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

[Audio Gap] Strong growth. We had our operating income at a consolidated basis up by 14% -- sorry, by 12% and our costs were up by 4%. So we had jaws of about 8%, which is in line with where we want to go. It had solid jaws. And I think the other important fact what was driving the growth in operating income was really strong performance in our net interest income, which grew quite significantly and was due to an increase in our NIMs from 2.4% to 2.7%. So I think this is an important factor and we expect to be able to maintain this going forward if not trying to improve it. That's always our endeavor, but we are saying that we will maintain that. So the other factor, which I think is important, is that we got an improved contribution from our international associates. So if you look at NBO, they had a better performance this year almost up to QAR 100 million and that is up about 60% compared to 2020. And similarly for UAB from a net loss position, they've gone to a positive. Now whilst the numbers itself I think are not huge, they're showing the trend line of where we expect the business to go. We have a clear plan for NBO, which I think will be the largest contributor going forward and UAB has also got a trend line of improvement. So I think that's important. In terms of our last international operation, which is Turkey, of course Turkey was affected by the currency. So when you translate, obviously that has halved in value. Now we see some stabilization in the Turkish lira. Of course it's an open question how and where that will go. But for our mind, all the measures that we took in earlier years to reduce our foreign currency lending, et cetera, have all stood us in good stead. So our net interest -- sorry, our NPLs in Turkey are down to 2.5% as compared to the market of 4%. So we are managing Turkey for risk and making sure that we have a stable business there. So that's the sort of underlying business and Rehan will speak to that in more detail. The one thing what I would say is that what has probably surprised everyone and I'm very aware of it is on the provision line. Now that provision obviously has been much larger than was expected and was larger than we were planning to do and there's a reason for that. That's primarily around COVID. Now all of us were expecting COVID to peter down by the end of the year. Unfortunately, Omicron started and then it's got much worse, the fourth wave. And so even all the forbearance measures were continued in Qatar till March and my feeling is they're likely to be continuing further, maybe by another 3 months. Again that will be the call of the Central Bank. But I expect -- and because of that, we decided that we are going to provision on additional amounts on many names so that we can -- whilst our profits are strong, we will use that to also build up some provisioning. Because I think the one thing that this whole COVID has shown us is that there's a lot of uncertainty and it's been very difficult to predict. So we prefer to build provisions now from our healthy profits and then we can always have the luxury of deciding what to do if we don't need them. But at this stage, we will continue to build these provisions as a measure of prudence. The other factor, which I think affected people was the NPL ratio going up. It went up from 4.3% to 4.7%. Now actually there was one very large loan, which we got a major payment and we were able to then restructure it, which actually moved from Stage 3 NPL to Stage 2. If we had just taken that, we could have reduced our NPL ratio from 4.3% to about 3.2%. But we felt that that was probably not the right thing to do given the COVID, given forbearance is still going on. So we actually use the opportunity to NPL to other names that we had in Stage 2 and that again is a measure of conservatism. So I see the trend is that we will address some names and get them out. We may address conservatively some others. And so that will be a moving sort of ratio, but it will go up and down maybe 0.5% not from here, but down and up in that range. But this is the sort of approach that we are taking. So rather than just take a reduced NPL straightaway, we decided we'd be more conservative. So that's the reason why we have that slight increase. Now the last one I think, which has also affected people, is the dividends. Given that in 2019 because I was talking about pre-COVID days, the normal days, we paid a dividend of approximately 20% on a lower profit. This year we only paid 16%. The challenge is -- and we have always said our policy is to pay a maximum of 50%. The challenge has been that because of the Turkish lira depreciation, our foreign currency translation and other effects eroded a lot of our earnings. So this is the amount that we could pay. I see this as a one-off hit coming from the Turkish lira depreciation. And therefore, we would going forward actually restore our dividend to more I think realistic levels and the Board is also committed to that. So that's the background to the dividend being a tad slightly lower and frankly, lower than what we would have normally paid out. But unfortunately, the reality of the impact of the Turkish lira was almost QAR 1.1 billion on our earnings so overall -- not on our earnings, after tax and net profit. So that's the highlight and overall -- I'll try and address some of these issues upfront. Overall look, the outlook for 2022, we remain -- as I said earlier last time, I still think this is probably the most positive time that I've seen in the last 5 years. Oil and gas prices remain high. You've got the World Cup coming with COVID, I was in December at the FIFA Arab Cup where the stadium had 60,000 people in it and it shows that you can even in COVID have a full stadium and they managed it quite well. You're also seeing, I would say, continued investment. The government's fiscal position will remain strong. I think they'll be in a budget surplus because their breakeven levels are in the $40 per barrel of oil equivalent where now the oil is in the $80s and oil and gas is actually much higher in terms of barrel of oil equivalent price. So that remains strong. Continued investment in expansions of Hamad Port. So all that remains on track and therefore, I believe that the outlook remains positive and no change from what I indicated 6 months ago -- sorry, at the last quarterly call. So with that, I'll hand it over to Rehan, who can talk to you in more detail. And then if you have other questions, of course we'll address them after Rehan. Thank you.

Thank you, Joseph, and good afternoon, everyone. I'll focus mainly on Slide 7 here, which is in front of you. As a reminder, we have the reported numbers on the right hand side and on the left hand side what we have done is normalize those numbers. This is to really take out the impact of IFRS 2, which has an impact on both income and costs as a result of the staff performance scheme that we have. As you know, there is net no impact at the operating profit level. You can see QAR 998 million in Q4 of this year, QAR 998 million in the reported also because we have an underlying hedge, which fully takes care of those movements. So now we look at the normalized columns, which basically gives you the underlying performance of the bank. I'll start firstly with the lending volume. As you can see, we have QAR 98 billion in loans at the end of 2021. This is down 3.1% quarter-on-quarter, but up 1.3% year-on-year. I'll just break that down a little bit. In Qatar, the loan book has actually grown 5.8% year-on-year and as we've discussed in the past, the government had temporary overdrafts in the banking system. But given the liquidity that it has, it has been paying that back including in the last quarter. So if I was to add back the impact of that, we'd actually see a loan growth of about 9% year-on-year so about another 3% on top of the 5.8% that we already have. So actually what I wanted to demonstrate is actually the underlying business is very strong. There is growth going on in our core business and our proportion of the government and public sector is growing as well. And obviously the second part of that is the impact of the Turkish lira. Alternatif have actually grown their loan book year-on-year. But when you convert it to Qatari riyals given the depreciation, it actually shows about a QAR 4 billion decrease in the business on a consolidated basis for us. So I think -- I mean that is the reality of course and that's why the numbers show QAR 98 billion. But probably our underlying growth is between 8% and 9% that we've seen during the year and that puts us in a very good position as we go into 2022. You can see our operating income has been growing each quarter. Even in quarter 4, it's up 6.3% versus previous quarter and our overall growth in income is 12.4% led by our net interest margins. We've been very focused on improving those. You can see that has improved from 2.4% to 2.7% focusing very much on the cost of funding and that has really helped us. Some of the products that we're working on generate very good low cost deposits. That's up 5% year-on-year. And that's why we think that this momentum will go into 2022. There's no one-offs in our net interest income, net interest margin. So we think that that will continue well into 2022 and generate further income. On our costs, it's been fairly flat quarter-on-quarter, up 4% year-on-year. But as you can see, overall our operating profit is up 15.3% year-on-year and 8.6% quarter-on-quarter. So that as we'd I think indicated in previous quarters, we now expect revenue to be the main driver of our cost/income ratio improvements. That stands at 22.2% for the quarter and 24.1% for the year versus 26% last year. In Commercial Bank here in Qatar, the cost/income ratio now is 20.5% and we expect this trend to continue in 2022 with further reductions in our cost/income ratio. As far as provisions goes, Joseph has explained that in a fair amount of detail. We do think that given the extension of the QCB forbearance schemes, the COVID situation and also I think just coupled with the countercyclical approach that we have, we deemed it appropriate to increase our provisioning. We've also moved some accounts staging wise. As Joseph mentioned, we had one very large recovery. It didn't have a P&L impact, but it was a very large recovery and we did move a few more accounts into Stage 3. As you know, we're more focused on cost of risk rather than the NPL ratio. I think that will be a little in and out with the names. But our cost of risk now stands at 111 basis points on a net basis and I think that's the kind of area we expect between 100 and 111 basis points and 110 basis points for 2022 as well. In terms of our associates' performance, I think 2 things to say here. Firstly, both UAB and NBO are showing an improved performance year-on-year and we believe that will continue. Very strong management in place at NBO in particular, which is the larger contributor out of the 2, and UAB have turned a loss in 2020 into a profit in 2021. In addition to that, we've taken an impairment of QAR 291 million in 2021 for UAB. We believe now this is the end of those large impairments and now it's going to really revert to a BAU process once a year at the end of the year. And I think now the numbers -- working very closely with our auditors, we now think that the numbers going forward are going to be sub QAR 100 million on an annual basis given the current market conditions. I think that was a very important objective for us to ensure that that is not an issue for Commercial Bank going forward and I think we've addressed that over the last couple of years and 2021 I think signals the end of those large impairments for our associates. And then lastly, I'll just talk about the capital position. As you can see, our ratios remain very strong. Our CET1 was impacted by the currency depreciation in the Turkish lira and, as Joseph mentioned, that does impact our ability to pay dividends. However, our ratios are well above QCB requirements, Basel requirements and compare very favorably with the rest of the market. So with that, I'll hand you over to Kaan bhi to talk a little bit more detail on the Turkish business and then we can go to questions and answers.

Thank you, Mr. Rehan. Good afternoon. Actually I would like to skip on our last page especially the last quarter financial results, we'd go on the details and then I'm sure that you're going to have some questions and then Q&A session, I'm going to catch up those questions. First of all, I would like to say that when you look into our last quarter financials, you can see that including the year-to-date performances, actually 37% year-to-date growth in assets including of course the currency impact there. But the most important thing is here. Actually as I always emphasize that, we are very selective especially on the lending side. And as we all, including Mr. Joseph, focusing on the management of the risk factors in the sector at Alternatif Bank, actually we are very careful and cautious especially on the lending approach. I could say that for example in 2021, our FX loans decreased by in nominal terms over $300 million. So you can see here total loans grew by 18% and the 15% comes from the last quarter, actually it is the effect of the very aggressive depreciation of Turkish lira against especially dollar. So actually we are in a position to convert the total loan book in favor of Turkish lira. So I think this is very important optimizing efforts of managing the loan book portfolio in successful performances. At the same time, I can say that we are focusing on the Turkish lira funding cost and we are optimizing again funding cost there in order to especially funding mix is important and we are increasing our share of low ticket deposits and we are very proactive management of FX Turkish lira companies of the funding side. So when you look into again the total deposits grew by 46% as a total, again I can say that there is a good well-managed balanced deposit growth there. The other important thing is a part of our 2021 and of course beyond 2022 for the 5-year business plan, digital acquisition. We are growing our digital customer base. We are investing our digital facilities and this makes us a very diversified and healthy retail deposit base. We did that over 2021 and it's going to be the major situation for 2021. Actually I can say that when you look into especially the profitability, as I always insist on that and emphasizing that, starting from the second quarter actually our performance is going much more better. Especially last quarter, you can see that there is a very strong operating income and our whole profitability metrics is getting better. And so 2022 is going to be the better contribution from Alternatif Bank to Commercial Bank. This is going to be very solid performance in terms of profitability in the same time. When you look into our especially OpEx management, you can see that we have been facing over 36% CPI in Turkey and first half of 2022, it's going to be over 30%, but we kept our OpEx below yield inflation. In the same time I could emphasize that we have TRY 55 million general resources of preprovision. Actually it's a kind of a strong buffer for the 2022 profitability performances. In the same time as we are very risk focused and very selective and those are important things, our sizable collection performance of in 2021 help us to sustain our NPL level at 2.2%. So this is considerably lower than the sector versus private banks, foreign banks, et cetera. The most important thing is as Rehan bhi emphasized again, of course the cost of risk 0.6% realization is showing our existing portfolio's quality. So the last thing maybe I would like to say that especially the coverage, it is very, very well managed increased to 149%. And in the same time, the Stage 2 ratio is around 12.9%, which is again in line with the private banks' averages. So all in all, Alternatif Bank's contribution definitely will increase in 2022 because it's a kind of transition period and very risk-focused management within last 3 years. So we are going to harvest the outcome of those solid approach I believe in that from 2022. Thank you. This is all I would like to share. And if you have any questions, then I'm ready to answer those. Thank you.

Thank you, Kaan bhi. [Operator Instructions] We already have our first question, Waleed Mohsin.

It's Waleed Mohsin from Goldman Sachs. I have 3 questions. First, I wanted to get your thoughts on how you see the change in the rate outlook impacting your profitability and balance sheet given the changing rate outlook globally. So if you could please comment on that and talk about your sensitivity of your balance sheet and the P&L to that, that will be very useful. Secondly, I want to delve a little bit further into your cost of risk outlook for 2022. If I heard correctly, you mentioned, Rehan, 100 to 110 basis points for 2022. I want to understand how much of this is recurring and how much of this you're still thinking of it as some sort of ongoing COVID or prudence overlay and when you get to more normalized levels, whether it's second half 2022 or whether it's 2023? And the third and final question is on Turkey. I wanted to get your thoughts on the trends you're seeing on the Turkish lira deposit gathering. Obviously December was a tough month for Turkish banks with Turkish lira deposit costs going up. The government has introduced a few new products on the deposit side and I was wondering if that's something which the bank has been using or has had good traction with and if that's helped reduce the deposit costs in Turkey. And maybe a final one on Turkey, if you could also comment on plans to -- I saw there were some headlines mentioning that you may look to augment the capital base at Alternatif Bank. So any comments on that would be very helpful.

Let me take the first half and then I'll hand over to Kaan bhi for the Turkey deposits question that you had. Firstly, in terms of rate outlook and what impact that may have on Commercial Bank. As far as our lending book goes, it's basically a floating rate book so any increases in the rates would translate to higher asset yields and higher NIMs. We do have of course on our liability book quite an extensive EMTN program, quite long-dated liabilities as well as, as you've seen, about 35% of our deposit book is in low cost funds, which are not really sensitive to rates. So I think the increases in interest rates would be beneficial to the bank. We've estimated that every 0.25% adds about QAR 40 million to the bottom line. As far as cost of risk, your second question goes, yes, the guidance is 100 to 110 basis points for 2022. First half of the year is really -- our assumption is further on the COVID schemes and then second half of the year will be more on normal ongoing business. But I think I'll just add that we do have very good collateral on the loans going into our nonperforming loan book. We do have a very streamlined process within the bank now for recoveries, business, legal working together and we're pretty confident that that process will achieve good results for us in 2022 also. I'll hand you to Kaan bhi for the question on the deposit gathering especially in the last month or so.

Thanks for the question. Actually, yes. What we have been seeing since December actually in the market that definitely there is a kind of movement from the residents having those new announced Turkish lira deposit schemes. So I can say that roughly TRY 140 billion actually converted from standard Turkish lira deposit to the treasury and Central Bank backed new deposit instruments. We have seen the same -- almost the same trend in Alternatif Bank. And of course this is going to help the banking system to especially manage the cost of funding in that way. So it is obvious that the trend is going to be higher and more aggressively within the whole year. The most important thing is I would like to say that here especially in Turkey, the banking system is in the same time benefiting from the swap transactions with the Central Bank in order to minimize the cost of funding because there is a picture in front of us that there is deposit cost, okay, standard which is around 21% annual cost on it. On the other side when you look into new announced deposit instruments, there's almost 18% or 17% cost on that. But when you look into swap mechanism and then the total cost of funding is going to decrease by something 2%, 2.5%. It is very important gap and it's a kind of balance that every bank in the system is trying to benefit those new announced instruments. So I can say that this is going to help especially the resident is going to trust Turkish lira again, is going to kind of start from conversion from ethics to Turkish lira.

And Waleed, you had one more question which was on capital for the subsidiary. As you know, we laid out a plan a few years ago of the amount of investment we would do in Turkey. We're still committed to that. We do review it on an annual basis of what their requirements are and their growth plans and we're committed to invest further in Alternatif on a need basis.

Our next question is from Rahul Bajaj.

This is Rahul Bajaj from Citi. I have 2 questions on margins and provisions so will kind of seek more clarification there and one additional question on lending growth. So the first one on margins. If I remember correctly, during the third quarter call you mentioned about 10 to 20 basis points Y-on-Y margin expansion expectation for 2022, 10 to 20 basis points. Where do we stand now in terms of your expectations? How do you think margin will pan out? Especially one, we now have maybe 3 to 4 rate hikes probably baked in the numbers for this year. And on the second -- on the other side, the Turkish sort of interest rate moves, just wanted to understand what level of cuts that we've seen in Turkish interest rates are still to flow through your margins and they probably will have negative impact if I'm not mistaken. So any thoughts there? That's the first question. The second question on provisioning. Completely understand this 100 to 110 basis points new guidance. But just wanted to understand the earlier sort of 2022 to '25, '26 trajectory, which was provided and if I'm not mistaken 40 basis points was suggested as the end goal for provisioning in that outlook. Do we still stand with that kind of projection? Do you think that 40 basis points is still achievable or we've seen structural changes in the business mix and the economy and you think that maybe not 40 basis points, 60 basis points is more likely as we go ahead in the next 2 to 3 years. That's my second question. The final question on loan growth. As I understand, bulk of the kind of the noise in lending growth during 2021 was due to the repayments coming from the government sector on the overdrafts. Any sense you have on to what extent this could continue in 2022 as in oil price remains at high levels so in all likelihood, you will continue to see repayments come through from the government on these overdrafts in 2022 as well. And in that context, what kind of lending growth should we be thinking about for this year?

Let me take that. Firstly in terms of margins, as you saw, we had a strong year in 2021 going from 2.4% to 2.7%. We are still targeting a further growth in our net interest margins, 10 basis points I think is probably appropriate. As you rightly mentioned, there is an offset from the Turkish business given the reduction in interest rates expected. However, having said that, that's something that is very closely managed by Alternatif and they are fairly well positioned from a balance sheet and ALM point of view for the rate. So I think 10 basis points is a conservative and achievable number as far as net interest margins go. On the provisioning, yes, we've given 100 to 110 basis points and we've given the explanations for that. For longer term, Joseph, do you want to?

Yes, I think you're correct, Rahul, that we gave about 40 basis points. To my mind given the nature of this provisioning, it doesn't mean that there's a fundamental structural change in the quality of our loan book. In fact the loans that have been originated over the last 5 years, the NPL is less than 20 basis points so our cost per risk is going to be much lower on this new book. So this is really, I would say, a kind of front ending of what might potentially have been coming across the next few years. So that's the way to look at it. So 40 basis points is out there and we will continue to target that and I believe that's the way we should look at it. It's not that we see a fundamental deterioration in the portfolio quality, which is causing this. I think it's because of COVID, the uncertainties around it, the uncertainty around when forbearance will be removed and what are the effects arising out of forbearance. So I think this is the uncertainty which is causing us to do this. On the flip side, we have a much stronger business outlook and we think that may have some partial offsetting influences. But we prefer to be on the conservative side for this year definitely.

Rahul, your last question was about the government temporary overdrafts. I think we can expect volatility in that number in 2022 as well. I think there will be some periods when it will go down, some periods when it will go up, probably overall still a decline. I think countering that is a very strong pipeline that we see for ourselves in terms of loan growth going forward. There are a lot of long-term projects that we will see in Qatar and I think Commercial Bank is very well placed to take a large part of those whether they're in government or private. So I think we will still see that loan growth of 6% to 8% is our guidance for this year.

Maybe just one quick follow-up from my side, ROEs. So for 2021, you did kindly provide a kind of guidance of 10% to 11%. Is there a formal guidance for 2022? Where should we expect ROEs to land for the full year?

We expect ROE to continue to increase. We are looking at 12% for our ROE for 2022.

Our next question is from Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. 2 very quick questions. The first one is just I want to get my understanding right. So you are saying that the net nonperforming loans was 4.3% and after the recovery it should have reduced to 3.2%, but you took a lot more conservative approach in the whole process and that's why the NPL ratio went up to 4.7%. So just want to get a understanding that what kind of loan are these. Are they riskier loan I mean or are you even allowed to move a Stage 2 to Stage 3? Just want to get a sense about this or if you just wanted to boost your provisioning, why didn't you boost the provision for the rest of it? I just want to understand the technical aspect of it. That's my first one. Second one is also in continuation of your loan book. So which are the sectors which we'll be primarily targeting? Would it primarily be public sector as you have said in the past? And also I saw that the loan to deposit have come down, which is some analysts might find it good, but you say that you are comfortable with an even higher loan-to-deposit ratio. So what would be the path ahead in that thing also?

Firstly, in terms of the provisioning and how that moves. Of course when you move accounts from Stage 2 to Stage 3, there is already typically an ECL against those names so that then moves from Stage 2 to Stage 3 into specific provisions. So you'll see a reduction in ECL and an increase in the specific provisions when you move an account staging wise. Of course the underlying ECL is still growing for the COVID schemes and generally for the lending book. So that's why you see some movements between the ECL and the specific provisions. Yes, you're quite right. What we've mentioned earlier on is that there was a large recovery that would have meant that our NPL ratio would go down. We were not comfortable that that is the right signal at this moment in time and we saw accounts that needed to move to Stage 3 and we moved them for the year-end. So that's really around the provisioning. In terms of...

So which are the sectors which are -- sorry to interrupt. Which are the sectors where you are seeing these concerns? Where it is hurting you?

I mean look, these are some of the older loans. So typically real estate is the main one, the area in which we find most of the provisioning that is required. In terms of your second question, where do we see loan growth? Yes, public sector, government is our Number 1 focus. But there are -- now that you're seeing more and more diversification in the economy and in the business, we expect to see increases across the board also. But we're still managing down our percentage of real estate and you can see that in our 2021 numbers as well. Loan-to-deposit ratio, as we've always said, we do focus on the Basel ratios, NSFR, LCR, Those are compliant requirements. LD ratio can be a little up, a little down. It's a secondary focus for us versus the Basel ratios.

And I think I would just add that part of that is our primary focus is on increasing our low cost deposit base and as a percentage of our funding. So that's now rising steadily from where it was say 3 years ago. I think it's gone up about...

Realistically till what percentage do you believe you can take this to?

We have a target of 50% of our deposits should be coming from low cost deposits. I think it's currently 35%, right? We've set ourselves a first target level of 50%. So there's a steady work on that all the time.

In a rising interest rate environment, do you think there will be a hindrance to this target from the ground reality?

Actually not really because these low cost deposits are really coming off transactional balances. So I think they're less interest sensitive in that sense. As long as you're providing the strong cash management and other capabilities around it, yes, you will see some pressure for increases, but they're never to the same extent as a normal say deposit. So I think that's the reason because this is more about service and transaction. That's where it's your capability which matters. So that's why we think that that is still sustainable. We're still winning more and more mandates from our clients and that's why we still believe that that target of 50% is what we have to get to as a first step.

Our next question is from [ Leah Al-Hej ].

So this is Leah Hej from Bloomberg Intelligence Research. So I just wanted to ask how many interest rate hikes do you have budgeted and are these budgeted towards the beginning or the end of the year? And also do you think the Central Bank of Qatar will follow the Fed in the number of hikes even though inflation level could be lower in Qatar versus U.S?

Thanks, Leah. Look, the budgeting looks at our overall balance sheet movements and the kind of business that we're focusing on not so much individually how many hikes there will be or will not be. That's a moving target always with the Fed constantly updating, with expectations and what the market expects. What we look at more is how our business is growing and what our net interest margins will look like. As I mentioned earlier, each 25% hike results in about QAR 40 million increase in our net interest income and that's what we're really looking at is how that will grow over the next year. I think the number of hikes is always changing in terms of what the market expects. So we don't really budget in that kind of way that every quarter how many hikes will there be or not be?

I think we do it more around the net interest margin and the asset growth. I mean it's very simplistic I would say and probably not as sophisticated as the model that you're referring to. I don't think we are at that stage. I'll be very frank. We do it quite simply. In terms of the Central Bank, actually the Qatar riyal is obviously pegged to the U.S. dollar. So I think they would follow the U.S. dollar hikes because otherwise if you're out of step too long, then it affects your overall status. So the question of timing, I can't really -- I'm not the governor. We have a new governor so I think that's down to him. In the past they have usually followed it maybe with a little bit of a time lag, but they have generally followed both on the upward and on the downward. I would say that's been our experience.

Our next question is from Aybek Islamov.

I wanted to ask you whether the Central Bank of Qatar provides guidance and recommendations on provision coverage. That CBQ that you have to follow as a bank. That's my first question. Secondly, when the rates increase, what do you think will be response from your CASA deposits? If you look at the historical experience, what do you think could be the attrition in the CASA deposit ratio in the event of higher interest rates? I think thirdly, I just wanted to ask you what do you think will happen to the income on your securities portfolio, realized gains all-in when we have a very sort of quick steep increase in 10-year U.S. yields?

Your first question in terms of guidance from the Central Bank. I think the most important thing is that if we are moving an account out of one stage and into a lower stage, that requires Central Bank permission. So that's the -- if we thought a Stage 3 for example should now move to Stage 2 or Stage 2 to Stage 1, that cannot be done without Central Bank's prior permission. So that's probably the most important role that the Central Bank plays in terms of guidance for our staging. I kind of missed the second question, but I'll address the third question, which was on investment securities. Most of these, the impact of them is in our equity and reserves not P&L. So of course there can be negative and positive mark-to-markets as a result of interest rate movements. And obviously with potentially interest rates going upwards, any purchases that we have in the past would have a negative impact on our overall equity and reserves, but it is not through the P&L primarily. Aybek, would you mind just repeating the second question? I think it was something to do with deposits, I didn't quite catch it.

Yes, sure. So the question was around the CASA deposit ratio. How will that change in a rising rate environment? Looking at your historical experience, what do you think will happen to your CASA deposit ratio? Will it grow over [Technical Difficulty]?

Yes. Of course as we mentioned, Aybek, a lot of the low cost deposits is really coming from our transaction banking. So that is something where we are actually increasing our penetration. We are winning new mandates. So we don't see those as particularly interest rate sensitive. So we expect that low cost deposit rise to continue. Yes, there may be some low cost deposits currently in our books, which would be moving as a result of any significant interest rate moves. But our overall view is that low cost deposits will continue to increase even in an increasing rate environment given the nature of how they are generated for the bank. Hope that answers your questions.

Our next question is from Lee Beswick.

CBQ has always carried a relatively high LDR, I think you're up at 120%-ish. And if you look at the evolution of some of the other banks in Qatar, they've moved towards your level now such that there's a relatively high gearing ratio for a lot of the banks and U.S. dollars are at a premium in Qatar today. So just wondering given the sort of U.S. dollar shortage within the banking system, is that something which can affect your funding going forward putting aside U.S. dollar, U.S. interest rate increases. I was wondering whether you'd be squeezed at all on the funding side and that could affect NIMs in future.

Lee, thank you for that question. Let me take that. LD ratio, as you know, is a very simple ratio of just loans and deposits. It totally excludes all of our long-term funding liabilities that we built up. And in Commercial Bank, that's actually quite a significant part of our liabilities. So we focus more on NSFR and LCR, which are the Basel ratios, which truly show you the position of the bank and on both of those, we are compliant as far as ratio requirements are concerned. So no, we don't really see that being an impact on our abilities and on our net interest margins. LD ratio is, as I said, a very simple formula. The NSFI and LCR really capture the situation much better.

Okay. And sorry, just a follow-up on a different point. When is the full loan forbearance due to end in Qatar?

It was recently extended till March so Q1 of this year. It is being done quarter-by-quarter so we will see if it gets extended further beyond Q1.

Okay. And the provisions that you took sort of had that in mind presumably that at some point that will end?

That was definitely one of the considerations, yes.

Our next question is from Waruna Kumarage.

This is Waruna Kumarage from SICO Bahrain. I have only one question regarding Alternatif Bank. When I look at the table, which shows the summary balance sheet, I can see like a sharp drop in equity to assets ratio in the fourth quarter. So I was wondering whether you might require to raise capital as early as the first quarter. That's it.

First of all, thank you for the question. Actually yes, it looks like especially regarding the very high and aggressive Turkish lira depreciation, we have seen that effect. But actually especially with the forbearance actions from the BRSA in Turkey, actually it is whole banking sector issue. Actually we don't have any additional capital injection needs especially just now because I would like to remember that especially the average dollar-Turkish lira rate in last quarter was almost TRY 16. But now it is very stable at around TRY 13.5 and we offset that impact actually. So it was a very unique incident for last quarter, but now it is stabilizing and our total risk credit asset actually is normalizing. And of course our efforts in order to decrease the total FX loan is going to continue and we are decreasing again the FX loans in total loan book. So we can say that.

We have the next question from Edmond Christou.

Okay. I just want to follow up on the asset quality. There is a write-off that -- when I look at the number, there is high write-off of around QAR 653 million quarterly sequentially in Q4. My understanding in Qatar is hard to get approval for the write-off. Is this related to Turkey or it's a legacy real estate portfolio? The other thing I want to understand when we look at the coverage ratio Stage 3, 2 and 1 for Qatari Bank, you are not on the higher end. So what's your aspiration level going into 1H? How confident you're going to see on the Stage 3? And it's very hard to see what is the collateral value against Stage 3, if possible to provide either collateral value or Stage 3 including collateral value, some haircut will be beneficial.

Let me take that, Edmond. So yes, the write-off you see is actually in Qatar and that relates to that account that we mentioned during the provisions piece that basically we did have quite a large settlement, which included a write-off and which would have reduced the NPL ratio quite significantly if new names had not been moved into Stage 3 at the same time. So that's that specific account that we were -- it was a legacy real estate loan that was settled at the end of 2021. So that specifically is the account that we were referring to. In terms of coverage, yes, of course when you first move accounts from Stage 2 to Stage 3, you will see a reduction in coverage especially as I mentioned, they're very well collateralized. So you don't 100% provide for those, you provide according to a reduction in the collateral. We expect that coverage to start going up again during the course of 2022. So these are some temporary ups and downs in terms of coverage ratio. I think you'll see that going upwards during 2022. In terms of collateral, of course there is -- because of these kind of loans which are in the real estate sector, there is very good collateral of differing amounts, but typically 100% -- over 100% covered.

Yes. I think one aspect to keep in mind is that the Central Bank is very conservative in how it treats collateral. So as an example if you have a loan for 100 let's say and you have real estate of say 200, they ask you to take a 50% haircut on it, which means you get a loan or you get a collateral value of 100. But even then, they don't allow you to take 100. They ask you to take only 50% of the loan. So it's a very, very conservative approach to real estate. So in that sense if you were to take, let's say, the provision and the collateral, I think we'd be well over 100% covered, significant margin.

So if we include 50% of the collateral, your Stage 3 coverage is at least 100%.

That's correct. That's the way to look at it, Edmond.

Okay. And if I can follow up on one of the things that I find is quite interesting in this earning is the repayment. We don't talk about repayment and we talk about stronger public sector demand for credit. I do understand the higher spending ahead of the World Cup. Can you shed some light on what kind of project you see in the pipeline for the public sector? And if you can, just give me some clarity on what the health of the private sector as of now and what's your expectation for the 1H in term of the credit growth coming from the private sector. It's easy to think about it when the World Cup happen, ahead of the World Cup you will see credit growth coming from the private sector and businesses and business activity improving. But what is the situation right now in 1H?

Edmond, look, I think there are long-term projects that the government has laid out. They include Qatar Rail, expansion of the airport, Lusail City, expressways. So those are just the noncarbon projects that are out there. Of course we know that there is the expansion in the gas fields as well. So these are the big projects of the government going forward. What that means of course is that the private sector benefits as well and a lot of these will spill through into the private sector and that's why we see a very optimistic view in terms of growth for the country well beyond the World Cup. I think most of the projects we will be involved in are not directly related to the World Cup. They are really indirect projects for improving the infrastructure of the country.

And this is happening this year. This is reflected this year in your guidance?

Yes, in 2022 and beyond -- well beyond 2022 as well.

Our next question is from Janany.

I have a couple of quick questions if I may. My first one is around asset quality. Would you be able to share with us what percentage of your loan book is still on the deferred program? And on the real estate portfolio, I think it's about 20% of your total loans is still in real estate, about 19%. What percentage of that is still likely to underwritten under the old regime like before you overhaul the underwriting regime? And my second one is around FOL. Do you think you can give us any color on the timing and what further steps do you have to do? And also whether you could approve it at the AGM rather than an EGM with the normal AGM which will convene after the full year results?

Janany, in terms of firstly, asset quality. Look, I think the real estate percentages are coming down. You can see that it's around 19%. Most of the real estate lending that we have is from older than 5 years now in the book. So very little new real estate lending has been done not 0. There has been some. There are some which are government led so we would do those. But otherwise, we've obviously had that focus on government and public sector and out of real estate. So that is the main area for our focus to move up on government and public sector and down on real estate. As far as FOL goes, that process is ongoing. We are expecting that in the first half of this year we will be able to complete that. Our AGM is in middle of March so whether it is in time for that, I'm not sure. Joseph?

Yes.

So we've certainly put it on the agenda, but it just depends on whether we get the go ahead from QCB in time to be able to table it. But certainly as of now, we have made sure that it is part of the agenda. So basically the AGM will be followed straight by an EGM. It's for March 16 for us. And if we get all the approvals, then we will move ahead with that.

That's very helpful. Just to clarify on March 16 itself say the QCB approves, you will be able to go ahead with the EGM and approve the 100% FOL?

That's correct, Janany.

Okay. And just a follow-up. I'm not sure whether you can share the percentage with us like what percentage of your book is still on the deferred program like that was extended like end of December.

Yes, very little. I think it's 2.5%.

Is this on your total loan book or is it just on your Qatari book?

On the Qatari book.

Our next question and the last one is from Waruna, a repeat question.

Sorry, just a follow-up question to Rehan. I just want to clarify this since you mentioned that the QAR 600 million write-off was related to the same account, which you could have moved from Stage 3 to 2. So is it that part of it was written off and part was regularized? Is that how it happened? If you could explain that to me.

That's correct, Waruna.

That's the end of our Q&A. I hand you over to Joseph for closing comments.

Thank you very much. And I think there were some very good interesting and insightful questions there. As always, we are available to answer any clarifications if you may need so please feel free to approach us, Rehan or his team, at any time. And we look forward to seeing you at the next quarterly call. And let me also wish you on behalf of my team -- of our team, a Happy New Year rather belated, but all the best and stay safe. Thank you.

Thank you, everyone.

Thank you.