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

Good afternoon, ladies and gentlemen. This is Zubair Chaiwalla, Head Capital Management and Investor Relations, and I welcome you to Commercial Bank's Q1 2022 Results Call. You will be put on mute for the entire duration of the speakers' talk, and then we'll come back to you at Q&A. Joining on the call are Joseph Abraham, Group Chief Executive, Commercial Bank; Rehan Khan, CFO, Commercial Bank; and Kaan Gur, CEO, Alternatif Bank. I now hand you over to Joseph. Joseph, please go ahead.

Thank you, Zubair. First of all, Ramadan Kareem to those of you who are fasting. Thank you for joining us today. We can start on Page 8, which gives an overview of the results. And as you can see, we've had a good start to the year with our net profit up 16.5%, which was really achieved through a combination of higher operating income, which is benefited by increasing our NIMs and also increased, I think, momentum in our business. Now Rehan will talk about this in more detail in the later part of this presentation. But I just want to go more to the macro outlook because obviously, that's going to affect us for the rest of the year. So on Page 4, I had said at the last call that this was probably the best time that I've seen in the last 5 years. And I remain of that view. If anything, we see in January, the blockade on Qatar was removed. We haven't seen the effects of that fully coming through. We expect that in the second half of the year post the COVID impacts, because COVID is currently probably kind of lagging some of the benefits of the blockade removal. But with COVID sort of winding down across the world, and I do hope sincerely that it doesn't make a comeback, we expect the second half of the year to be stronger with all the benefits. And we've got the World Cup coming. And also Qatar is -- the world, unfortunately, because of the Ukraine situation, we have prices which are very high for -- which benefit Qatar, of course, as a gas exporter. So overall, the outlook remains very positive, and we continue to see strong, I would say, government fiscal balances, which on the one side, you've seen some paydown of government overdrafts, which I'll talk about a little bit later. And where at the same time, it allows enough space for further government investment in the economy and diversification. And of course, the expansion of the North Field will continue to provide a strong underpinning for government revenues. Now if you go to the next slide. Again, I just want to talk about our 5-year plan. As you can see, the 2026 plan targets are there. And our guidance remains more or less unchanged in this regard. I think we would probably like to overachieve on some of these areas. As you can see, we're already at 12.2% for our CET1 goal for this year, and we're already in this range. So I would hope that we would overperform in most of our guidance, except perhaps in the reshape of the loan book. We talked about the government and public sector being 19% for 2022. With the significant payment of the government overdraft, that may be slightly challenged. But I don't see that as being a long-term effect. As I said, the government fiscal position is strong and we will see continued investment in the economy. So otherwise, we remain on track and hopefully aim to be at the upper end of most of these guidance. Let me go to the next slide. One of the areas that has been talked about, I know it's probably topical, is the Fitch report, which downgraded the Qatari banking sector because of its dependence on foreign funding. And I just thought we would show the figures here. As you can see on the top left hand, the nonresident funding for the Qatar banks is about 47% of the Qatari banking sector's liabilities. For us, it's about 45%, and it's up from 38% a few years ago where we were at 37%. But I think it's important to see the mix of -- if you see the mix on the left-hand side, it's more deposits due to banks for the sector. Whereas for us, you can see our mix has gone more on bond issuances, syndicated loan borrowing. The reason for this is one, these tend to be a longer tenure. They are in the 3- to 5-year range. And secondly, they provide more stability in the long term. And I think we have also diversified our sources of these investor bases from right across Asia, many countries and also Europe and America. So we remain comfortable with this mix. And if anything, it will continue in this way. I think at an overall level, the 2017 blockade was a real stress test for the vulnerability to foreign currency funding. And I think the Qatari banking system came through that because of government support. And yes, this dependence may have increased, but at the same time, the government's fiscal position is also stronger. So we remain comfortable with our position and particularly the fact that the majority of our funding comes from term funding. That means we are less fundable to outflows in any sort of stress situation. And as an example, we have an average remaining tenure of about 2.5 years on our bond issuance and syndicated loan borrowing, which also benefits us in this interest rate environment where we are seeing rising interest rates. So we are cushioned to an extent on a lot of our foreign currency borrowing. The last one I want to talk about was around the loan growth. I know you've seen it across the sector, it has been reasonably muted. I would say that this is a result of the government paying down its borrowings from the banking sector. So if you were to take -- if you were to remove that from the calculation, we actually grew about 4%. And so that's why we are still comfortable with our guidance of 4 to -- sorry, 6% to 8% for the full year for loan growth. So overall, I'd say the banks had a good start. We remain confident about our guidance and the outlook for the rest of the year. And we have, I would say, a good pipeline of asset growth to support that. And so overall, the position of the bank, I would say, is very positive for the rest of the year. I'll now hand over to Rehan, who will speak in more detail about the financials. And then we are very happy to answer any questions. Thank you.

Thank you, Joseph, and good afternoon, everyone. Yes, I'll focus mainly on Slide 9. As you know, we have the normalized numbers on the left-hand side. and the reported numbers on the right-hand side. The difference being that in the normalized, we strip out the impact of IFRS 2, both on the income and the cost side. This is a fully hedged scheme for the staff share performance scheme. And therefore, you can see that at operating profit, QAR 942 million is normalized and QAR 942 million is reported as well. As we've seen, a profit of QAR 702 million is a strong start for the year. It's 16.5% up year-on-year and 305% up after Q4 where we took additional provisions. We'll start with the balance sheet. In terms of the lending book, we haven't really seen a large increase in the loan book yet. And there are 2 reasons for that, which we flagged in previous quarters as well. Firstly, the government temporary overdraft has been reducing and also secondly, the Turkish lira depreciation impact. If I strip those out, there is a strong growth in loans. Year-on-year, it would be around 7% and quarter-on-quarter, it would be 3%. And our guidance remains intact of 6% to 8% loan growth for the full year. We are seeing a fairly strong, healthy pipeline of approved deals, mainly in the public sector and selectively in the private sector. So we expect to achieve that guidance that we've given. On the deposit side, we have about a 3% increase quarter-on-quarter and year-on-year. Pleasingly, that is mainly driven by the fact that our low-cost deposits continue to go up. They're up approximately 11% year-on-year. And that's helping our net interest margins. You can see it's gone up from 2.6% a year ago up to 2.7% by the year-end and 2.8% in the first quarter of this year. In fact, our net interest income is up around 11% year-on-year, and our noninterest income is up 14% year-on-year. The only thing you can see, though, is quarter-on-quarter, it's down 5%. And that's driven by the fact that we have seen in our investment book, our bond portfolio, a negative mark-to-market of approximately 50 million for the quarter. I see that stabilizing in the second quarter. We've seen previously that coming back, and I can see that happening in the second quarter as well. We've also seen a fairly strong fee income generation in the first quarter and also FX has also been a strong performer in the first quarter. So I think that's core growth in our business, and that bodes well for the rest of the year. Costs are down slightly, 6% year-on-year and 3.7% quarter-on-quarter. I expect a fairly flat cost for the year. So the cost/income ratio, which continues to go down, you can see from 26.8% to 22.5% in Q1, I expect the further reductions for the rest of the year to be driven by increasing operating income rather than decreasing the costs. On the provision side, we continue to be fairly conservative. We gave a guidance of 100 to 110 basis points net for the year. We're at 96 for the first quarter. So I see this as a fairly representative of the rest of the year. The phasing may differ. As you may be aware, the QCB has now communicated to the banks to phase out the forbearance schemes that were in place. We're working with our customers, the central bank and the auditors to ensure that this is done in an orderly fashion in the coming months. But we felt that in the first quarter, at least, we should be fairly conservative in terms of our provisioning. And we're also looking to build up our coverage ratio specifically in stage 3. So we're over 100% now again in terms of overall coverage, and we expect that to continue, but more biased towards Stage 3 coverage. In terms of our capital adequacy ratios, they continue to be strong and well above the requirements for the regulator. We're now at 12.2% on CET1 and 18.1% on total cost. The other thing to note is that the contribution from our subsidiary, Alternatif Bank and our 2 associates, NBO and UAB has improved year-on-year and quarter-on-quarter. And that is in line with our strategy, and we expect that to continue for the rest of the year. I will hand over to Kaan [ Bay ], who will talk more about the performance of Alternatif Bank in Turkey. And then we can get to the Q&A session. So Kaan [ Bay ], over to you.

Thanks a lot. First of all, good afternoon. I would like to start with the macros. First of all, as you remember, GDP growth in Turkey was, year-on-year, 11% as of 2021. I can say that still, especially on the real sector side, it is, again, considerably strong. But I can say the same thing for the consumer side is the kind of lagging. But we expect GDP growth is going to be around lower 3% in 2022. The current account deficit is important. We have to monitor in a very close manner. So we think that especially the base effects may result in a rise on current account deficit, while those revenues will be highly crucial in 2022. Turkish lira depreciation, deterioration in pricing and higher content prices actually putting additional pressure on the inflation side. Although this inflation factors will start to be effected in late 2022, and we expect that the below 50% level for the CPI. And our CBRTs on auto policy actions were effective. So supplies the volatility in a fixed market, and it's -- it pays. In the same time, I can say that as long as the macro potential measures are effective, market sentiment would be under control. However, of course, the changing global launch of policies may put pressure on market sentiment. Next pledge -- slide please, next page. Actually, when you look into the Turkish banking performances, I can say that banks in Turkey accelerated unprofitability sites, especially first quarter, thanks to effect of CPI linkers and improving Turkish lira spread, banking sector has been improving bottom line performance on a quarterly basis. And when you look into total loans origination, again, especially Turkish lira loans compared to year-end, it's developing 12% growth there as of March 2022. And the balance sheet composition turns into a Turkish lira basis with the effect of annualization. Sector assets size remained broadly stable, growing mainly true on the Turkish lira loan side and the contribution of these securities. Asset quality and opposite trends in all sectors, thanks to limited NPL inflow and stronger collection performance, I can say that. All in all, I can say that as Alternatif Bank, when you compare the sector, you can see that we are continuing to outperform the sector herein, especially NPL and the cost of risk metrics as a result of, as I always emphasize and be consistent focus over the several years. But I can say that as a last sentence for the sector, the pressure on the banking sector due to low net interest margin environment has disappeared, and it has started to continue its business activities with hard spreads. Next, please. Okay, thank you. Thank you. Let's look into our performances. First of all, I can say that, yes, I agree on that. This is a very strong start for 2022. As you can see here, our asset size grew by 7% year-to-date. And the mostly growth comes from Turkish lira loan almost TRY 4 billion. And we are still on optimizing our loan through increasing share of our Turkish lira loan book and floating rate loans, and we continued our effective risk management mentality. Thanks to that, our Turkish lira loan share is 54% as of March. It was 47% as of year-end. So it's again, improvement there. As a result of our actions since beginning of 2021, we fully hedge balance sheet structure against any depreciation of Turkish lira. So we are well repaid for that. And in the same time, especially, again, the important factor of the bottom line profitability, we are decreasing Turkish lira funding costs and optimizing funding mix by increasing share of growth equity deposits. And we are very proactive on management of a fixed Turkish lira components in funding. And in addition, I would like to say that especially a fixed protected Turkish lira time deposit product of CBRT enable us to manage the funding cost at optimum level. So all in all, you can see that quarter-on-quarter increase at the net profits, with positive effect of net interest income is almost 107%. So thanks to our foreign currency spread. And this is a Turkish lira spread, I'm sorry. And of course, the CPI linkers gain. Those are the important factors of increasing our Turkish lira net interest margin. We continued tight management of our expense base and significantly below yearly inflation levels. As always, focused on asset quality and better performance and asset quality, compare sectors, 0.8% cost of risk. This is around 4.1% as private loan. So this is a positive differentiation. And when we look at the picture on the profit, but I can say that net interest income in this period also increased by 63% on quarter on basis, quarterly TRY 346 million. Our trading income realized as TRY 35 million with more stable exchange rate in first quarter. In the end, we closed first quarter on a strong note with higher operating profitability and despite the challenging operating environment. I expect to see that the accelerating trend in our loan deposit spreads as well as overall profitability in continuation of 2022. Thanks a lot. I'm looking forward to answering your questions during Q&A session. Thank you.

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

I have 3 questions, actually, quick ones, if I may, please. The first one is on government repayments. So you talked about government repayments and how they are impacting kind of net lending growth in the sector. Just wanted to understand how should I think about government repayments going into the future? I mean, is this a trend which should continue to kind of put pressure on lending growth for the remainder of this year and 2023? Because I mean the oil price outlook continues to remain pretty solid. So how should we think about that part of the business? The second question is on associated business. So impairments of associates, so you had guided to a number last year and kind of did much better than on the associate impairment. How should we think about impairment, if any, of the associates towards the end of this year? So any guidance there would be useful. And thirdly, just on the fee income side, I see a very solid jump in fee income on a Q-on-Q basis. If I step out the impact coming from the ESOP, how should I think about this? And can this kind of continue in the remaining quarters of this year?

I think regarding the government borrowing. The government has sort of repaid the majority of their overdraft, I would reckon in the banking system. So let's say, about 80% has been paid off. This is my -- I don't have accurate figure, but this is my summary based on what I see from our own experience. So therefore, going forward, I think they might just maintain that or they might even use a little more. So in terms of the lending impact, I think that phase of the lending impact has finished. This will be my view, and that's perhaps how we should look at it going forward, that this impact is now more or less done for the banking sector. I would just -- one guidance just to supplement what Rehan had said about the provisioning. I think we have kept our guidance at about 110 basis points. But I think because of the COVID schemes, forbearances are winding down, we will see the impacts of that, I think, at the end of the year. So whilst we kept our guidance at about 110 basis points, I would say it would be more weighted towards the last quarter when you see probably a clearer picture of the emanation from the winddown of the COVID. So that's just a further sort of guidance or reach out. Rehan?

Yes. Rahul, in terms of your second question on associates and impairment, what we said in the last call is now this is becoming a BAU exercise. It will still continue to be at the back end of the year, third quarter, fourth quarter, especially taking into account performance of that year and the latest forecasts for going forward. So we now think that, if anything, it will be sort of maybe 150 is the max that we may see this year and we'll be striving for it to be lower than that, but that's probably at the high end, the top end of expectations in terms of impairment for this year. Your third question was in terms of fee income generation. And yes, we've certainly seen strong start to the year. There's a small element, which is a one-off, but the remainder of that is for fee income generation. So we would expect that to continue. It is an area of focus for us, and we do expect that momentum to continue in the remaining quarters of this year. I hope that answered your question.

Just one quick follow-up, if I may, on the associates. Just wanted to understand, is the business performance of associate now in line with your expectation? Or are they trending ahead of what you probably anticipated? I see that -- I mean, the numbers on the associate line, at least, were ahead of what I was expecting, but just trying to understand how it did versus your kind of thought process?

They're in line with the sort of plan that we have projected for the year. So that's what I'm saying. As I've said in our note, we expect this performance to continue to improve during the rest of the year. So we expect an improving trend for the rest of the year, but it's in line with our expectation. As we said, we've done the majority of the cleanup that was required. And we have new teams in place, the new CEO, CFO, COO in NBO and also in UAB. So we expect a majority of the sort of hard grind has been done, and we expect to see the benefits of that now coming through in the next few quarters.

Our next question is from Leah [indiscernible].

Yes, I just have 2 quick questions. First, in order to achieve your loan growth actually at 6% to 8%, do you expect to compete in the private sector? And will that pressure actually cause pressure on your asset yields and do you expect that? And also like if you have 6 to 7 rate hikes this year, so how much do you expect your margin to expand following these rate hikes?

Yes, Leah, we are fairly selective on the private sector. And yes, we do expect growth in that private sector, but we will be expecting much more on the government side than the private sector side. We don't expect margin compression given what we're seeing at the moment. In terms of rate hikes, as you know, that does depend on the QMLR rate, the domestic rate here. There's typically a lag between the rates going up in the U.S. and those translating in Qatar. So that's why the guidance we've given is a 10 basis points improvement in net interest margins year-on-year.

[Operator Instructions] There are no further questions. I now hand over to Joseph for any closing remarks.

Thank you very much for joining us today. And as always, if there are any further questions which come up, our team, Rehan, Zubair, are very happy to answer and provide any clarifications. And I think we'll close the meeting now, and may I wish you a happy Eid in advance. Thank you very much.

Thank you, everyone.

Thank you. Thank you, everyone.