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

[Audio Gap] At that time, our capital was in the 9.6% range. We said we have to reach at least 11% to 11.5% during the 5-year plan. I'm glad to say that today, we are at 12.2%. So this has been achieved. Similarly, we had a very high -- if you take Points 2 and 3, we had a very high proportion of our loan book in real estate, which is 28%. And conversely, a very low proportion in government and public sector at 6%. And we said we have to change these ratios. So today, our government and public sector is 17%, which is a positive, and our real estate is coming down to 20%. And we will continue on that journey so that ultimately, the government and public sector is larger than our real estate, which will then more, I would say, closely resemble the exposures in the marketplace. Item #4 was our costs. At that time, our cost-income ratio consolidated was 45% and CB Domestic, which is Qatar, was 40%, and the market was around 30% at the time. So we were obviously way out of line of the market. We said that we want to come back to the market level. So today, our consolidated cost-income ratio is 26%, 25.8%. And our domestic is 22%. So we have made significant progress. But again, the market has moved. So our domestic in our competitors are at 22%, 20% -- or even 20%. So obviously, we have a little further to go. But I would say that our costs have been coming down, our cost-to-income ratio, primarily due to cutting out wastage and investing in technology. And that is something that I believe will support us in the future because that's where the environment is changing to support banks, which have strong technology basis. 5 and 6 are really around what I talk about digital leadership and process automation. And one of the things we did was our operations and technology had been outsourced to India. And we brought that back to Qatar in a fully 100% owned subsidiary in the Qatar Finance Center with a different set of, let's say, remunerations and cost pressures. But the benefit was it enabled us to marry our business, our operations and our technology together. And this is critical for future efficiencies and also the client experience in terms of rollout of digital products. And I believe this will continue to support us. 7 was, of course, about collaboration and teamwork rather than silos, which I believe we now have a very collaborative team approach. 8 was around compliance and good governance. We have significantly stepped up our compliance and good governance in terms of culture and also people's awareness that everyone is accountable for it. In good governance, we also brought in -- we are the first bank to bring in deferred bonuses. So our bonuses are deferred over 3 years. And also first bank to bring in a deferral of bonus into a share option scheme, which again is linking performance -- to the performance of the bank. And finally, was around investments in our banks in Turkey, Oman and in the UAE. This is work-in-progress in terms of reshaping these businesses, working closer with us and making sure they generate a return on equity, which is satisfactory for the capital invested. We have, I would say, chain in the management teams in all these locations. We have made progress in Turkey and Southern Oman -- I'm sorry, UAE and even Oman, but there's still work to be done because there's still scope for further improvement and further improvements in the return on equity. And so I would say that's definitely what we have made progress. So if I can go to the -- so that shows you our broad strategic intent and how we have done over the last few years. So I would say we have made good progress, but there's still work to be done. Now in terms of this year's results, obviously -- sorry, 2020 results, obviously, COVID was the predominant factor over it all. Now the impact of COVID was primarily on provisioning. So we saw about 60% of the incremental of -- our provisioning was for, I would say, cautionary buffers of risk that we have built up through our model. And the second impact, of course, was on income due to, let's say, reduced card spending on international travel and some other fees that we waived to provide support to our clients. So -- but -- and the other -- second impact was around an impairment that we took to our UAE business, which brought its carrying value closer to its fair value, and that's the discussion we have with the auditor. So these 2 impacts obviously resulted in our net profit being 35% below last year. Last year was a record $2 billion. So this was 35% below. So obviously, something that we would like to improve in this year. But I would say that fundamentally, we need to look through these figures and look at our actual business income. So if you see, in 2020, our operating income was down by only 2.5%. And that as I said, we saw reductions in some fees and card spend. But we saw some increases in our -- as an example, our international remittances, which were up by 50% during the peak of the COVID crisis, as other alternatives were shut down from physical interaction. And that's boosted our foreign exchange income and some fees. So our digital offerings were able to compensate on that side. So our operating income only went down by 2.5%, and our operating profit was actually up by 1%. So that shows that our underlying business, despite the pandemic, was quite strong. And I believe this year -- we have started this year with some positive headwind -- I'm sorry, tailwinds. One, of course, is the lifting of the blockade on Qatar by -- and that's positive because, one is for sentiment, of course, but two is positive for the region because anything which acts as impediment to the free movement of people, goods and services is always -- removal of that is always positive. We think the sectors, like hospitality, tourism, retail, all these will be positively benefited. But a lot of it will be linked to the vaccine rollout. But this is a positive. The second, of course, is that oil and gas prices are up this year. The Qatar government budgeted at $40 per barrel. We are well above that and even gas prices. So that gives some fiscal flexibility to the government. And third is that the government continues to invest in infrastructure; Hamad, the seaport, the airport; the expansion of the North field for gas, which will increase the production. So all these are positives. And combined with positive sentiment, we think that 2021 should be a very positive year for all and definitely an improvement over 2020. So I would say, as we talked about our capital ratios, if you look at the capital is now, we're above our range. And of course, this is the last year of our 5-year plan. So we are at 12.2%. For me, the ideal range would be at least 13% to 14%, say, 13.5% to me is where I think that would meet most people's benchmarks for a strong CET1. So that will be our target for the next 5-year plan, but we hope to achieve that sooner than that area. And our loan book, as we said, will continue to grow, but will continue to grow the government and public sector. Our provisioning, if you look at it, our NPL ratio is 4.3%. This is a -- and it's come down from a peak of 5.6%. Our view is that, over time, this will again drop to below 3%, again, over a 5-year period. But hopefully, we'll do that before the end of the 5-year period. But this is an area, which is sometimes subject to factors outside our control, like when we get a write-off approval or when litigation enables a settlement. But more importantly, I think the cost of risk -- the net cost of risk, we expect it to come down this year to the 60 to 70 range. And over time, we would like to be, as I said, in the next 5-year plan, I would see that as being between 40 and 50 basis points. And our cost-income ratio, as you can see, consolidated, we've improved from 28.7% to about 26%. And in Qatar, it's 25% to 22%. There's a lot of work going on here. And my view is that we will continue to drop this over the next few years. And ideally, I would say that our CI ratio should be 22% at a consolidated level and sub-20% at a domestic level, and that is achievable by the work that we're doing in technology and operation. And I think Alternatif Bank, we have a clear plan for the next few years to significantly step up with their contribution. Oman has done a bit of cleanup this year. They had some specific. But again, a new CEO is in place, and we will bring some -- I'd say some improvements will come there. UAE, we -- as I said, we're in the turnaround for that. We've done the cleanup of the legacy loan book, a new CEO is in charge. And I believe that our costs have been brought down by 20% in the UAE. So I believe that we will see more upside here in the future. So overall, we are probably at the lowest point possible for our subsidiaries and associates with -- but I would see that -- them contributing more positively in the future, over the next few years, and that will be part of the next 5-year plan. But definitely, from a slow point, I see much more upside contribution than further downsides. So that's at a high level, how we see it's going. And I would say the things which will differentiate us in the future competitively are our ability to deploy technology into customer products, rapid rollouts, which we -- and the second is deploying technology in an end-to-end process efficiency. And that, I believe, will help us to drive down our costs. So our strategy is ultimately that we'll be able to do -- capture more and more with the customer's wallet and do it in a customized manner to ensure we delight the customer. But at the same time, we do it with almost 0 incremental cost. So that is the fundamental approach that we're going to take. And therefore, whatever volume we do will almost drop down to the bottom line straight through without much incremental cost. And that's really where our strategic thinking is on this side and how we'll maintain our competitive advantage and build our position in the market. So that's at a very high-level approach and our progress. And I would now hand over to Rehan, who'll talk you through the actual figures in a little more detail.

Thank you, Joseph, and good morning, everyone. Let me just build on what Joseph has just outlined. Firstly, in terms of the challenges on Slide 7, you can see clearly impact of COVID-19. We had a higher ECL charge, resulted in about 20 basis points additional. We had the reduction in fees and commission on both lower spend as well as the waiver of certain fees like remittances and credit card charges. We also saw, and primarily in the first quarter of this year, a negative impact due to mark-to-market, unrealized, of course. Much of that came back in the subsequent quarters actually. And then lastly, particular to us was the impact on impairment for UAB, something we had highlighted to the analysts previously. And overall, we saw an impact of about QAR 400 million negatively versus 2019. Having said that, our focus was to continue delivering on our strategy. The ratings remain stable and unchanged from previous year. Our capital has now improved to 12.2% on CET1 and 17.8% on total CAR. NPL ratio has reduced to 4.3%, as Joseph said, that peaked at 5.6% a couple of years ago. So it continues to come down due to settlements, and we'll continue to work on that area. Cost-income ratio is now 26% and has continued to come down. It's 22% at Qatar level. And our NIMs have improved on a normalized basis from 2.3% last year to 2.4% in 2020. The next slide gives a bit more detail. As in previous quarters, we have reported, but on the left-hand side normalized. And what we've done there is we've stripped out the impact of IFRS 2, which results from the movement in share price for the staff share option scheme that Joseph spoke about earlier. In Q4 -- if you look at Q3 versus Q4, there was approximately a QAR 51 million change due to that. So when you strip that out, you can really see what the underlying trend is. I'll start firstly with the balance sheet. You can see that we increased our loans by 7% or QAR 6.2 billion between Q3 and Q4. At the same time, our deposits grew by 4% or QAR 2.7 billion. Importantly, within that, low-cost deposits continue to grow and they're up 8% quarter-on-quarter or 24% year-on-year. As you're aware, this is one of our focus areas. We've been very active in transaction banking through our payments and cash management as well as our leading remittance products. And this has resulted in higher average low-cost deposits throughout the year. If we then look at the income statement on operating income, this grew by 5% quarter-on-quarter. Within that, NII increased by 3% and our fees and other income grew by 11%. Cost-wise, I think underlying costs are pretty similar throughout the 4 quarters. And that's meant that our cost-income ratio has continued to decrease. It's 25% for the quarter versus 26.1% last quarter. And again, within Qatar, it's just under 21% for Q4. All of that means that our operating profit at QAR 834 million is up 7% quarter-on-quarter. And that is very positive, and we can carry that forward, that momentum into 2021. In terms of provisions, the focus in Q4 was really to build and have adequate and precautionary provisioning under IFRS 9. ECL charge on Stage 1 was increased by 36% and on Stage 2 by 28%. The provisioning on NPLs continues to be prudent, continually reassessed, of course, given market conditions and, of course, the progress that we're making in our resolution management. As you've seen, we've had success in this area throughout the year, and this will be an area that we'll continue to work hard on in 2021. On the associates, as we've highlighted for UAB, we have taken impairments, both in 2019 and in 2020. We use a value-in-use model and that has been independently assessed and vetted by our auditors. So that means that overall, we did see, as I said, about a QAR 400 million negative impact to our profit versus 2019. I'll then just turn now to Kaan Gür. As you know, he is our CEO in Alternatif Bank. And if we can turn to Slide 23, he will give you an overview on Turkey and the bank in particular. Over to you, Kaan.

Thank you. Thank you, Rehan bhai. Good morning, dear all. Again, I wish you a safe, healthy and prosperous New Year. Actually, we need that good intentions actually. First of all, let me start with the Turkish microeconomics, actually. Stimulus, true loans enabled Turkish GDP to grow by 1.5% in last year. Yet, of course, with the cost of high yields, in 2021, we expect Turkish GDP growth to be around at 3.5% to 4% levels. Normalization process with tighter monetary policy of Turkish Central Bank and ease regulations for banking sector enabled market dynamics to work properly again and resulted in Turkish revaluation. Especially current account deficits recorded at $38 billion in 2020. Actually, our expectation is a considerable decline, and we are expecting $15 billion in 2021. Of course, with the support of higher tourism revenues and low gold imports and, of course, the vaccination rates increases are the main factor of improving the whole economic situation globally, actually. In the same time, Turkey Central Bank, as you know, already simplified the monetary policy and increased its policy rate up to 17%. As Alternatif Bank, we expect policy rates continue to be Turkish positive unless future volatility occurs. CPI is expected to rise 15%, first, but before full to 11% by 2021 year-end. We think demand should be contained to maintain both financial and price stability. On the next slide, let's look into Turkish banking sectors very quickly. Economic stimulus, true loans enabled Turkish banks to grow their loan base rapidly in 2020, according to weekly BRSA data. Turkish banking sector realized a solid loan growth of 25% on an annual basis. Dollarization in the country resulted in a fixed deposit share in total deposits up to 55%. This is a kind of record high. Yet, the contraction in the fixed loan decreased the share of FX loan in the total loans by also 4%. Thus, the overall FX share in Turkish banking sector balance sheet was flat on a year-on-year basis. On the contrary, securities to asset ratio of the sector was up to 17% versus 15% of last year as the investment portfolio sector increased by 44%, owing to more attractive yields. On the profitability side, I can say that net interest margin of the sector has been under significant pressure since late third quarter and hit the fourth quarter income of the sector. Net interest margin's squeeze is expected to continue in the first and, most probably, second quarter of the 2021 as well. Let's look into our financial results for 2020. As you can see on the left-hand side, our asset growth was quite strong at 23%. The main driver of the strong growth was the solid loan growth, 25%. I should underline that the growth came from Turkish lira corporate and commercial loans have been the engine of our healthy loan growth in 2020. This was a result of our strategic focus, reshaping loan book in favor of Turkish lira. On the other hand, in line with that focus, we have managed to increase our deposit base also by 14% with a substantial Turkish lira deposit growth of 26%, dominated by more diversified retail deposits. Another positive development I should emphasize that in 2020 was on the asset quality side. In line with our healthier balance sheet focus, our NPL ratio decreased to 4.8%, while our cost of risk was down to 1.3% from 1.9% of last year. We have a higher coverage ratio at 80%. Last year, we were around, in 2019, 64%. On the profitability side, you can see the figures on the right-hand side table. As it was also the case for the sector, tighter regulations and higher interest rates took its toll on our net interest margin. And hereby, our NII was down by 8% on an annual basis. On the other hand, in contrast to the sector trends, Alternatif Bank had managed to increase net fee income robustly by 72%. However, due to swap restrictions, we had a negative impact on our total operating income and saw a decline of 10%. In order to offset lower income and protect profitability, we have taken proactive measures on our cost management and we managed to control our OpEx growth, both below budget and inflation. As I have mentioned, thanks to our intact asset quality and our provision expenses, down by 32% compared to a year ago. All in all, we have come up with an annual net income of TRY 106 million, which is almost flat compared to our 2019 figures. So this is a quick outlook of Alternatif Bank's performance in 2020. Now I will be handing over to Mr. Zubair and looking forward to answering your questions, if any, during the Q&A session. Have a great day. Thank you.

Thank you, Kaan. We now move to the Q&A. [Operator Instructions] We now have our first question, Rahul Bajaj.

Very useful. This is Rahul Bajaj from Citibank. I have 3 quick questions actually. First one, on the impairment of the associate line, I recall you mentioned during the previous calls that probably fourth quarter '20 would be the last quarter when you will take a bit kind of impairment for that item. Just wanted to understand how are we standing now? I mean do we need to take further impairments in 2021 for the associate UAB? And partly linked to that, the nonimpairment part of kind of associate profit, which was negative in 2020, should we expect 2021 to turn into profitability for UAB and National Bank of Oman on a consolidated basis? How should we think about that line? So that was my first question. Second question quickly on the loan deferrals in Qatar. And as I understand, the loan deferrals ended at the end of 2020. Just wanted to get any color you have or want to share about how have those loans been trending now that the deferrals are over in the month of January. And my final question on Turkey actually, very interesting trend in terms of coverage and NPLs there. I see the NPLs are down, but coverage is up. I just wanted to understand, is this a result of the loan deferrals and loans not moving into Stage 3 because of the deferral fees and hence the NPLs are down and coverage looks up? Or it's kind of an actual trend where NPLs are coming down and coverage is going up?

Yes, Rahul. Let me take those first 2 questions. And then on the Turkey one, I can ask Kaan bhai to address that. Firstly, on the associate impairment, yes, we have talked about the impairment requirements both in 2019 and 2020. And we have done those impairments. Substantially done and, of course, to a level that we are satisfied and our auditors are satisfied. Having said that, this is an annual assessment. So again, we will do that at the end of 2021. If there is a requirement, we will, of course, make that -- put that through. But I don't expect it to be anything in the magnitude of what we've done in the past 2 years. I think your second question was around loan deferrals. Actually, Rahul, the schemes have been extended. They've been extended till June of this year in Qatar. And they've been extended in other countries as well. Oman, I think is still March. Turkey has been extended. And Oman has been extended as well into 2021. In Qatar, it's about 2.5% that has been deferred. And therefore, we still need to see during 2021 how that plays out and what that overall then impact is post the deferral period coming to an end. I think your third question was on Turkey around the coverage, so let me ask Kaan bhai to answer that.

Yes. Rahul, thanks for the question. Actually, it is a very important issue that at Alternatif Bank, actually, we are focusing on, especially on our asset quality in order to make it the solid buffer for the future, but in the same time, our efforts to especially manage the existing NPL. And I can say that within the private banking sector, Alternatif Bank has one of the lowest NPL ratio. But I can easily say that, yes, this is a huge effort. And at the same time, our collection and recovery performances in 2020 was exceptional. And then we're going to move in the same manner in 2021. It is about the balance management. It's just the outcome of the very focused management on that areas, actually.

Just a quick follow-up on the Turkey answer. So is it safe to assume that 80% level of coverage where you are now is kind of a safe level you think going forward? Or you think there is room to improve it further?

Yes, for sure, within our next year, especially in the budget, we are going to increase a little bit our existing coverage ratios, 80%, 85%, 90%. We will maintain our existing -- a little bit increase existing coverage ratios for 2021. Actually, I can say that we are in a good shape in order to manage those very important risk issues.

We have our next question from Edmond Christou.

This is Edmond Christou from Bloomberg Intelligence Research. Since I started covering the bank very recently, can you explain to me the size of the Stage 2 loan? I think this is a legacy book you have on the books. Just -- it is higher than the industry. I just want to understand how much of that is at risk because of the COVID and to migration to Stage 3? It has come down, which is positive. I just want to understand the migration you expect since you are flagging that the deferral program will phase out by 1H and we could see some downgrade in the second half of the year. The other question, is it possible to provide some clarity on the collateral you have against the coverage? What is the size of the collateral? Do you see impact from the real estate on the collateral valuations? The last one is your LDR is high. I think this is something you're probably looking at to reduce over the next 5 years. Any clarity on how much you're going to reduce it? Is it gradual or significant? And what's impact on the cost of funding for 2021?

Thank you, Edmond. Let me take those questions in turn. Firstly, on Stage 2, 16% of the overall book is in Stage 2. This compares at a very similar level, for example, with Masraf Al Rayan and a couple of the other banks. It has actually been going down. A year ago, it was 17%. So it's trending downwards for Commercial Bank at a consolidated level. Your second question was around the collateral. So when you saw in our numbers that our coverage ratio is just over 100%, 101.6%, you can add about 15% to that for the collateral that we hold, which we don't include in that calculation. The third question was on cost of funds. I didn't catch exactly what it was. Could you just repeat it?

LDR, let me handle that.

Oh, LDR. Okay.

Just a follow-up on the first one. On the Stage 2, since it's a legacy book, how much an impact you've seen or deterioration within the Stage 2 in terms of the COVID? I believe this is already a restructured loan. Do you see more restructuring happening for an existing restructured loan?

Actually, we work very hard on our Stage 2. We've actually seen, as I said, a reduction in our stage through -- Stage 2 through settlements, negotiations, derisking. So all of those actions are actually reducing Stage 2, not increasing them. Of course, once the deferrals are completed, we will reassess that book and assess how much needs to go into Stage 3, if at all. Yes, and ECL coverage actually now stands at 28% in -- Stage 2 is now over 7%. So I think it's pretty much the highest in the market that is there for Stage 2 coverage.

I'll take the question on the loan deposit ratio. You're right, it was a bit high. And that's because at the year-end, we had a significant drawdown, which again was repaid. But fundamentally, we believe that what we should be looking at is really our liquidity coverage ratio than our net stable funding ratio, which are reflecting the true liquidity. And this year, we'll be raising further long-term funds. And on that basis, we are comfortable with where we are. And more importantly, because you can always bring down your loan deposit ratio by paying up for some high-cost deposits. And frankly, our focus is on increasing our proportion of low-cost deposits because we believe these are sticky and supported by transaction banking, and they also bring down your cost of fund. So as Rehan mentioned, our low-cost deposits have grown by 25% this year -- sorry, 24-point something. So 24%. So that's where our focus is on. And that's how we will bring sustainability to our funding and also bring down the cost of funding. Because I do believe the loan deposit ratios are rather blunt instrument, because it doesn't differentiate between high-cost deposits, low-cost deposits or even the duration of the loans. And that's why probably better to look at NSFR, LCR and then the proportion of low-cost deposits to get a sort of reasonable picture of liquidity and that's where our focus is on. And the loan deposit ratio is -- like I said, it's a little bit volatile, but I think it's -- sometimes gives the wrong signal of growth.

So I should expect that the cost of funding pressure should come only from Turkey, not from Qatar?

Sorry, I didn't quite understand the context, the context of that?

The pressure on margin is likely to come from Turkey only, not from Qatar on higher cost of funding, given -- especially in the first half of the year?

I will let Kaan Gür answer that, but yes, I would say, in Qatar, we are anticipating -- we continue to work very hard on our cost of funding. And as we reprice some of our higher costing bonds, we expect that to come down. I think Turkey, the effects of that, the rise in the interest rates by 4%, 4.5% will work through the system in the first quarter. The repricing, I think, mismatch. And after that, you'll see the benefit. But Kaan, do you have anything to add to that?

Yes. Mr. Joseph, thank you. Actually, this is a structural issue of Turkish banking sector, the mismatch of the deposit and the loan, especially on the Turkish lira side. Actually, we are one of the -- maybe the lowest maturity mismatch gaps, again, in the private sector due to our very solid approach growing in Turkish lira side also. But it is obvious that we're going to see that strong pressure on the net interest margin side. But of course, all efforts to repricing the existing portfolio in, again, growing very selectively. And then, of course, in the same time, demand deposit base is another important issue to overcome that net interest margin pressure. We are all focused on that in order to improve our net interest margin in -- starting from second quarter, I can say. But this is a structural issue, and the whole Turkish banking system actually impacted. That's the trend starting from early August in 2020, I can say that.

Our next question is from Vikram Viswanathan.

Can you hear me?

Yes.

My first question is on the impairment of the bank in UAE. According to my calculations, if I look at the carrying value which you reported and then compare it to the market value of this bank, there is still a gap of QAR 300 million to QAR 350 million. I just wanted to get a better sense of your fair value for this bank. I think the right way to do this is compare the carrying value versus the fair value and not the carrying value versus the market cap. If you can just give us a sense of approximately where the fair value is of this bank?

Yes, Vikram, let me take that. You're quite right. The industry standard model is a value-in-use model that looks at a lot of internal metrics, like the Board approved 5-year plan, cost of equity, terminal growth rates, et cetera, and also the value of the business in terms of future activities. And then we have an independent validation done of that by, not only the auditors, but their specialists in valuation terms as well. So what we've done over the last couple of years is bring the value of UAB down substantially. It is not at market value. You don't do that for businesses that you have as long-term investments associates, which are a going-concern business. And that's why the valuation is done on these industry-standard methodologies. And that means the value now that we have, which you can see in our books, also in our accounts, is now under QAR 1 billion for UAB.

So I was just trying to figure out how different is the fair value compared to the market value. Is it significantly different? Or is it very close to the market value of this company?

The fair value will always incorporate, as I said, future growth plans, the 5-year Board-approved plan and also a premium for the share -- shares that you hold, which, as you know, we have a 40% stake. So all of those are brought in when that value-in-use number is derived.

Okay. Okay. My second question is on the growth. The growth in the last quarter was quite good as far as loan book is concerned. Should we see this as a one-off? Or should we expect this trend to continue in the upcoming quarters?

Yes. Look, I think there are positives in the market, as we've discussed, with the vaccines rollout, the World Cup is getting nearer, the lifting of the blockade, et cetera. So I think there's a lot of positives in terms of sentiment. So we would expect loans to grow into 2021. We're guiding between 5% to 6% as the loan growth for 2021. And I'd like to think that is a conservative estimate for loan growth.

And there was -- you're correct, there was a one-off item in the last week of December, which boosted our loan growth. That's a one-off item. It's got reversed or repaid, I would say, in the early January. So therefore, that will obviously -- you need to adjust the year-end figures by about QAR 3 billion to take account of that one-off adjustment. And on that revised base, I think you can factor in 5% to 6% conservative growth rate for loan growth.

Right, right. Okay. My last question is on National Bank of Oman. It looks like you've been trying to clean this bank up, similar to the bank in the UAE. How far are you in this cleanup? Should we expect a much better year in 2021? Or should we see more cleanup happening this year?

I think NBO is a listed company, so I don't want to go into too much detail on what their outlook, et cetera, is. But I would say that this is -- a new CEO has come, so, obviously, they'll look at the loan book and do it. But we are optimistic on NBO for 2021.

Our next question is from Aybek Islamov.

This is Aybek from HSBC. So a couple of questions. 2 or 3 questions I want to ask you is, well, firstly, on impairment, where you already answered many questions, impairment of United Arab Bank. I think you mentioned that you're going to review whether further impairment would be necessary towards the end of this year, right? Correct me if I didn't understand you correctly. So does the normalization with GCC, with the UAE play in any way into your impairment view on United Arab Bank? That's my #1 question. And #2 question also relates to this normalization of relations with the rest of the GCC. How can that impact your cost of risk, asset quality prospects of United Arab Bank in UAE? Will there be any impact at all? That's my second question. And thirdly, looking at your funding cost, to what extent can you drive your funding costs lower in Qatar? Yes, let's forget about Turkey for now. I'm just curious about your ability to further reduce the funding cost in Qatar. And that's all.

Thanks, Aybek, let me take those. Firstly, on UAB, yes, that's correct. It's an annual assessment. We tend to do that towards the end of each year. Obviously, last year in 2020, because we knew that the numbers were fairly significant, we did that throughout the quarters. But in 2021, we expect to revert to at the end of each year. As far as obviously, the blockade lifting, I think that's very positive from all sides and that should see better, improved activities between the countries as well. Will that impact the impairment? Early to say. We will have to watch and see what that means from an impairment point of view. But certainly, as I said, the substantial impairment that needed to be done on UAB has been done. Your last question was on funding cost in Qatar. Actually, it continues to come down on a monthly basis, and we expect that funding cost to continue decreasing. We -- it's something we have a very, very focused view on and something we look at on a weekly basis. And we are seeing the results of that in a very positive way. So I expect that to continue into 2021.

Let me add a little bit of flavor to that, Aybek. On the UAB impairment and the impacts of the blockade, I would say there would probably be limited direct impact because they don't have too much, let's say, cross-border exposures. So I think the -- it might be, I would say, perhaps risk perceptions when they raise debt, et cetera, which might be positively benefited in that extent. So there may be, I would say, on the liquidity and the cost of funding, perhaps we're benefiting rather than directly impacting, say, in impairment assessment. So that's that piece. On the cost of funding in Qatar, as Rehan said, we look at that on a very -- on a weekly basis. Where you will see some benefit is that we had some longer-dated funding from, say, clients. As that matures in 2021, that will obviously get repriced at lower rates. Secondly, we have some longer-dated EMTN maturing in 2021, which, again, we will replace with lower cost funding given the current market levels. Plus, and the third factor will be, we continue to focus on cash management and capturing more mandates. And as you saw, there was a significant growth in our low-cost deposits last year. That is an ongoing strategic focus and that will again -- we could expect that trend to continue. And therefore, that will also contribute to the lower cost of funds. So there is still potential to continue to drop our cost of funding in Qatar.

Just a follow-up on the United Arab Bank. Do you think that the blockade impacted the asset quality in any way, the asset quality of United Arab Bank? Did it impact, for example, the ability to recover and collect on bad loans?

I would say -- as I said, I mean, maybe it's the other way around. If say Qatari banks have some loans in the UAE, it probably makes it easier or Saudi makes it easier to recover. I don't think UAB has that much offshore exposure outside the UAE. And therefore, to that extent, recovery may not be such an -- or lending to a lot of foreign principles. So that's why I don't believe it's that relevant to them. But definitely, if Qatari banks have exposure in the UAE, you would see some benefits in terms of enforcement and recovery.

Our next question is from Waruna149.

This is Waruna Kumarage. I'm from SICO Bank Bahrain. I have a couple of follow-up questions on the loan growth. Thank you for the clarification on the spike of loans in the fourth quarter, but I just want to understand 2 things. One is where is this normally came from? Was it from the government side? And secondly, I can see an increase, actually, in absolute terms in real estate loans in the fourth -- in 2020 compared to 2019. So is it like -- because as you're strategically winding down on the real estate exposure, I was wondering whether this was an opportunistic measure? Or if you can give some color on that?

Yes. Thanks for the question, Waruna. In terms of -- firstly, I'll answer the second question on real estate. As you know, the percentage still continues to come down year-on-year. So yes, there will always be some growth in the lending in that sector, but our intention is always that the percentage comes down and the government sector percentage goes up. And that has been achieved. If you look at Slide 13 of the presentation, you can see that. In terms of your first question, the temporary was, yes, it was government. And that has come off in the first few weeks of January. As Joseph said, that was about QAR 3 billion.

And just to add flavor to the first part to what Rehan said, what -- we're now extremely selective on real estate. And I think that's -- but again, real estate is an important part of the economy. So there will always be some individual opportunities, whether for long-standing clients or for bank projects. So that's what we are doing. So we are very selective now. It doesn't mean that we've completely frozen real estate lending because that would then completely take us out of the market. But it's much more on a selective basis with the right clients and the right projects, and that's where our approach is.

Our next question is from [ Omkar Jambhale ].

I have one question. What is the size of the deferred book as a percentage of total portfolio both in the Qatar? I just wanted a clarify on how much of that is from Qatar and from Turkey?

Yes. Thanks, [ Omkar ]. As I mentioned earlier, it represents about 2.5% approximately in Qatar of the overall book. And as I mentioned also, the program has been extended until June of this year.

And what percentage is from Turkey?

Kaan, do you want to take that?

Yes, yes, yes, of course. Actually, maybe I can say that it is less than, as an NPL to total volume, maybe 10% to 15% at most. Actually, this is well-managed again, especially during the forbearances, et cetera, all over the regulations regarding those issues. But 10% to 15%, at most, I can say that, which is, again, very lower than the private sector banks.

Kaan bhai, I just want to clarify, I think the question was, what percentage of your total loan book has been put under deferred installment or deferred interest? I think -- so I'm not quite sure whether that was what you addressed. What percentage of your loan book has come under this deferred scheme, under the government measures?

Okay. Okay. Actually, this is, again, regarding the existing situation, I am excluding the legacy portfolio, the new deferrals is at up to 15%.

We have no further questions. Back to you, Joseph.

Well, thank you, everyone, for joining us today and for your very insightful questions. As always, we're always available to answer any questions from Rehan and his team. And we also have a full-fledged Investor Day on -- next Thursday, on the 4th of February, sorry, at 10:00 a.m. Again, during that, we do this every year, that will be -- so that gives you a chance to also hear from the individual businesses, our retail, our corporate, et cetera. And also I would probably -- and also a chance to get a better idea of what's happening in the business and the progress going forward. So we look forward to welcoming you to that. That should be about -- we'll keep the presentation to about 1.5 hours across 5 or 6 key aspects. So -- and then you have time for questions about 1/2 hour. So we understand your time is valuable, so we'll try and keep it short and sharp and insightful. So once again, thank you, and look forward to hearing and seeing you all next Thursday, 10:00 a.m., Doha time, right? 10 a.m. Doha time. Thank you. Bye-bye.

Thank you. Bye, everyone.

Thank you.

Thank you. Bye.