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

Good afternoon, everybody. I'm Zubair Chaiwalla, Head of Investor Relations and Capital Management in Commercial Bank. And I welcome you all to the Q1 2023 Commercial Bank Results Call. With me on the call to my right is Joseph Abraham, the Group Chief Executive Officer; and to my far right is Rehan Khan, the CFO. For the duration of the speakers talk you will be on mute. And I'll get back to you before the Q&A starts. I now hand you over to Joseph Abraham. Joseph, over to you, please.

Good morning, everyone, or good afternoon, sorry, everyone, and thanks for joining us today. We've now finished the first quarter of 2023. And obviously, I think after the hectic activities of the last quarter with the World Cup, there's going to be a slightly quieter phase in Q1. But I would say that we anticipate the spending and the other initiatives to accelerate in Q2, Q3, Q4. So this is, I would say, temporary low. Despite that, we have shown a good result in terms of a 7% increase in our profit. One of the facts which obviously will stand out is the sort of reduction in the loan assets as from the balance sheet. I would actually say that, just to give you a bit more clarity on the individual components, we've actually increased our domestic lending in Qatar, both across wholesale and retail banking. Retail banking has gone up about 10% on a year-on-year basis about QAR 900 million and wholesale is also up about QAR 2 billion. So we've actually shown growth in our domestic business. This has been offset, of course, by a reduction in the MOB as a Ministry of Finance overdraft. But also one of the factors which shows us a loan reduction, but which actually is just, something called exceptions under the central bank regulation, when we put a acceptance on letter of credit, we have to show it under the lending side. And we used to use this as a means of raising structured deposits. So people place cash with us against an LC, which we have confirmed, they would then get that discounted offshore, basically taking a bit of arbitrage on the difference between the deposit rate from the lending rate. In the revised context of some haircut on long invested deposits and also the higher cost of funding, we found this was no longer beneficial. So we dropped these structured deposits and they're down about QAR 4 billion year-on-year. So that's showing us a reduction in dollars. But I want to just clarify it's not really a reduction though. Then similarly, there's a reduction in deposits because these are also the -- on the other side of the deposits. So net-net, the figures are giving us slightly, I'd say, exaggerated picture of a decline, which is not really there. And that's why I think our net interest margin has remained the same. And our net interest income as result -- or sorry, year-over-year and quarter-on-quarter, it's slight decline, but that's, I think, coming more from a increase in the cost of funds. And so overall, I'd say that despite the relative quietness in the first quarter, we have continued to see growth in our loan book. Of course, in Turkey, we saw a reduction and that's also showing in the consolidated figures, because in Turkey there has been quite a few changes in the various rules and regulations regarding deposits and loans. And currently, there's almost a negative spread on loans, so it makes sense through these deposits. So I would say that that's the context in which you need to -- what we've done is actually reduced structured deposits and loans which are either negative carryover very low margins, and that will be long-term positive for the business. So apart from that, I'd say the other factor is the improved performance of our associates NBO and UAB and we expect that uptick to continue in the next few quarters for the year. I will let Rehan go into a little more detail, but I just wanted to give that high level sort of that the momentum has positive legs behind it. And as I said for a long time, the challenge for every bank is maintaining and growing its net interest income, given where we are in terms of the cost of funding. That said, I think there are multiple views of where the Fed will go and -- but I think the good thing is that we're reaching the peak level for interest rates probably or close to it. And that, I think, is the key for the future. And therefore, we should see a positive trend in net interest income in the future when rates go down because the primary factor between both to the banks in Qatar has been the cost of funds rising, following the Fed rates. Rehan, over to you.

Yes. Thank you, Joseph. Good afternoon, everyone. I'll focus on the same slide, Slide 8, which shows the quarter-by-quarter performance. As always, on the right-hand side is the reported numbers. And on the left-hand side are the normalized numbers, which strip out the impact of IFRS 2, regarding the staff performance scheme, which is a fully hedged scheme. So just to remind you that that has no impact overall at operating profit level. So you can see Q1 is QAR 1,026 million, both in normalized and operating, similarly Q1 last year, QAR 942 million and QAR 942 million, but the income and costs now show much more the underlying trends are taking up the impact of IFRS 2. Having said that, look, we're up 7% in profit year-on-year or 22% -- 23% up quarter-on-quarter. I'll focus more on year-on-year because as you know, Q4 has a number of anomalies always. So starting with the operating income, it's up 11%. Within that net interest income is up 7.5%. And we have managed to maintain our NIMs for the quarter, 2.8%, which was the full year for 2022 as well. And it's up from 2.7% a year ago. Back in 2018, our NIM was 2.1%, so it's a much improved position that we're in now at 2.8%. So NIM has been maintained. Joseph explained the decrease in lending. And within that, Alternatif was QAR 2 billion down year-on-year as well, which is a function of them also looking very carefully at what is NIM enhancing and what is not and exiting from some of the loans that were not enhancing. So that's what we are focused and making sure that everything we're doing on the asset side is with a NIM focus for us. On the noninterest income side, we're up 22% year-on-year. So this is fees, FX, investment income, et cetera. And that is of a recurring nature. So we are pleased with how our noninterest income is performing as well. Some decrease in fees, which would be typically loan-related. So once our other loans start improving and I think we'll start seeing an increase in our fee income as well. On the cost side, you can see it's at QAR 326 million. It's up 19% year-on-year. Within this -- within domestic, there's a very small increase in cost, mainly AMC-related. Staff costs are pretty similar year-on-year. But obviously, as we know, Turkey is in a hyperinflation situation, so staff costs are up year-on-year. And also because of the earthquake disaster, donations were made and that's also within our Q1. So those are the main contributors to our cost increase. Having said that, our operating profit at QAR 1,026 million is up 8.8% year-on-year. And so that's a very positive improvement for us and is showing the momentum in the business. In terms of provisions, QAR 273 million versus QAR 276 million. So quite similar, although credit provisions are lower and other financial assets provisions are higher. As Joseph again mentioned, very good momentum in our share of associates. That's at QAR 70 million for the first quarter. Both UAB and NBO continue to improve year-on-year and quarter-on-quarter. So we're pleased that that turnaround is continuing with both of those associates and it's a promising trend for the future as well. As we mentioned, non-monetary assets is the adjustment for Alternatif regarding IAS 29 due to hyperinflation. So that is the adjustment of QAR 42 million, as you can see there. And the tax is primarily Alternatif as well on the profits that are being made there. So overall, decent results of QAR 751 million for the quarter, strong momentum, I think, going into the next few quarters. Cost-to-income ratio is the one area where because of that increase in cost, we need to manage that down for the next few quarters. We have given guidance that will trend downwards in Q2 to Q4 and we expect that to happen. So I think that's an overall summary of the results and I hand you back to Zubair and then we can go to Q&A.

Thank you, Rehan. We will now start with the Q&A. [Operator Instructions] We now have the first question from Waruna. Waruna, please go ahead, unmute and ask your question.

I have mainly 2 questions. The first one is related to the change in the loan that yourself alluded to in the beginning as a result of dropping the structured deposits and related loans, want to -- I mean, if you could shed some more color on it, I mean, what was the rationale for, first of all, for originating this business. And in terms of letting go of this business, I thought you said it's because of the net-net, there is no benefit. So if you could elaborate a bit on that, that'll be useful. And secondly, on the expenses, I think Rehan mentioned there was like one-off element in terms of earthquake donations. And so there were some, I think, one-off increase there. So how much of the total cost was related to that? If you could explain that as well.

I can take the first part and then let Rehan handle the second part. I think regarding the -- this is a form of generating some deposits for us. As I said, internationally, some clients have access to deposits, so they would place it with us. And then LC would be issued which we would accept and they will get that discounted abroad. So they were basically taking some arbitrage against the funding, what we're earning on their deposits, this big sort of international commodity companies, et cetera. With the deeper nonresident deposits. And therefore with the QCB has been asking the Qatari banks to reduce their [indiscernible] of this, so we saw that as no longer being useful in this context. And also with the rise in interest rates, et cetera, the benefit of margin from a liquidity point of view. So that's why we have taken a conscious position that they no longer serve the purpose during the change context. And that's why we dropped them. That's why you're seeing -- there was acceptance because we put our acceptance of the letter of credit. That was coming as per the central bank classification on the loans results coming. The deposits are also on the other side. And that's why you've seen a reduction in loans, I mean, at a higher loan and a reduction in deposits. But in fact, it's not really a huge reduction in our loan sales because it was just a form of structured liquidity raise.

I mean, just -- obviously, when the interest rates go up, that does not become viable really for us to continue with that. And obviously, our focus is to optimize our net interest margin. And just to reiterate the numbers Joseph said, retail is up about QAR 800 million year-on-year, which represents about 8% to 9%. Corporate was up QAR 2.2 billion year-on-year as well. So with this reduction in acceptances and the reduction in the MoF overdraft and then thirdly the Alternatif reduction, these are all, I think, going to help us in the long term for our net interest margins. And that has to be the main concern rather than the absolute amount [indiscernible].

And I would say just to get you further. We have probably on a quarter-on-quarter basis, we've been reasonably flat. Retail has grown about QAR 300 million, I think, also has been reasonably flat. So despite a negative trend in most of the banks we would say that we have maintained our loan book during the first quarter. And as I said, we expect some momentum to increase in the following quarters.

Yes. And then the second question was around expenses. Around QAR 9 million of this would be one-off in Turkey. The remainder is genuinely inflation-related increase, primarily from Turkey. There is some here as well, which is more to do with the investment that we've made in technology. So we are seeing a little higher depreciation. We are seeing a little higher AMC costs, but primarily the increase is coming from our subsidiary in Turkey, which is inflation-related.

If I may ask one more question, if you don't mind. I mean, so related to this nonresident deposits, do you see any further requirements coming in to bring down this exposure further or is the current level kind of acceptable to the central bank?

Yes. Look, I think as a bank, we would never want to be our clients. Our ratio at the peak was 22%. But I think at that time, the system was 28% or in that range. So we've never been an outlier in terms of the composition of nonresident deposits. Today, we're at about 13% or -- 13% or 14%. So I think this is very much in line with where -- and this is just going to go down, I think it's what --

18%.

-- 18%, yes. So I think -- I think it's a long term that they want reduce the dependence on nonresident deposits. I would say now the next highest country in the GCC is the UAE, which is at about 14%, I believe. And so I think, I would say that, that's probably a benchmark that we could set as a threshold where a low gross system might want to stabilize.

Our next question is from Janany. Her question is, can you please give some color on recovery in lending in the coming quarters? Given drop in deposits, how do you expect this to affect cost of fund trend and NIMs?

Yes. I would say lending growth, as I said, this has been a quiet quarter. We expect it to pick up a bit in the second and probably third and fourth where we see more growth. We have given a guidance of 3% to 5% for the year. I would say that probably would be at 3%, I would expect, because as I said, most of our reduction came from these acceptances, which you dropped and also to -- now we don't see too much more of that effect in '22, maybe Turkey, I don't know, depending on [indiscernible]. So I don't want to be absolutely specific on that. But I would say that we expect to continue our growth in retail. I would say retail will grow at the same level of FX. So we expect 10% to [indiscernible] which probably come at about QAR 700 million, QAR 800 million, QAR 900 million. And wholesale, I expect QAR 2 billion or QAR 2 billion or QAR 3 billion more, I think that's -- I think 3% is probably where we would like to come on in terms of momentum. In terms of retail, deposits dropping off, as I said, these are at the marginal level where we're trying to manage our cost of funding. So per se, they don't affect the NIM that much. It's, I would say, much more challenging if we see a big drop in our low-cost funds and areas like that. And that's a constant challenge for us. I think the challenge is more about low-cost funds migrating to slightly high interest rates because at these rates, everyone wants start looking at their idle [ funds ]. So that's more of a challenge, I'd say, for us. So we've given guidance that the NIM could drop 10 basis points. So I would keep that guidance in place because -- but it's not from the absolute level of deposits, I'd say it's more from migration of 0 interest cost of balances due to coal accounts and overall time coming more, I'd say, attuned to the interest earning opportunity. And this is, I think, the global focus to cut down.

Thank you. I think we don't have any more questions. Joseph, over to you for any closing remarks.

Well, I think, as I said, Qatar remains in a very strong position, firstly the government, which I think is the most important thing for the economy in the long-term, whilst it has short-term implications of paying out the government overdraft, I think that's a shorter period thing. I think this gives the government the wherewithal to continue to invest and build the economy. And there are definitely more [indiscernible] I think, now that the World Cup is behind us to really initiate initiatives which will boost the economic growth and diversification of the economy and the continued investment in [indiscernible] expansions. So we remain positive on the overall outlook for 2023.

Joseph, just as we said that, please. The next question from [ Muhammad Fifi ]. Please go ahead and ask your question.

So I have question about cost of risk. So we're guiding for 1.2% risk for the full year because the risk came this quarter way lower than the guidance. So I mean for the full year, you still have the guidance of 1.2% risk?

Yes. Yes, we do. Yes, we do. Obviously, not a lot has happened in the first quarter. So almost all of our provisioning actually is under the ECL rather than any specific provision. We expect as the year develops to look carefully at the performance of our customers and where the provisioning will be required. So yes, we don't change the full year guidance.

Okay. And I have one more for [indiscernible]. Is there any one-offs in the fee income for this quarter?

No, no. There is not one offs in the fee income.

Okay. If I may, one last question, towards the nonresident deposits. So I mean, we know that the central -- as you mentioned, also the central bank were advising the banks to lower the exposure to nonresident deposits. So do you now reach the level that is comfortable or you will go further in dropping nonresident deposits?

I think we are reasonably comfortable at the level we are at. We see no pressure to either grow or raw. I think also features come up with you. There will be regional metric calls, because they were reporting the [indiscernible]. The central bank took that seriously, which I think is proactive on their part, and they brought it down. As I said, I think that this 18% level, even Fitch has come out with a recent report saying there has been a big improvement and this shows the resilience of the recovery banking sector, et cetera. So I think that also, let's say, pressure has come off. Now is 18% satisfactory, like I said, I think around 14% which is like UAE is probably where everyone will feel comfortable. So I don't see any big pressure to -- we are in 13% or 14%. We are at that level. So it's not a big issue for us.

Our next question is from Vikram Viswanathan.

A question on the margins. If the Fed rates were to decline by 100 basis points, what will be the impact on CBQ's margins? I think you mentioned that if rates were to go down, it's generally positive for the Qatari banking sector, given the increase in funding costs that you've seen. So I'm just curious to understand if rates were to take a U-turn and start going down, how sensitive is the margins to a rates decline?

Yes. Look, Vikram, I think for us, we certainly highlighted before as well that with such sharp increases in interest rates, number one, the QCB has not fully passed that on in the QMLR rate. And secondly, there is a point where you come to the customers where it is not appropriate to pass on the full increase. So I think a decrease in interest rates from now would be NIM-enhancing because deposit rates would fall and not necessarily would be fully reflected in the lending rate. So I think it would be positive for the banks in Qatar when interest rates start coming down.

Sure. I'm just trying to assess the magnitude, if rates go down by 100 basis points, what will be the impact on CBQ's NIMs?

With the -- the point here is if you just do a model basis, it will give you about QAR 40-odd million. But the fact and this is what Rehan and Joseph have also mentioned in the past, it does not move unilaterally in a straight line like how the model moves. And that we've seen it in the real life situation as well.

So I think, look, I think because we're in that sort of space where the rates are very high, customers are suffering, I would say that when the rates come down, obviously, it would pass through into the cost of funding, but also into the customers also. So I would expect this be net because the repricing of the deposits might happen with a slight lag. But I think we will try, it's managing how we reprice that assets or so.

Because it's, as Zubair says, it's not a straight line, net-net, but I would say the first drop with 100 basis points, I'm not sure what the effect will be. I would say, basically broadly neutral. I do say that it's a next set where you like to see the bigger benefit for the banks because then we've got out of the danger zone of interest rates, that will be my -- on the loan side and then you'll see a better result for the bank. That's my view.

Thanks, Joseph, for taking those additional questions. We can call it a close here.

Okay. Great.

Thank you.

Thank you, everyone.

Thank you.