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

[Audio Gap] With me today on the call are Joseph Abraham, the Group Chief Executive of Commercial Bank; and Rehan Khan, the CFO. You will be put on mute during the duration of the speakers' presentation, and I'll get back to you before the Q&A. I now hand you over to Joseph Abraham. Joseph, over to you, please.

Thank you, Zubair. Good afternoon to everyone, or good morning if you're in another location. I think as you've all seen the results, we've had a strong 2022 with a 22% increase in our net profit. But what I would talk about first is the outlook for Qatar in 2023. As you know, there was a very successful World Cup, and I hope some of you had the chance to visit us in Qatar. It was very well organized. And I think it showed that Qatar has the ability to handle events -- world events in a world-class way. But going beyond that, what does 2023 hold because some -- I know there are some views that the economy will slow down, or there will be a bit of a downturn. Personally, I think the macros, as I said before, last year, this is probably the best that I've seen the macros in the last 5 or 6 years, given that we went through first of all, the blockade on Qatar, then oil and gas prices really low, then the real estate market adjustment and then the pandemic. So when you look at today, the macros, the outlook for oil and gas, and gas in particular, both on the demand side and the price side looks very strong, and this ties in well with Qatar's NFE, North Field Expansion, then there's a lot of downstream industry investment going on as we know QatarEnergy has announced a $6 billion Ras Laffan Petrochemicals Complex. So that will have further economic activity benefits. In addition, beyond that, I believe the awareness that has been created about Qatar is very, very important, in other ways, perhaps not directly in terms of industrial investment, but in terms of both as a place to visit, and secondly, as maybe as a residency location or as -- and this is why because -- as people talk about hotels being empty, et cetera, post the World Cup and how will they be filled up, I really think that -- we forget that Qatar has 40 million people actually arriving in Doha, but not staying here. And that's because they go through Doha airport. If we can just convert 10% of that to stay 2 nights, you've got -- and assuming that's 4 million, 8 million room nights, assume double occupancy of 4 million room nights, that will straightaway solve any hotel problems. And I think there is a great awareness in Qatar and the government and the tourism authority about the need to do that. So we're seeing already some pickup in that from making Qatar more attractive destination. And the World Cup has created the awareness. And I really think this is important because Qatar has had a lot of positive attributes, but very few people are aware of Qatar. I think the Middle East, especially when you go to Asia and parts of America and maybe Western Europe, the Middle East is basically Dubai. That's awareness wise. And that's why I think Qatar holding the World Cup has created awareness. And the second is apart from the tourism aspect, I think, Qatar has a very strong and attractive permanent residency program, which would -- again, it's a zero-tax location, great infrastructure, and the criteria are quite low with the $250,000 investment, get 5-year renewable residency, and with a $1 million investment, you get lifetime residency, including health care at government facilities and even education. Now everyone talks about the Golden Visa program, which is very well known, but very few people are aware of this. And I think we, in fact, will be doing some road shows around it, but we think this is an opportunity to, again, further build out the population in a sort of -- for Qatar. So that's very positive, which will benefit the retail banks, will benefit many aspects of social spending. The third is the fiscal position of the government is very strong. They've got a 13% budget surplus this year projected. And that's at a $65 per barrel of oil assumption, and it's likely to be much above that. So your fiscal surplus is going to be probably much greater, which will again enable the government to have the fiscal firepower to invest in the economy. And finally, the credit rating continues to improve. Qatar is the one of the few in the Gulf with AA rating. And so I think, as I said, we've been through the previous 5 years through, I'd say, 2016, 2017 to 2021 have been quite difficult. 2022 was marked by very choppy global environment. And I think 2023 will have some volatility. But comparatively, Qatar is well placed to manage it. So the outlook remains, to my mind, positive. And therefore, we enter 2023 in -- Qatar is one of the probably the better places to be. And the bank is also well positioned in that space. If we go to the next one. I would say, in terms of our guidance and indications, you can see this out here. I would just say that loan growth, we are saying 3% to 5%, which I think is where it will be, and we are comfortable with that. Our capital, we gave our guidance in this range, 12.2% to 12.7% and 18% to 18.5%, which is pretty strong in terms of capital. In terms of risk, we will put our cost of risk, again, as we said, the one point is we're coming out of the COVID scheme. So we want to be conservative. So we kept our cost of risk at the same levels as 2022, and our NPL ratio will be in that range. Our loan book reshape, you might see that our government and public sector is 15% to 18%, the same level as '21. This is because, as I said, the strong fiscal position of the government has enabled them to pay down their government overdrafts and that will likely continue. But as they do investments and certain public sector investments will happen, we will try and capture some of that business. And the cost-to-income ratio continues to improve, we expect to be going down further below 21% at a consolidated ratio and below 19% there. And that's because we -- as I said, our costs have been relatively flat for the last few years, and that's where we intend to keep it as we continue to invest in technology, but our income will continue to rise, and that will finally drive the return on equity, which is, again, we hope to be in that 12.5% to 13% range. So that gives you an outlook at a macro level and also our guidance. So you can see that we are showing a positive guidance for 2023. And of course, it's going to be a strong focus on our strategic plan execution, but that's been the guiding sort of light for us over the last few years, and that's why we are able to deliver these results that we have delivered so far, and we expect that trend to continue. I'll hand over to Rehan now, who can give you some more color on the details of the financials. And then, of course, happy to take any questions. Rehan?

Yes. Thank you, Joseph, and good afternoon, everyone. As usual, I'll focus on Slide 8, which shows the quarterly trend as well as the year-on-year performance. As you know, on the right-hand side, we have the reported numbers. And on the left-hand side, we have the normalized numbers. And this is really to strip out the impact of IFRS 2, on both the income side and the cost side for the staff performance scheme that we have in place. So the reported numbers do change as a result of any share price movement quarter-on-quarter. It's obviously a fully hedged scheme. And therefore, the impact is overall zero at both the operating profit level and at the net profit level. So you can see, for example, 2021, the operating profit is QAR 3,621 million at the reported level and also at the normalized level. Similarly, for 2022, QAR 4,156 million reported QAR 4,156 million at the normalized as well. So if we start at the top, what we can see is that operating income is up 11% year-on-year. It's approximately QAR 500 million, just over QAR 500 million, is the additional operating income that we've generated this year. Both NII is up approximately 11%, and the noninterest income is also up around 11% as well. So equally, distributed in percentage terms. And as you can see, the record profit that we've made of QAR 2.8 billion is about QAR 500 million up year-on-year as well. So pluses and minuses on all the other lines, but it's really the operating income that is driving the net profit, almost the same amount at top level as at bottom level. Within this, as you can see, our net interest income has gone up 11%. Our net interest margin is 2.8%, up from 2.7%. And if I wind back about 5 years, in 2018, our net interest margin was 2.1%. So over the last few years, we've been gradually improving our net interest margin year-on-year, and 2.8% represents one of the highest now in the market in Qatar. In terms of noninterest income, this was derived by strong FX trading income and overall very good trading volumes over the course of the year. Costs have stayed fairly similar to last year, down slightly, 0.7% positive variance year-on-year. And what it means is that overall, our operating profit is up almost 15%, 14.8% year-on-year. And this does mean that we are continuing to bring down the cost-to-income ratio. It now stands at 21.6%. It was 24.1% last year. And again, if we go back to 2018, for example, it was 33.4%. So it's a considerable improvement in our cost-to-income ratio as well over the last 5 years. If we then turn to provisions, we're just over QAR 100 million more in 2022 versus 2021. And that means our cost of risk is 121 basis points versus 111 basis points last year. We guided that we will be prudent in 2022, and we expect that to maintain in 2023 as well. I think it's a sensible thing to do while we're coming out of the COVID schemes, and our revenue generation is healthy at the moment. We will build up our buffers, and we do want our coverage ratio to continue going up. It now stands at 105.4% versus 97.4% last year. I think what's been very encouraging has been the contribution from our associates, as you can see, QAR 222 million is the net contribution from them. This is both UAB and NBO, who have performed significantly better than 2021. We did guide in the previous few calls that we did not expect any impairment on our associates, and that has turned out to be the case. So there's no impairment in our 2022 numbers, and we are very comfortable with the carrying values of both UAB and NBO. As we know with Turkey, it is in a hyperinflation situation at the moment. The results of Alternatif on a stand-alone basis, very good. However, there is an adjustment for the net monetary loss, noncash is QAR 189 million. And we've seen that since June reporting onwards when we've implemented that. Tax is purely coming from Alternatif as the profits are higher there. Obviously, 2022 marks the first year of our new 5-year strategy. So we are very pleased with the momentum that we're seeing in the business. As I said, it's a record year and a record year last year as well, so 2 consecutive record years for us. Having said that, on the balance sheet side, we don't see a net loan growth purely because of the government repayments that we've seen during the course of the year. I think when you strip that out, it's approximately 4% growth in our lending book. In terms of deposits, it's up 1.5%. But within that, the low-cost funds are up 6%, 6.5% year-on-year. And that's a very important factor when we looked at our cost of funding and will continue to be a very important factor going forward as well. So that just gives you an overview of the results. I'll hand you over to Zubair to then take us into a Q&A session.

Thank you, Rehan. We now begin the Q&A session. [Operator Instructions] We have the first question from Waleed Mohsin.

Yes. Good afternoon. Thank you very much for the presentation, and congratulations on a good set of results in a challenging fourth quarter environment. Three quick questions from my side. First, on credit growth. If you could provide some more details in terms of what is going to drive credit growth going forward. So what I'm thinking here is, do you think it's going to be mostly working capital facilities because some of the large projects have indeed been completed? Is this going to be a purely private sector, given the public sector has been repaying some of the facilities? Do you think most of the repayment from the government are done? So any color in terms of helping us shape our thoughts on what gives us comfort that the credit growth will be positive and not zero or negative over the short to medium term would be very helpful. Secondly, credit losses you've -- on the provisioning side, you continue to build up coverage. And from that perspective, we start from a healthy position. But in terms of kind of getting comfort around the medium term, or that progress towards what you have always kind of talked about as a normalized credit loss ratio, where are we in that cycle? What will give us comfort that we are actually trending towards a normalized ratio because your guidance for 2023 continues to be quite conservative around credit losses. And my third and final question, when I look at your ROE targets for 2023, it seems that most of the improvement will come from cost-to-income. And then secondly, on the -- that you're I think expecting that the hyperinflationary loss will not repeat itself at least in the same quantum. Any other factors because I would have thought leverage would be one part of it. But if I look at your kind of capital guidance, it's still healthy and you're actually assuming a significant buildup in 2023. Those are my 3 questions.

Thanks, Mohsin. I'll handle the first bit and give some color on some of the Others, and then Rehan will give more detail. Regarding the lending growth, even in 2022, whilst we showed a flat lending position, it actually was 4% growth in the private sector and then negative in the government because they repaid their government borrowings because of the strong fiscal position, which actually is the right thing to do. So we should actually, as I said, it points positively to the Qatar government's fiscal prudence. And we would expect that to continue in 2023 in the sense that they've actually paid down most of their government overdraft. The only positive on that, I would say, is that actually, because that government is quite finely priced, and particularly at today's interest rates, so the net loss of interest income is not that huge when you -- net interest income is not that huge because it's quite a finely priced loan. And -- but we actually see potential for growth in 2023, coming from, one, is the North Field expansion. So you see a lot of onshore project work being done by contractors. And then you have the bonding, you have some of the financing of the projects. That is going to come through. And that's quite a significant amount, and we're already seeing quite a few requests and tenders coming our way. So that's one aspect. We also see our retail bank. Now I think our retail bank is relatively, it's -- our brand is quite strong in Qatar. And our retail bank is -- has significant growth potential, whether it's in the card space, whether it's in the personal loan space, whether it's in the world space. So we see lending growth coming from that area to end mortgages. So we think that's an engine of growth, which we are acquiring up quite strongly as compared to previous years. So that will also provide a supplement to the corporate side. So these 2 areas will be what provides us with asset growth and lending growth in 2023, and we expect that trend to continue. That's why we say we expect in the 3.5% to 4% range because that's where we think is the right approach. And of course, we continue to be conservative in our credit underwriting. And as we've seen in the last 5 years, our net new NPL formation is actually quite low at 50 basis points or below even. So -- and we want to continue that because, to me, that's very important that we grow in the right manner.

Yes. Waleed, I think you were asking also about -- I'll just go to the Slide 5, which shows the targets. In terms of risk management, as you can see, our 5-year target remains in place, which is 2.5% NPL ratio and 60 to 80 basis points in terms of cost of risk. So while it stays at these kind of levels for 2022 and 2023, we then start expecting to see a gradual downward trend towards these ratios that we've got as targets. And then I think your next question was around return on equity, which we're guiding will go up from 11.3% to 12.5% to 13% range for 2023, with our capital ratios also going up at the same time net of the dividend that we announced yesterday. So revenue generation is going to be the main driver. You talked about cost-to-income ratio. Cost revenue is the main driver now of that cost-to-income ratio reduction. And we expect that to be the case for 2023 as well. We expect the momentum that we have in the revenue will continue. We expect that the International entities will deliver as well. in terms of hyperinflation impact, yes, it will be -- we expect it to be slightly less than in 2022, but not significantly less. We don't think that will be the driver. We expect hyperinflation to be in place throughout 2023 and potentially going into 2024 as well. I hope that answers your questions.

Very helpful. Just one very quick follow-up. So on the 120 to 135 basis points cost of risk guidance, should we expect this to be kind of front-loaded in the first half, you continue to take provisions? And then second half, we should expect some sort of a recovery in terms of the regulatory, I would say, push for building up provisions or looking at Stage 2. Is that pretty much done? And it should be a first half front-loaded and second half improvement kind of a scenario?

I expect it to be similar to 2022. We will build it up during the course of the year. But with some of these names, typically, the assessment is done towards the end of the year.

We have our next question from Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. I have 2 questions. The first one is related to the net interest margin. So NIM has been on an upward trend. So I want to get a sense how should we see it going forward, considering that you plan to move towards public sector loans, so that we believe might have a lower margin. And just now you said that overdraft also is at so much lower margin. So the NIM direction would be very helpful. That's my first one. Second one is more related to the asset quality. So what we -- what I understood is that the North Field Expansion project, you would be targeting more the contracting side. So in the past, we have seen a lot of defaults in the contracting sector. I know we cannot generalize, but -- so how comfortable should we feel about it? Or these are all government backed, so the probability of default would be really low. So this is my second question. And a continuation of the previous line, which you said that 50 basis point default or the new NPL default, it's on the new loan, which you have disbursed over the last 5 years, or it is on the total loan base? Just wanted to get a sense of that. These are my questions.

I will take the first question. I think the point is about the public sector. As you can see over the last 5 years, we've actually grown our public sector exposure to -- from -- it used to be in single digits. And today, it went up as high as 18%, and now it's 15%. But during that same period, we've also grown our net interest income and net interest margin from 2.1% to 2.8%. So I would say that it's not counterintuitive that you can take on public sector and still grow your net interest margin because net interest margin is a combination of both your gross interest margin and your cost of funds. And during the same time, we have captured a lot of the nonfunded -- sorry, the low-cost funds. So the proportion of our low-cost funds has gone up from -- I think it was in the low 20s to now it's almost 40%, 50% of our -- 40%, sorry, 40% of our deposits. And we want to continue that. And so it's -- lending is a tool by which we can then get entry into the wider ecosystem of the client. And that's been a digital innovation and digital capabilities. So that's why I would say we will still continue to grow public sector. But in terms of the net interest margin, as Rehan mentioned, it's already one of the highest in the market. So obviously, there's a limit to how much you can continue to grow it. So we would anticipate that it would probably be remaining flat going forward and maintaining that would itself be a positive achievement.

Yes. And Chiro, your second question was about asset quality and specifically around contractors. Of course, we are very careful in terms of the contractors we lend to. It is at the higher end of the chain as far as contractors go. And that's what makes us relatively comfortable about the lending that we're doing. And then thirdly, around NPL formation, the 50 basis points is what we're really seeing is since 2018, the last 5 years, all of our lending that we've done about 0.5%, 50 basis points is only what has gone into nonperforming loans.

Our next question is from [ Shreekant Wable ].

First of all, congratulations on good set of numbers. What I'm seeing [indiscernible] 9% higher bottom, which coupled with flattish loan resulting in higher NPL ratios around 4.9%. So I just wanted to understand which sectors are contributing to NPLs? And what is your view over it?

Yes, Shreekant. I think I understood you. You're saying basically on the nonperforming loans, which sectors does it cover.

Yes.

If -- there's quite a lot of background if you can mute, if you're not speaking, that would be helpful. Look, I think, as we've said in previous conference calls, there is more in real estate, but it is covered across various sectors. The NPL ratio is 4.9%. It was 4.7% last year. So it's a very similar percentage on a loan book that hasn't moved year-on-year. So it is more in our real estate sector, which does represent about 20% of our overall loan book. But the good news is that on the more recent lending in the last 5 years, the NPL formation has been really negligible. And just to add, obviously, we're working on resolutions of these customers. We do have good collateral with, obviously, real estate loans. And therefore, we do expect over a period of time to be able to come to conclusions and to be able to exercise that collateral.

That was very helpful. So apart -- I just have one more question. So apart from net impairment losses on loans, bank also reported net impairment losses amounting to QAR 149 million for 2022 versus reversal of QAR 22 million in 2021. So any clarity on the same will be really helpful.

Yes, Shreekant. So it basically pertains to off-balance sheet items, and these include both ECL as well as NPL. So last year, there was a net reversal of ECL on specific off-balance sheet products versus this year, a net provision. And that's the difference between 149 charge and a 22 credit.

Our next question is from Lee Beswick. Lee, if you could unmute and ask your question please? We'll wait for -- whilst we wait for Lee to join in, our next question is from Rohit Raj. Rohit, do you want to unmute and ask your question, please? Okay, Lee does not have audio, so I'll ask his questions. Sorry, Rohit Raj is asking his question.

I have put my question in the chat. So maybe you can take that.

Yes. So I'll go to Lee's question first and then move to Rohit's from the chat. So Lee's first question is, can you explain the staff cost line for Q4, QAR 595 million at year-end, QAR 570 million at Q3. So earnings seem to beat because you almost 0 staff costs in Q4. What is the reason behind the quarterly volatility and will it continue? Lee, the main reason for that is the movement in share price, which has resulted in a net credit on our staff costs because the performance rights, our IFRS 2 accounted. And as the share price in Q4 for Commercial Bank fell, there was a net credit in the staff cost line. The next question is, what is CBQ's exposure to residential apartments in the 20% real estate? How will this evolve as the Supreme Committee releases World Cup inventory back to the market, also office and retail exposure? So what is the residential exposure within real estate? Lee, roughly from the 20%, about 11% is mortgages, including retail and residential and 9% is commercial. And the last question from Lee is, CBQ has the highest wholesale funding as a percentage of total funding. Can CBQ shift to more deposit funding as higher interbank rates are less attractive today?

I would say, look, we have actually -- our wholesale funding has actually turned out to be quite advantageous for us because we have created a broad base of investors across Asia, across Europe and even in the U.S. And that's advantageous because it enables us to tap the markets at appropriate times and appropriate currencies. As an example, we did in AT1, last year an International AT1 for the first time. That's one of the first International AT1s by Qatari banks. And it was done at 4.5%, which looks very good in today's market, where comparable funding would be 7.5% or so. So we also don't have too many issuances maturing last year in 2022 or in 2023. So that has given us an advantageous interest benefit in today's market. We will go to the International markets at the opportune time when we see the interest rate cycle moving in our favor. And so that's how we play it. So the volume of International go up or down. As I was mentioning earlier, we will continue to build our deposit base. But I think I would differentiate between looking at a deposit base, retail or wholesale at a -- as a homogeneous pool. You should really differentiate between the proportion of high-cost deposits and low-cost deposits because you can easily put on a bigger retail deposit base, if you just pay up. So for us, our focus is on building a sustainable low-cost deposit base. And that's gone from what was about QAR 18 billion a few years ago to about QAR 29 billion to QAR 30 billion. And we -- that's our prime focus. So that's the way we operate on the retail deposit space and the corporate deport space, because we look at the low-cost deposits as the key driver and that's our strategic approach.

Lee, I just wanted to add also regarding your first question on the staff costs. And I'll just take you back to Slide 8 and reiterate what I said at the beginning, which is that IFRS 2 requires us to show the movement in the share price, both in terms of income and costs. And that's why we also showed the normalized numbers here. And as you can see, costs have not changed much between Q3 and Q4 when you look at normalized numbers, QAR 286 million, QAR 280 million. And within that, staff cost has not changed actually very much at all. It's just a share price movement that is making it look in the financials that there's been a significant move in the staff cost. But that's not actually the case when you strip out the impact. And as I mentioned, it is fully hedged. Therefore, income and costs move in the same quantum and direction each quarter depending on the share price movement. And that's why it's operating profit there's no difference between normalized and reported. I hope that helps explain to you that staff credit is not the reason why our performance has improved in terms of revenue and costs. It's actually a net zero impact on our overall performance.

Our next question is from in Vikram Viswanathan.

Just a question on the -- you mentioned about good revenue generation in 2023. The question I have here is, you said you can grow your loan book by around 3% to 4%, somewhat flat margins compared to this year. So it does not look like you will grow much on the net interest income line. So I'm just trying to wonder, where this growth in revenue will come from? Is it going to be fees? Are there any other sources of revenue that you can generate? That's my first question. The second question is on the Central Bank of Qatar asset quality review. There was a lot of hue and cry about the new governor, and the asset quality review that you had started and the impact of the review on the provisions. But so far, from what we have seen from the banking sector results, none of that really came through. We were hearing that the Central Bank is pushing for some of the Stage 2 loans to be pushed into Stage 3, if they cannot be made viable. But we do not see any of these issues come through in the banking sector numbers. So I'm just wondering if the Central Bank could change their minds, or if you could elaborate on what happened there, that would be great.

Yes. Vikram, look, in terms of revenue generation, as we saw in 2022, revenue was up approximately QAR 500 million year-on-year. We expect a similar amount. We did not grow the balance sheet between '21 and '22, either the loan book, certainly on a net basis, and we had the QAR 500 million growth in revenue. So we expect that to be something we can replicate in 2023. Of course, we're always developing various revenue streams. It's not just on NII, payments and cash management, FX, they've all been strong contributors in 2022, and we expect that to be the case in 2023. We are focusing a lot on retail. Wealth management will also be key contributors in 2023. And of course, we've seen a very good contribution from our International entities, our 2 associates. And we see -- we're working very closely with them. They have 5-year strategies in place now as well, and we see that being a contributor that increases year-on-year as well. So all of those combined give us the targets that we have in place in terms of net profit and return on equity.

I think about the second part of your question regarding the Central Bank, I think they are taking the prudent approach, which is actually good for the banking system. And I think we are also taking a prudent approach. So it's not a surprise or a challenge to us in terms of the provisioning that we are taking. So -- because we have, since the last 4 or 5 years, being prudent in our provisioning and recognizing what needs to be done. So for us, we are quite aligned with that approach. And that's why we've also guided that we will continue that prudent approach for 2023 and perhaps into 2024, so I think we currently speak for ourselves.

Our next question is from Aybek Islamov.

So I think I wanted to ask around the asset quality situation with Commercial Bank of Qatar. I think firstly, I think the -- what we see is that real estate values in Qatar declined since 2016 by about 30%, right? So I suspect the loan-to-value ratios on real estate loans must be higher than they were, let's say, back then in 2017, 2016. So can you comment what are the LTVs like on your real estate? And obviously, real estate is, I guess, about 25% of your own portfolio, right, quite a material exposure. And if LTV is above the comfort level of the Central Bank or Commercial Bank of Qatar Management, what are the ways to rectify that? Does higher provision rectify or hedge you against the high LTV loans? Can you elaborate a little bit on this? And I think thirdly, when we look at the increase in Stage 2 loans, Stage 3 loans, I just want to understand qualitatively which segment of the loan portfolio is driving that and why we're not seeing high write-offs of the loans, particularly in the fourth quarter, for example, but throughout 2022. Is that because the loans which have been taken into Stage 2, they are long-term loans? So I would just appreciate more color on this subject.

Yes, Aybek, thanks for those questions. Yes, of course, there is a decline in real estate values. Our LTV is around 70%. In terms of Stage 2 and Stage 3 formation, it has been in the real estate sector to a large extent. In terms of write-offs, obviously, we get to 100% provisioning first and then we do the write-offs. We do expect write-offs to happen in 2023. It was on the low side in 2022, but part of the reason why we're building up those provisions is so that we can get to that 100% provision. And then we can look at write-offs, which obviously impacts the NPL ratio as well.

And can I ask you just as a follow-up. Is there a guidance as to what kind of Stage 2 loan coverage is adequate for Commercial Bank of Qatar?

Yes. Look, it varies. It does depend on different sectors within the book. And of course, we see quite a wide variance between banks as well in terms of Stage 2 provisioning. But I think anything between 10% and 20% coverage on Stage 2 is adequate.

Our next question is from [indiscernible]. He has asked to read it out. I was looking at the CET1 ratio versus your targets for 2023. They are 60 basis points higher than FY 2022 levels. I guess retained earnings from this year will be reflected only in Q1 2023 capital. So this should help ratios. But can you elaborate a bit more on how you plan to achieve the capital targets? So yes, in Qatar, the Central Bank allows the capitalization of profits only after the payment of dividend. So that will happen in Q1 in 2023. So there's only once that capital profits can be capitalized. As we have done in the past, we will continue to maintain a balanced approach towards dividend payout and profit retention and management generally guides that the payout will not exceed 50%. And that helps us to build our capital over a period of time. And we believe that, that strategy will get us to our capital targets in the medium term. The second question is on issuance plans for 2023 for senior and subordinated bonds. And lastly, is the outlook on the Turkey business.

On senior bonds, I think we will watch the market very carefully in terms of timing. We do -- we're obviously looking at to see how Fed rates move over the next 6 months, 9 months, 12 months. We're certainly not in a hurry to do an issuance. And we did -- the last one was in 2021 when we did the additional Tier 1 issuance at very favorable rates. So we have locked in long-term funding through that as well as a capital impact as well. So we will look at the market to see when is the appropriate time for bond issuance.

You might do -- like I said, we're always constantly exploring new investor bases and new forms. So we might look at a local bond issuance if the market is suitable for it, in local currency bond issuance as a new form of issuance. But that's more like trying out something new and building diversity for the future.

And I think your last question was around Turkey, the outlook. We have our Turkish CEO here. But I think -- and going back to an earlier question, the hyperinflationary accounting is likely to continue for this year because as per our understanding, and Rehan can confirm, you have to have 3Q if your inflation total for -- cumulative inflation total for over 3 years is 100%, then you have to apply it. So I don't think we'll get out of that cumulative 100% for the next at least 2 years. So we would expect hyperinflationary accounting to be applied for this year and next year. So I think we -- assuming unless there's a dramatic change in the inflation outlook. For our business, the way we've run our business is a conservative business. The -- we have not chased growth. We've ensured risk quality is strong, and that's why our Turkish business is one of the lowest nonperforming NPL ratios. I think it's below 3% right now. And that's what we expect to continue. At an operating level last year in Turkish lira terms, it performed extremely well, as did the entire Turkish banking market. So at a stand-alone entity, it did very well. I think it made QAR 222 million equivalent of profit. But then when you apply hyperinflationary accounting, then that obviously has negated that impact. And that's why we expect Turkey will continue to have hyperinflationary accounting. But our underlying business will continue to do well because it's conservatively managed. And that's -- we're not pushing for huge growth there, and I think that's important, given that we may expect some more volatility in Turkey. We have our CEO of our Alternatifbank her, Kaan Gür, and he might like to give a short view of what the outlook is like for Turkey. Kaan?

Thanks a lot, Mr. Joseph. Actually, I thought we agree what you're describing the -- our 2022 performances in all terms. Regarding 2023, actually, I could say that the most important thing is the Central Bank [ realization ]. It's going on. So it means that as there is a very important -- the ratio holder banking system should follow that. The banks are trying to keep over 60% Turkish lira deposit ratio. So it is a very strong [ realization ] effort. And at the same time, there is some pressure, especially on the commercial lending yields. But actually, the most important thing is the protecting the existing net interest margin by diversifying the loan book. As you very well mentioned, Mr. Joseph, we're going to maintain our prudent approach on credit risk management, rightsizing of the balance sheet. And of course, we're going to move focus on noninterest income generation. So -- of course, there are some obligations if the banks doesn't meet a 60% Turkish lira deposit ratio, such as reserve requirement commissions and purchasing low-yield treasury security maintenance. However, our Alternatifbank is very well performing, and we are over 60%. So it's going to be main issue throughout the whole year. I would like to say those words, if there's any detailed questions, so I'm ready to answer that.

Yes. I would just add that in our current 2022 figures, the contribution of our Alternatifbank has, obviously, as I said, been very minimal due to the hyperinflation accounting. And for 2023, we are expecting the same sort of contribution. So we're not expecting a huge contribution post hyperinflation accounting in our 2023 outlook.

We have no further questions. Joseph, over to you for closing comments, please.

Thank you, Zubair. And thank you, everyone, for joining us today, and we hope we were able to give you a satisfactory explanation. But I think there's one more question.

Yes. Rohit, you can go ahead and ask your question. Yes, Yes. I'll read it from the chat. The parent results published on last page of financial statement shows the parent operating income is down QAR 48 million and OpEx, including share cost, of QAR 61 million. Does this mean entire increase in operating income is from Turkey that is offset by hyperinflationary adjustment, and all the increase in group net profit is primarily from no impairment for associates and share plan-related cost year-on-year positive impact of QAR 396 million?

No. Again, it goes back to the same answer as previously. There is a difference between the reported numbers and the normalized numbers. The share price movement has caused some differences. But what you can see is -- and as I mentioned to you, on a normalized basis, operating income is up 11%. It's quite similar in the parent company as well as in International as well. And costs are about normal for -- about the same in both entities as well year-on-year. So it is the share price movement that is likely giving that impression. But overall, the contribution is both at domestic level and at International level. And there is -- sorry, I'll just add, obviously, there is a positive contribution from the fact that the associates income has been very good, their contribution as well as the fact that there is no impairment required this year as there was last year and the year before.

We don't expect the impairment to continue, and we expect that position to continue as operating performance of the associates is also positive, and we said the outlook also looked positive. So we don't expect any further impairments on those [ assets ]. If there are no other questions, then we'll wind up today. Again, thank you very much for joining us. And if there are any other questions or clarification that you need, please feel free to reach out to Zubair, and we'd be happy to answer that. So thank you again, and we wish you a good day.

Thank you, everyone. Bye now.

Thank you. Bye-bye.