free to contact Rehan and Zubair. And as always, 'til our next session, we look forward to talking to you again. Until then, please stay safe. Thank you very much.

Thank you, Kaan. Zubair, thank you very much. So see you. Have a good holiday in Bodrum, okay?

I'm coming back. I'm coming back.

All right. Thank you.

Okay. Thank you. Take care.

Enjoy, Bodrum.

Thank you for joining us today. Thank you very much.

Thank you. Bye-bye.

Bye now.