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

Thank you very much, ladies and gentlemen. I am Zubair Chaiwalla, the Head of Capital Management and Investor Relations, and I welcome you to The Commercial Bank's H1 2021 Results Call. With me, we have Joseph Abraham, the Group Chief Executive Officer; and Rehan Khan, the CFO. And I will now hand you over to Joseph Abraham for the call. Joseph, over to you, please.

Thank you, Zubair. We also have CEO from Turkey, Mr. Kaan Gur, also available, and he will speak briefly. Thank you all for joining us today. First of all, we have had a very positive set of results. As you saw the headline, net profit is up 47%. But that's, of course, flattered by an impairment that we took last year, which we haven't yet taken. But at the fundamental level of -- you can see the net operating income is up by 9.9%. And you can see the operating profit is up by 11.6%, and that's underpinned by good growth in our balance sheet. The loan growth has been very strong and positive, 15.6%. The growth in our low-cost deposits has been up by 23%, which is really the culmination of transaction banking strategy. And that's also helped improve our net interest margin from 2.4% to 2.6%. And our NPL ratio has also reduced to 4.1% with good coverage. So overall, I'd say, directionally, we're heading in a positive direction. And also we are seeing more positive contribution from our subsidiary. Alternatif bank has moved to profit for this quarter and also our associates have started contributing. So that overhang is starting to mitigate. In terms of the outlook, I would say, Qatar, the outlook is very positive. And if you compare with last year this time, you take oil prices were $42 per barrel today. Where in the '70s, if you take gas prices, they were $1.80 per million BTU, today they're over $4. If you take the removal of the blockade, we have that. If you take the expansion of the North Gas field, that's a big piece of expenditure, which will flow through over the next few years. You see the answer World Cup is coming through and the uncertainty around it because the blockade is being removed. Now therefore, you're seeing a positive sentiment all around. And therefore, we continue to see a positive outlook for the banking sector and for ourselves because we have a very good franchise across both retail and corporate spheres. So we -- as you can see, the banking sector grew by about 12% in the first half of the year, and we expect that trend to continue because of the continued expenditure. And also, the benefits of the removal of the blockade are not yet fully flowing through because that's been counteracted by the COVID effects. But the hospitality and tourism sector will benefit greatly once the COVID effects are reduced or mitigated over the next 6 to 12 months. So Qatar also benefits from that very low breakeven of $43 per barrel of oil equivalent. And therefore, at current prices, what was -- it gives quite a lot of room for the economy from a fiscal perspective. And they were expected to be in our fiscal surplus next year and deficit this year. But I think given these prices, we never know where it will come up, but it is a positive trend. So overall, we're quite positive. We also see Turkey. Our bank is well positioned from a conservative point of view. We see if the volatility continues from a ForEx and interest rate perspective, we have positioned ourselves conservatively. And that's shown in our NPL ratio, which is at 2.8%, which is one of the lowest in the entire banking sector, where the sector average is closer to 4.8% to 5%. Similarly, in Oman, we have a good franchise, and we're working on continuing to improve that contribution, which will happen. We have a new team there, new CEO and new CFO, new Head of Retail. And that management team will with our continued input continue to progress. Some of you may have further questions around NBO, we can address that in the offer. But our view is very clear, it's either an associate or a subsidiary. So we're not going halfway. We just want to increase our stake for the sake of increasing our stake. And we are disciplined on the price. And that's -- we didn't get the off support, mainly from the local institutional shareholders. There was good support from the retail investors. But that's fine. So we will focus on other priorities. And I would say, finally, I've also asked Rehan to give one piece of clarification on our long-term share incentive scheme. The reason is because the figures are quite significant, and they are actually impacting how you look at cost income ratios or other ratios. And the amounts are quite significant. This year, we paid out close to QAR 128 million to our staff. Now this is a significant amount, but it actually didn't cost the bank anything because we have a fully hedged share option scheme. But to put that in context, that's a very significant incentive and performance linked. And that's part of our culture of driving towards performance orientation and linking remuneration motto with variable pay. And I thought it's important that we give a clarification because as the bank's performance improves and the share price improves, over time, this will continue to have a major effect on the income and expense line without actually being a true cash charge because it's a fully hedged scheme as shares are actually held by a trust. So I wanted to bring this clarification so that it's clear for everyone and answer any queries here. So overall, I would say, a positive set of results with good underlying momentum, and we see that continuing to go in the same direction and momentum for the second half of the year. I'll hand over now to Rehan for greater detailed explanation.

Thanks, Joseph, and good afternoon, everyone. So on slide that you have in front of you, on Slide 7. I will again just emphasize the difference between the normalized numbers and the reported numbers. And as you can see, in H1 of this year, at the reported level versus the H1 normalized level, there's a $162 million difference between the 2. And similarly, the same amount of difference in the expenses as well. So that $162 million represents basically the share price movement between December and June, which basically went up from 4.41 to 5.27. So every time the share price moves up, that means under IFRS 2, we need to account for that as an additional staff cost. And at the same time, the value of the derivative goes up, and that's recorded in the income side. So as the share price can be volatile, it can move up and down. Conversely, if it went down, the income and the cost would go down by the same amount as well. And that's why you see that the operating profit is exactly the same, both in the normalized numbers and in the reported numbers. So that's something that, as Joseph also said, if the share price movement is significant between a period, then that number will also go up similarly. It is run by an independent trust. So the administration is totally outside of Commercial Bank. And there is no net cost to the bank of this scheme. But it has proven to be very successful. It is a very good motivator for the staff and acts as a very good retention tool as well. So on the normalized columns, you can see that's really showing what the underlying performance is. Firstly, at the quarter level, you can see income has grown by approximately 10% between this quarter and the last quarter and 11% between this quarter and a year ago. This is driven mainly by increased net interest income. We are seeing an improvement in our NIM. It's at 2.7% for the quarter. And for the half year, it's at 2.6% versus 2.4% a year ago. We are managing our funding very carefully. Our low-cost funds are up 23% year-on-year. And an example of the EMTN, which we did in the second quarter of $700 million, that was at 2%, and it replaced an EMTN of $750 million at 3.25%. So these are the kind of movements that we're seeing that is helping us manage our cost of funds and improve our net interest margins. Costs are fairly flat at a normalized level between Q1 and Q2. And I expect this kind of level going forward. But what you can see is that the operating profit is up by 14% versus previous quarter and also versus a year ago and 11.7% at the half year level. So this is a very strong improvement in our operating profit. It does mean that our cost-to-income ratio is down to 24% at consolidated level and 25.3% at the half year. At the Qatar domestic level, our cost-to-income ratio for the half year is 21% and getting more and more in line with the rest of the market and indeed even the Islamic Bank. On the provisioning front, similar level to last quarter, $220 million. It is higher at half year versus half year last year. We did have very large recoveries in the first half of last year. We're continuing to work on recoveries at the moment as well. The timing is less predictable. It depends on when the settlements are actually achieved. But I do expect provisioning to continue at these kind of levels. And our cost of risk is now at net level, down to 84 basis points for the quarter and 86 basis points for the half year. Again, I would guide that this is the kind of level we should expect for the full year. On the NPL ratio, that's now down to 4.1% and our coverage ratio continues to improve. It's at 112.1%. As Joseph mentioned, at Alternatif, they've also improved credit quality and the NPL ratio, and we'll hear more from that from Kaan Gur in the next section. Going back up, on the associates, you can see both NBO and UAB are profitable. And in fact, they have increased their profits between Q1 and Q2. As you know, we have a budget for impairment. We've highlighted that in the past. We will be assessing that in the third and fourth quarter, and there is an expectation that an impairment will be taken of the kind of level that I guided around the $400 million mark. Overall, $724 million profit for the quarter, is up 45% versus a year ago. We are seeing good growth in our balance sheet also. Our lending is up 15.6% year-on-year and about 4% versus end of last year. Similarly, with deposits, they're up 6% year-on-year and about 9% versus end of last year. Finally, here, you can see our capital continues to be strong. We're at 16.3% at Tier 1 level and at 18.4% at total CAR level. And this, again, is well in line with the rest of the market. I'll just hand you over now to Kaan Gur, our CEO of Alternatif for an update on Turkey and the bank there. And after that, we will turn to Q&A. Over to you, Kaan Gur.

Thank you, Mr. Rehan, and good afternoon. I hope that everyone is staying safe and healthy. I would like to start with a brief update on the Turkish macroeconomic indicators. Then I will cover the latest data on the banking sector. And finally, I will summarize the highlights from [ Henkel ] Bank's first half financial results. So regarding Turkish macroeconomics, in a nutshell, I can say that regarding GDP growth, we expect that the base effects will begin to recede and growth momentum will be limited in second half of the year. Our full year GDP growth forecast is 6%, which is largely in line with the OECD and World Bank estimates. As Turkey, back to normalize its economic activity levels, we're believing that the improvements on the current account deficit, which is very important for Turkey, is going to decline to 2.7% in 2021, which was around 5.2% in 2020. Thanks to higher tourism income, thanks to a very strong improvement in export transaction and, of course, lower gold imports. Actually, this will allow and enable Turkey to pace this recovery on the current account deficit to GDP ratio. On the other hand, I could say that on the CPI side, CPI maybe stay higher till early last quarter of this year due to the supply side pressure. So we expect CPI to finish the year around 16%. And still, we may see maybe 100%, 100 basis points rate cuts from CBRT, but we have to be careful about its expectation. On the second slide, let's look at the Turkish banking sector as an overview. I can say that banks in Turkey continue to be in squeezed margin environment with pressure on operating profitability. The sector has managed to offset this so far through lower provision expenses and tight control over OpEx. In contrast to 2020, the first half of this year, we have seen limited growth in loans and overall decrease in lending appetite by the banks due to continuing high interest environments. Banking sectors overall profitability, I can say that has been decreasing due to pressure on net interest margin as well as trading gains following the sharp increase in cost of fundings. Total net profit, as you can see here, fell 16%, with sector return on average equity standing around 9% as May 2021. When you look into Alternatif Bank, especially they positively differentiated itself, especially on the NPL ratio. As Mr. Joseph mentioned, that actually we ended up the second quarter by 2.8%, and our cost of ratio is 0.7%. Those are important areas that we have been focusing on this asset quality issue since last 3 years actually. The next slide, I will summarize our financial performances. As you can see here, actually, we maintain our cautious and very selective lending approach. We recorded around 3% year-to-date nominal increase. During this period, we also focused on hedging our balance sheet in order to minimize any impact, our future depreciation in Turkish lira. On the deposit side, I have to emphasize that especially our continuous effort to diversify our demand deposit and the total deposit, we have recorded 15% year-to-date increase in small ticket deposits. And thanks to our improving digital channels. This is very important continuing efforts for the rest of 2021 and beyond, of course. On the asset quality, as you can see here, we improved our asset quality. And in the same time, our NPL coverage is higher than 139%. On the profitability side, actually, I would like to emphasize that. I was saying that starting from quarter 2, bank will return to operate profitably. And now we have seen that, thanks to our efforts, now we recorded $16.1 million net profit as a sole basis in Q2. And actually, we took very quick and comprehensive action, especially to address the issue sharply increasing funding costs beginning at the end of 2020. And we quickly returned to a positive profitability trend. And despite extraordinary macroeconomic conditions and a challenging operating environment, actually, we are going to improve our bottom line profitability in 2021. And in the same time, I would like to emphasize that, again, net fee commissions generation and especially the tight management of our expense base, we successfully maintained our OpEx below the budget, below the yearly inflation levels. Actually, this is all I would like to share with you. Thank you. I'm looking forward to answering your questions during the Q&A session. Thank you for your time. Have a great day. Thank you.

Thank you, Kaan Gur. We will now start with our Q&As. [Operator Instructions] We now have our first question, Rahul Bajaj.

This is Rahul Bajaj from Citi. I have a few questions, actually, quick ones. First is on margins. We've seen some good improvement in margins with cost of funding remaining low and kind of improvements in cost of funding over the last few quarters. Just wanted to understand, to what extent can we expect this trend to continue in the future? Is current margin where you would probably end up being? And another kind of layer to the same question is around Turkey because as your asset side repricing in Turkey picks up, I would assume that would be positive on margins as we go ahead. So just wanted to understand how we should think about the margin trajectory from here on? So that's my first question. The second one is on NBO. Now that the transaction that you were trying to execute is not happening. Just wanted to understand what's the plan B? Is it same as what you were kind of looking at prior to the announcement of the transaction earlier this year? Or do you have something else in mind? What's the thinking around on that side? So that's the second question. Third one is on the guidance. I think Rehan mentioned about cost of risk guidance, which is around 80, 85 basis points, which is, I think, higher than the previous guidance that you have quoted, 60 to 70, if I'm not mistaken. Just wanted to understand, is there any other item where guidance you think for the full year could change compared to what you have earlier communicated? And the final one on FOL. I saw this news around the fact that CBQ has recommended 100% FOL increase. Just wanted to understand the time line here. How long does it take from here on, what are the steps involved for the kind of FOL change to happen? Sorry, 4 questions, but thanks for your time again.

Thanks, Rahul. Let me take those questions in turn. Firstly, on net interest margins. Yes, as you can see, the movement has been positive and upwards. And certainly, if rates go up, then Turkey would benefit from that also. So at the moment, our guidance is for continued upward movement. There are challenges, of course, with asset yields here in Qatar, especially. But we do overall expect NIMs to continue moving upwards. And that's certainly been our target, especially with the very careful management of cost of funding going forward. The second question you had was on NBO. I'll ask Joseph just to answer that one.

Regarding NBO, frankly, the offer that we made was converted from associate to a subsidiary. The benefit to NBA would be that it would get the higher rating that the CBQ ownership would entail. And therefore, this would lower their cost of funds and have other benefits and also give them greater firepower for arranging bond issuances, et cetera. What I would say is that -- so with it, now that it remains associated, it doesn't change the fundamental. There's a clear strategy in place in which we are heavily involved at the Board level. We remain the largest shareholder. And therefore, that will continue. The ancillary benefits that they would have got as a subsidiary, primarily around their rating and cost of funding and greater firepower for certain more complex capital market transactions probably won't happen right now, but I think that's just an aside. So we will continue. So there's really not anything different from what we currently have going on. We continue to work closely with NBO and the management team. We expect that to continue very much. And we are very positive on how NBO can progress from where it is today to the future. The third question you had was on cost of risk. Rahul, we gave a guidance of 70 to 80 basis points. In the last call, I think we said we expect it to be at the top end of that guidance. And that, I think, remains the case for the rest of the year. Of course, the QCB schemes are due for completion in September. So we will see what happens post that. But we expect that cost of risk trend that we have seen in the first half of the year to remain in the second half of the year. You also said, is there any other change in guidance? I certainly think loan growth, we gave 5% to 6% as our guidance. I think we'll be higher than that, probably 7% to 8% would be closer to where we will end up by the end of this year. And lastly, on foreign ownership limit. Yes, we did have in our Board meeting yesterday, an approval to call for an extraordinary General Meeting. That is the next step that is required. And once that is done, we will then seek all the approvals, yes. So probably early Q4 is when we would expect to complete that. I hope that answers all your questions.

[Operator Instructions]

It'd did seem that there are no other questions. Rahul, your 4 questions, obviously, tick the boxes for everyone. But as always, we are always available to take any questions or clarification later, Rehan and the team. So thank you again. Sorry, there's one question coming through now.

Rahul wants to ask.

One more question there, Rahul.

Rahul, go ahead.

Sorry, for another one. This one is around impairment on associates. So if my understanding was correct, you guided to $400 million in impairment split between third quarter and fourth quarter? Or should we expect all of this to come in fourth quarter? I mean, what would be the timing of the EUR 400 million?

We are beginning that work. Obviously, we -- one of the considerations is the performance of the 2 associates. And certainly, that's been positive in the first half of the year. So we were waiting to see how that transpires. But probably end of Q3, early Q4 is when we will have the discussions with the auditors and the conclusion of that. I'd expect the bulk of it to be in Q4. If we've completed the work, you may see something in Q3, but primarily Q4 is when we expect to make those final decisions based on our work with the auditors.

We now have one more question from Chiro Ghosh.

Thanks for the call. I think most of it has been answered. Just one quick one related to the fee income. So fee income was good in first half. Second quarter perhaps a little low, but quarter-on-quarter, perhaps it's not a fair way to analyze this number. How do you think the fee income would be -- would pan out for the rest of the year going forward? How are you seeing?

Hello, Chiro. Yes, you're quite right. One quarter doesn't really work as far as fee and other income goes. For the full year, it's much better to look at. We do have an expectation of growing our overall fee and other income by about 10% year-on-year. That's our target, and that remains the case for the full year.

And my voice broke a little bit. So the income from the associate, did you give any guidance? How do you see for the rest of the year?

Similar, I think, to H1 is what we expect in H2, slightly improving, but modest increase between H1 and H2. So overall, pretty similar.

Joseph, we have no further questions. Any closing remarks, please?

Thank you very much for joining us today. We're always available to answer any queries or any questions. So please do feel free to reach out. And thank you, again, for your questions and your attendance today. Have a good day. Thank you.