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

Good afternoon, ladies and gentlemen. I am Zubair Chaiwalla, Head, Capital Market and Investor Relations. And I welcome you all on The Commercial Bank Q1 2021 Results Call. [Operator Instructions] I now hand you over to Joseph Abraham, Commercial Bank's Group Chief Executive Officer. Joseph, over to you.

Thank you, Zubair, and welcome again to our quarterly analyst call. Well, this year's first quarter results have been a strong quarter. As you can see, a 50% increase in our net profit. This has reflected underlying strong growth in our loan book, which has grown at 12% on a consolidated basis and 15% in domestic. We've also seen good progress on our net interest income, helped by an improvement in our net interest margin to 2.6%. And also fees and other income have also grown by 12%, reflecting good ForEx, particularly in ForEx income arising from our strong remittances business. We have kept costs reasonably well controlled. And overall, I would say that the outlook remains positive for the Qatar economy, given the continued removal of uncertainties from the blockade and the lead up to the World Cup and also the expenditure on infrastructure and the North field expansion. So we remain positive on the Qatar outlook, and the IMF has put Qatar at 2.7% as the projected growth for 2021, though we actually expect it to be slightly higher, around 3%. Yes. The other, I would say, positive is from overall return from our subsidiaries and associates. We've seen NBO continue to be the main contributor, and we have also had a UAB, finally turning the corner and getting a positive result, albeit small. On the other side, we had Turkey, the volatility in policy and interest rates meant that our Turkish business had a loss for this quarter, which was due to the mismatch in pricing on the deposit and asset book. We expect that to flow through and beef coming into positive in the second quarter onwards. We also have our CEO here from Alternatif Bank, who will be available state. But we continue to show good asset quality in our Turkish loan book, which I think is the most important part, at about 4.6% NIM, which is 1 of the best in the sector. So that's very important for us. So overall, I would say, a very positive quarter and a positive outlook for the rest of the year. And therefore, we see discontinuing to build and benefit our ROE, which we have said would be in double digits, and which has already crossed 10% this year. So we continue progress in our ROE. And our CET1 remains at 12%, and our total CAR is also strong after our AT1 issuance. The other positive is the upgrade in Commercial Bank's outlook by S&P to positive from what was previously stable. And this, I think, is an indicator of, again, the rating agencies who have access to a good degree of our information, also signaling the positive outlook on Commercial Bank. I will hand over to Rehan, who will speak in more detail about the financials. And then after that, we can move to questions. Rehan?

Thank you, Joseph, and good afternoon, everyone. I'll focus primarily on Slide 7, which shows the quarter-on-quarter results. As in previous quarters, I've separated normalized results with reported results. This is just to strip out the impact of the staff share performance scheme, which is a fully hedged scheme and -- but it does -- on the operating profit, therefore, you can see that the numbers are the same, 795, 795 and 730 last year versus 730, but it does grow up both on the income and the cost side. So by stripping that out, you can see what the underlying trends are in both the income and in costs. It's actually been a busy start to the year. We successfully completed our first international AT1 issuance of $500 million. We've participated in NBOs, AT1 issuance in March. And as you can see from the balance sheet, we've got a very strong growth in loans of 12% year-on-year and just under 3% quarter-on-quarter. We've grown our share of consumption and government public sectors, which is a prime focus for us in our 5-year strategy. And at the same time, reduced our percentage in the real estate sector, which is now below 20% at 19%. Alternatif represents under 10% of the balance sheet size is now around 9.5%. On the deposit side, also, you've seen that we've grown our deposits by 5.8% year-on-year and 8% quarter-on-quarter. Within that, low-cost deposits have grown by 26% year-on-year and 9.5% quarter-on-quarter. This has been very much a focus area for us. Basically ensuring that areas such as payments, cash management and remittance products come to the 4. We've invested in those products, and that's beginning to help us in terms of lowering our cost of funding, our cost of deposits, and therefore, improving our NIM. As you can see now, that stands at 2.6% versus 2.4% for Q4 of last year. Our net interest income has grown by 12.3% -- sorry, by 8% year-on-year. So this is being driven by the overall reduction in our cost of funding and the overall loan growth. And I can see the momentum in the business, some of that loan growth was very much at the end of the quarter. And therefore, there's momentum in the business, which should mean that our net interest income continues to grow further from this area. In addition, on our nonfunded income, we grew by 12% year-on-year. Having said that, we did see some impact of the volatility in the Turkish lira, which did impact our fee income, our FX income and increased our swap costs slightly compressing the NIM in Turkey as well in Kaan Gür, we'll speak to that in a bit more detail later on. Costs are up quarter-on-quarter, but within the range that we expected, we continue to invest in the business, and this is likely to be the kind of area of costs that we see quarter-on-quarter going forward. Our cost to income ratio reduced from 27.1% to 26.8%. And what we can see going forward is that the main driver for reduction in cost income ratio will be an increase in income, both in our net interest income and also in our noninterest income. So overall, operating profit at QAR 795 million. Net provisions lower than the previous couple of quarters. However, we continue to be conservative. We've not changed our ECL model in the first quarter versus last year. As the QCB scheme has also been extended, we will continue to or on the conservative side. You can see our cost of risk is lower, though, than Q4, both on a gross basis. And on a net basis, we've been -- we've seen strong recoveries again in the first quarter, which has brought down the cost of risk on a net basis. NPL ratio, given those settlements, we've seen a small reduction in our NPL ratio from 4.3% to 4.2%. And importantly, our coverage ratio continues to go up, and it's just under 106% now at the end of Q1. Given the AT1 issuance, capital ratios have improved at Tier 1, it's now at 16.3% and 18.3% on a total basis. As Joseph mentioned, our associates have both recorded a profit in Q1, and it's good to see that UAB has returned to profitability in the first quarter of this year. I mentioned in the last call, that we will look at impairment again at the back end of this year, Q3, Q4. But given that both are -- have recorded a profit in the first quarter, that should give a strong signal of where we expect that to be. Having said that, we have set aside QAR 400 million in our budget for impairments, and we will, as I said, assess that in the second half of this year. Alternatif's profit, as I said, has been impacted by the volatility in interest rates and exchange rates, Turkish lira did depreciate, and that did have an impact in the operating income primarily, but they have worked very hard on the NPL ratio and the coverage ratio, which have both improved year-on-year. I'll hand over to Kaan bhai now to talk a little bit more on alternatives, the results and the Turkish environment -- economic environment. So Kaan bhai, over to you.

Thank you very much, Rehan bhai. Thank you. Good morning, dear all actually, today, I will give you a brief update on the Turkish macroeconomic indicators as well as the latest data on the banking sector, of course, following by I think bank's first quarter financial results. Here in first slide, let me start with the macroeconomic side. As you can see, actually, we have seen growth momentum, which was created in the second half of 2020 and this has been maintained in first quarter. We have seen solid 6% growth. However, we also see that the continuing volatility have the potential to limit the positive aspect for Turkey. 2021, as a full year, our growth expectation is going to be around 3.5%, 4% levels. As you know, the southern replacement of CBRT Governor generated some volatility in the financial market. But we are believing that, maintaining a tight monitor policy of course, we'll contain further royalties. Thanks to normalization effort, we expect, which is very important for Turkey, the current account deficit to GDP ratio. Actually, we're going to see a decline around 3% this year, it was around 5% last year. And of course, the most crucial thing is here is higher tourism in comp and lower gold imports. And those are expected to help the pace of this recovery. On the CPI side, we're going to see a rise 17.5% in May, but it's going to be decline. I think the fourth quarter is going to finish around 13.5% levels. Ultimately, we believe in that, the continuation of tight credit policy and demand control becomes even more important to maintain both financial and price stability for Turkish economy. Actually second slide, we're going to look at the Turkish banking overall trends. As you can see here, actually, in contrast to much of last year. In first quarter, we have seen limited growth in loans and the overall decrease in lending appetite by Turkish banks. Just a reminder, in 2020, the growth was around 35%. As Rehan bhai and Mr. Joseph underlined this, the high interest rate environment also meet generally lower demand for borrowing, especially on the business side and the individuals. But again, we look at main banking products, we see 4% to 5% growth loans and deposits. Actually, this is meaningful. But the most important signal comes from noncash loans, which is a reflection of increasing Turkey's foreign trade volume. And in the same time, low-cost of Exim Bank financing facilities. This is, again, an important issue. But asset quality, this is a very crucial thing we are focusing on as alternative bank. Actually, b, continue to outperform the sector here. And our NPL and post office metrics actually, this is as a result of our last several years, the efforts. Actually, we are doing very good at compared to especially private sector in Turkey. And in an overall -- the profitability aspects, Turkish banking sector, net interest margin under very huge pressure as funding costs increased sharply. And 30% year-on-year decrease in sector net interest income, we are going to call with that in a very, let's say, systematic way as Alternatif Bank. And at the same time, we have seen 6% decrease in fee and commissions sector-wide year-on-year. So the NIM squeeze has continued into second quarter. We believe, but we expect that it's going to be losing up, especially towards the end of year. Actually, this is the oral picture of Turkish banking sector. At last slide, I would like to mention about our performances under this background actually. Our total asset size, as you can see here, grew by 9% in nominal basis. The thing is here, we really maintained our existing loan book. We continued our selective lending. And of course, the risk management approach was very solid. We also focused on hedging our balance sheet in order to minimize any impact for future depreciation. On the deposit side, again, we were very selective but in the same time, our focus was on rationalizing our deposit base to optimize funding costs, especially, this is a very important performance -- key performance area here. Despite the challenging environment, I can say that we still managed to decrease our NPL volume, and we are finishing the quarter at 4.7%. I was underlying that. We have also increased our NPL coverage, 87% to 80%. And thanks to our existing capitalization plan. Our parent, Commercial Bank, we have received 25 million capital injection, and we completed the transaction in March. And also it was important AT1 issuance, which is $200 million, also completed again the last week of March. When you look into profitable decides, as we all know that under the huge net interest margin pressure, we are completely changing converting our existing NII facilities in order to cope with that -- the margin squeezes. We are diversifying our deposit base. We are much more focusing on, especially deposit costs. And of course, having a selective lending to the appetite, also gives us good news to, again, creating the positive net interest margin. But maybe the most important thing is here, especially for the first quarter, our high asset quality thanks to our very limited NPL flows. So very strong collections. We succeeding decreased 42% in our provision expenses. And of course, we allocate TRY 27 million free provision. This is, again, is going to be kind of shield against possible volatility in the markets. So I should really like to emphasize that at this point, also, while the bottom line for Q1 is negative, but we are believing that we are going to come back. And actually, we have taken quick and very comprehensive action in order to manage extremely well our duration gaps, especially on the Turkish lira balance sheet, focusing on lowering funding costs and, of course, successfully set a positive profit trend as March 2021 on solid basis. So we expect to finish the year in line with the profitability targets set in our 2021 budget. I am ready to answer your questions during the Q&A session. Stay safe and healthy in these extraordinary times. Thank you.

Thank you, Kaan. [Operator Instructions] We now have our first question from Rahul Bajaj.

This is Rahul Bajaj from Citi. Gentlemen for the call, very useful and our splendid set of results, definitely. I have 3 quick questions, if I may, please. The first is around margins. So I see a recent kind of pickup in first quarter margins Q-on-Q. Just wanted to understand is is the first quarter sort of run rate, the rate we should kind of bake in going forward for margins for the remainder of this year? Or you would expect improvements coming from Turkey and maybe some funding cost benefits to kind of push margins higher as we move into second quarter and the second half of the year. So any guidance around where margins will go from the pickup in first quarter? The second question is on loans. So again, very good performance on the loan side, plus 3% Q-on-Q. And if I recall correct me, please correct me if I'm wrong, there was a substantial repayment or the kind of repayment that was supposed to happen in first quarter. So if this 3% growth is actually including that repayment, which happened -- the loan drawdown happened in the end of last year, then it's even better performance, I would assume. So with that, background, how should I look at the full year sort of lending growth projection? I mean, your earlier guidance was around 5% to 6%, excluding that one-off loan repayment. So I'm sure you should be looking to exceed that guidance now. So where should we be looking for the loan growth for the full year? And my third question is around Turkey, ABank, specifically. So again, I understand the revenue pressure coming in from ABank, leading to the revenue decline, both on the interest income and interest expense line. But surprised to see that the costs are still pretty rigid or still pretty high. I mean, Y-on-Y revenues were down like 40%, but costs were up 13%. CIRs for the first quarter was at 84%, 85%, if I'm not mistaken. So any way to get the cost down, any plans to get the cost down in the ABank business or are you waiting for the revenue to return, and that will kind of normalize the CIR. And slightly linked to ABank, the capital injection point, just wanted to get some more color around what was the requirement for the capital injection coming from CBQ to ABank? And should we expect more of these?

Yes. Rahul, let me take those questions 1 at a time. First 1 was on net interest margin. As you first asked, what is the driver of that? I think there's a few there. Firstly, as I mentioned, the low-cost deposits continue to rise. They are not only rising, but they're of a more stable nature as well. Given the products we're focusing on. So that's been a very strong driver for increasing the net interest margin. Plus the lending, the investment book, et cetera, that we've been working on has ensured that our net interest margin improved. That's given even that alternatives was lower year-on-year as well as Kaan Gür had explained. So our guidance would be that net interest margin will continue to improve. It will be a modest improvement from here. This is 2.6% already at consolidated level. But our target is to continue increasing our net interest margin from this point onwards. Second question was around loan guidance. As you quite rightly said, our guidance was 5% to 6% for this year. We did have a large temporary overdraft at the end of last year. That was paid back, but built up a little bit again during the first quarter. But apart from that, there was strong -- there was a strong pipeline that we've been working on. The business converted that into loans within the first quarter. And that's something that we really emphasize to do as much of the business in the first part of the year as possible, and the business has been successful in doing that. Probably 5% to 6%, therefore, is at the lower end given what we've achieved already in the first quarter. But we'll watch that as we go. There is some derisking to be done as well. But we're certainly very pleased with the loan growth in the first quarter. I think your third and fourth questions were around Alternatif Bank. Let me just answer firstly on the capital injection. We've done QAR 25 million in the first quarter. There's another QAR 25 million to be done later this year. So we had budgeted for QAR 50 million capital injection during the course of this year. So half of that has been done so far. On the Alternatif's performance and the cost income ratio, obviously, there is inflation related cost increase in Alternatif. But having said that, the cost income ratio looks very high because of the decrease in income primarily. And that's what we will be looking to address. Of course, there are cost efficiencies to be achieved as well. And the management team is looking at how to reduce cost from the base that we have here. I'll ask Kaan bhai to add to that, if you will, Kaan.

Rehan bhai, thank you. You completely answered the questions actually. But again, I would like to assure that starting from quarter 2, actually we have seen the the actual results that we are coming back in terms of profitability. And at the same time, I would like to stress a little bit that, especially when you look into our performance year-on-year basis, I would like to remind that especially the recorded impacts started from April 2020. And the first quarter of last year in terms of the new business generations, et cetera were successful. And then, of course, the transaction numbers and the new business, when you look into the first quarter, there is a lack of demand in the market due to very higher borrowing rates, as I mentioned to the early. And the second thing is, yes, especially managing the expenses, our main focuses but at the same time, we are able to grow our net interest income the basis. And of course, we are, once again, converting our existing loan book in a very aggressive way, but very selective way in order to get higher-margin there. And at the same time, of course, the lowering the deposit cost as you can see, I mentioned that part, especially the demand deposit growth for the first quarter is better than the banking sector. Those are our main focuses. But of course, keeping our loan book intact, keep it healthy. And 1 of the best performance loan books in the banking system is -- that those are the important areas. Thank you, Rehan bhai. Thanks for the questions. Thank you.

And Rahul, I just add on the capital question that you had. So as I mentioned, QAR 50 million for this year, of which QAR 25 million has been done. And then there's a further QAR 50 million that we have in plan for next year, which takes it up to that QAR 300 million that we'd indicated a few years ago is the overall plan for Alternatif.

Sure. Thanks, Rehan and Kaan Gür. Just a quick 1 on capital injection. Please correct me if I'm wrong, what is the capital sort of impact on your kind of capital ratios from these injections? Is there any impact? Because ultimately, this gets kind of consolidated ABank gets consolidated with CBQ. Is there an impact at your capital level?

No. It cancels out completely at consolidation, given it's 100% subsidiary.

[Operator Instructions] Vikram, please go ahead and ask your question.

Hello, can you hear me?

Yes, Vikram, go ahead.

Yes. Thank you for the call. And congratulations for the wonderful set of results. My question was on the associate income. The aggregate share of income from associates has now turned positive in this quarter. How should we look at this as far as the full year is concerned, should we be annualizing the Q1 number? Or should we expect increasing momentum in earnings from the associates in 2021?

Yes, Vikram, I think Q1 is a good indication of where the business is going, both in UAB and NBO. Both are obviously working to improve their financials in Q2 onwards as well. So we expect that this will be a base case for both of those associates. Obviously, they're independent banks and independent entities. But I think that's the indication I would give on their numbers going forward.

Our next question is from Aybek Islamov.

Just a couple of questions from me. The first 1 is that you do have some other comprehensive losses, which basically means your comprehensive income is lower in the first quarter of this year. What's the chance you think that these other comprehensive losses may go into the P&L into the income statement during 2021? And secondly, I had a question about the Board of Directors in the term looks like in 2022, the term of 9 Board members will expire. What usually happens around the -- that period, how many members are going to be reelected? What sort of -- are you envisage -- do you envisage big changes to the Board of Directors in 2022, when the terms expire? If you can answer these questions.

Sure, Aybek, thanks for that. Firstly, in terms of OCI, other comprehensive income, no, they would stay in OCI, they would not translate into the P&L. In terms of the Board of Directors, it's been a pretty stable Board of Directors for a very long time. So I don't have any indication that it would change from what it is today. Joseph, anything you would add to that? No. I think -- I don't think APAC, we have any indication that the Board of Directors would be any different from what it is today.

And I think the -- I would just say that the Board of Director has been very supportive of the strategy and the actions that have been taken. So we would expect that to continue.

We have no further questions. Joseph, any closing remarks, please?

Thank you very much for joining us today. We're always happy to take any further questions or any clarification that you require. Rehan and Zubair from a finance team always available. And so thank you again for joining us, and we look forward to talking to you again after our half yearly results. Until then, please stay safe. As I said, we give an extraordinary time. So I think health is the most important one. Thank you very much.