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

Good afternoon, everybody, and welcome to The Commercial Bank's First Half 2023 Financial Investor Call. On the call, we have Group Chief Executive Officer, Joseph Abraham, to my right; and to his right, we have the CFO, Rehan Khan. I hand you now to Joseph for the call.

Yes, good afternoon, everyone. Thank you for joining us today. We've announced our half yearly results, which are up 8.5%, and this is the highest half-yearly results that have been declared by Commercial Bank and also our highest quarterly results at over QAR 800 million. This has been done in quite a challenging context in terms of loan growth, which I believe is where you had some questions. So I would say that in this period, and we have a slide which will explain that whilst the loan growth has always seen negative loan growth, actually already seen in areas where it is not really affecting our income primarily around [indiscernible] income. And also, it's a conscious position and also Turkey has contributed to that. So there was a negative lending margin in Turkey a bit of challenge in the operating environment there. But also, I would say that we continue to emphasize credit quality. And I think this is in terms of new loan acquisition of growth. And it is very important because these interest rates is putting pressure on borrowers. And we are not chasing loan growth for the sake of loan growth, particularly at suboptimal pricing, which doesn't properly reflect reward and risk. And given the outlook for higher interest rates to remain elevated for some time, we believe being cautious now will continue to pay us good dividends in terms of credit quality in the future. And we have done a considerable amount of work in the last few years in cleaning up our book, and we want to continue that. So that's the context. But overall, otherwise, I'd say the results are positive and we're pleased with them. And I will let Rehan now talk about the financials a bit in little detail, but I've asked for slides, particularly around loan growth, around the NPL ratio, which again because of the denominator effect that has seen some movement upwards but -- and finally on costs also, which again, I would say, we will explain that it's not a [indiscernible] from our core operating [indiscernible]. Rehan?

Yes. Thank you, Joseph, and good afternoon, everyone. I'll focus mainly on Slide 8, and this shows the quarter-by-quarter financial performance. As you know, on the right-hand side, we have the reported numbers, and we normalize them taking into account IFRS 2, which is in relation to the stock performance that we have. And what that does is make sure that we then can focus on the underlying trends. There's no change in terms of operating profit. You can see 2113 in the reported, 2113 in the operational audit but there is a gross up in the reported numbers both in terms of income and cost. And as it's a fully hedged scheme, it's appropriate to take that out and focus on what the trends are across the quarters for us to see. So as Joseph said, we have improved our profitability by 8.5% year-on-year and 7% quarter-on-quarter from QAR 751 million to QAR 803 million. So if we first look -- I think look at the balance sheet before we go into detail on the P&L. You can see that our lending volume now stands at just over QAR 89 billion and we have included an additional slide, Slide 9, which just shows the movements year-on-year so that it is transparent in terms of what we have done. And largely, this is a conscious decision. We obviously are constantly reviewing our positioning in terms of the balance sheet. And you can see that the large variance is our first thing due to acceptances. This does not -- this is NIM compressing, actually, and that's why we have taken the conscious decision to reduce this almost by QAR 5 million year-on-year. Similarly on Alternatif Bank loans, given the interest rate environment, Alternatif have also consciously reduced the amount of the loan book. This may go up again in the second half of the year if interest rates continue to go back up. But certainly, year-on-year, they're down QAR 3.2 billion. This is in Qatari rial equivalent. [ MoF ], we talked about in previous quarters, that's almost down to nothing now at the end of June. So that's down by 1.2%. Retail, as we've said, is one very big focus area for us and we're seeing around QAR 755 million increase year-on-year. So we're very pleased with the progress that we're making across the different products in retail, and we expect that to continue. And the last is primarily wholesale and international lending where, again, we have consciously seen, number one, some repayments and transfers to other banks and we've allowed that to happen. And then secondly, very conscious about the current high interest rates, and therefore, we've not booked new loans in the second quarter.

If I would say that all others refer primarily to our domestic business, so you can see that the real impact is -- here the proportion is only about QAR 3 billion, it's about 4.2% down. But out of that about almost 1/3 is where we had some credit quality concerns and let it go to be refinanced by other bank. And that's our prime goal to ensure that we don't get stuck later with some problematic, challenging loan. So that's a conscious decision. And some, as we said, there are price competition, et cetera, in the market, which we are not going to get into that. But again, every management [ has its own strategy ] but we believe that when the market comes back, those will be available again because moved on price. So we are comfortable with this position. Will we see such further growth, loan reduction in the next 2 quarters? We don't think so. We think that most of this is done. But again, I think if you look later in our guidance, our guidance is at the lower end. Initially we said 3% to 5%, but I think given the context of interest rates being higher for longer, we have said that it will be probably -- from here, we expect 0 to 1% growth that's something. But again, I would emphasize our focus is on the 2 aspects of net interest income, one is the interest revenue and the other is cost. And we are focusing a lot on managing our costs through building low-cost funds, et cetera. Like I said that we won a recent significant large mandate in the public sector, which again shows you the quality of our client and transaction-making acquisition, which remains a core focus.

Yes. So if we just go back to the results on Slide 8, you can see that the increase in profitability is driven firstly by an increase in operating income, increased contribution from our international entities. So Alternatif, NBO and UAB. All 3 have improved their performance year-on-year. And that more than offsets the increase in OpEx that you can see. Of course, you know that in -- largely in Turkey given the very high inflationary situation. And we've also taken more credit provisions in the first half of this year versus last year. And very much in line with the guidance, you can see now our cost of risk is up at 111 -- 112 basis points. And we've given a guidance of 120 to 135 for the year, and this is trending in that direction as we expected. The other thing, just keeping on the ratios, of course, you can see our NPL ratio is at 5.5% now. It's largely a function of the reduced lending. We did see a little bit of migration to Stage 3, but nothing significant. So it's really going up from 5% to 5.5% quarter-on-quarter is mainly the reduction in the loan book that is causing that. Just in terms of operating income, we did see our net interest margin -- our net interest income is up 2.4% year-on-year. Net interest margin is maintained at 2.7%. However, it's down from 2.8% to 2.7% in the quarter. And again, that is a guidance that we had given that we did expect in this environment for some reduction in our net interest margin. This is driven from our Alternatif subsidiary, as in Qatar domestically, we have maintained [ partnerships ]. Also, we can see that within our operating income, our noninterest income is up almost 24% year-on-year. We've seen a recovery in our investment income, and we've also seen strong FX income. And there's a little bit of trade-off again in Turkey there, lower NII, but higher FX and that can reverse in subsequent quarters if loan rates go up and our net interest margin starts going up again. In terms of operating profit, we are up 6.9% year-on-year. And our cost-income ratio is down from 24.1% to 22.5% quarter-on-quarter, but it's still higher year-on-year from 22.6% to 23.3%. So it's trending in the right direction, but it is higher than this time last year. In terms of OpEx, as I said, this is largely driven by the inflationary situation. In Alternatif, they are up about 34% year-on-year in terms of OpEx and that includes the one-off contribution regarding the earthquake that took place in the first quarter of this year. So there are the underlying staff costs that have gone up, but also the one-off. Within Qatar, we are investing in technology. So you do see some increase in AMC costs, in depreciation costs. And also, we are investing in the private banking wealth management and so we are investing in additional head count in that area. So those are the overall explanations for our OpEx increase year-on-year. In terms of provisioning, large fee Stage 3 additional provisioning that we have done in this quarter, and you can see that has resulted in a higher coverage ratio, which is just under 112%, including this year. In terms of associates, both UAB NBO have continued to do well. We are working very closely with both of them. They are exercising on their strategy, and we are seeing very positive results of that. Net monetary loss is obviously the IAS 29 adjustment that we've seen in place from last year. Taxes slightly lower quarter-on-quarter. There was some deferred tax in Alternatif that we have now taken off as an adjustment, and that has helped in the overall tax charge for the quarter. I think in terms of remaining ratios, CET1 is up from 11.7 to 11.9, and our total CAR now stands at 16.1%. So we're comfortably above our minimum ratios. So overall, strong capital adequacy ratio. I think we can end there in terms of overall presentation. We're happy to take the questions. I can hand over to Zubair for the Q&A.

Thank you very much, Rehan. We'll start the Q&A. [Operator Instructions] We already have a first question, Chira Ghosh. [Operator Instructions]

Can you hear me?

Yes, we can.

Yes, perfect. Okay. I'm Chira Ghosh. I'm calling from SICO Bahrain. So I have a couple of questions. The first one is related to the asset quality. So I see the asset quality deteriorated a bit, but I can understand, as you're saying, it is primarily because of the denominator impact. But through the call, you also said that 1/3 of the loan book that you let go was primarily due to asset quality concerns. So I would -- my rough calculation shows around QAR 1 billion-odd would be those loans. So if I take that off, it still looks like some asset quality deterioration did happen in this quarter. If you can throw some color on that one. That's my first part. And the second question is how sustainable are the FX income and the investment income going forward?

Okay. Yes. In terms of asset quality, as I said, there was a small migration from Stage 2 to Stage 3. Stage 2 actually overall has reduced by QAR 450 million overall in terms of the book. But there was a small migration, as I said, from Stage 2 to Stage 3. What Joseph was referring to was basically letting go some customers where we felt further down the line there would be asset concerns. And that's why we allowed that...

If I recall, right, by the Stage 2 or -- Stage 2.

Stage 2.

And so we and Alternatif Bank made a very attractive offer. So we were -- normally, our view is we don't chase business that lower interest rates, but in this case, they have made a very attractive offer. And we were willing to let it go consciously rather than defend our business. If -- normally, if someone attacks our portfolio, we defend it, even at -- but we don't chase new business at low risk. But in this case, we consciously let it go because we felt further down the line with the continuation of these interest rates with the sector it was in, we felt that there's overcapacity there. Therefore, this was probably a conscious decision. So that's why I was saying that we prioritized credit quality over immediate income growth or income loss because we believe that's fundamentally the right approach.

Yes. And then your second question around FX and investment income, FX, as I said, is largely coming from our subsidiary. There is a bit of trade-off between that and NII. We may see a little bit of reversal of that during the second half of the year. And that's my expectation talking to our colleagues there that there will be some additional NII and slight reduction in FX in the second half of this year. Investment income is, I think, more normalized now. So we expect that to continue in the second half of the year.

And just a quick reminder, so the loan growth guidance in the past was 3% to 5%. If you can remind our latest loan growth guidance now?

We said going forward for the rest of the year, we think 0 to 1%.

Yes.

Our next question is from Rahul Bajaj.

Rahul Bajaj from Citi. I have 3 quick questions, actually. The first one is on OpEx. So if I remember correctly, you had a QAR 10 million or QAR 9 million or so of one-off in the first Q on Turkey earthquake-related payments. So is it fair to think that this kind of second quarter run rate, which is QAR 315 million, QAR 316 million, give and take, is kind of a normalized run rate and we should build on that going forward? Or you think this is a part of elevated levels and we should see some normalization there. So that's my first question. My second question is I think just now Rehan mentioned that the investment income line is at more normalized levels now. Just wanted to clarify, are you talking about the 2Q run rate, which is just to QAR 100 million. Is that the run rate you're talking about? Or the first half run rate of around QAR 50 million a quarter -- QAR 50 million. Is that what you're talking about in terms of normalized. And my final question on lending growth. So I mean I understand the new guidance, 0 to 1%. If I look at year-till-date, loans are down almost 9% year-till-date. So if we have to get back to that 0 to 1% guidance, you're probably talking about between 9% to 10% growth in the second half of the year on the end of June base. So almost like 4%, 4.5% to 5% growth per quarter over the next couple of quarters. Do you think is that -- that is reasonable? Or what will drive this, in your view, this kind of 4%, 4.5% growth per quarter over the next couple of quarters?

Thanks for those questions. I think starting with your last question first, that probably I didn't communicate properly, my apologies. The -- what I meant was that from current level at the half year, we will be 0 to 1% growth. I wasn't talking about the annualized effect. So therefore, from our current level, where we are. So that means for the net -- for the full year, obviously we'll be down. The incremental growth from the third and fourth quarter is 0 to 1%. Again, we see slowness in the economy, we see slowness and with high interest rates, we see some maybe leverage challenges in some of the group. So that's why we are being so conscious in our approach. I think that -- yes, so that's correct. That's correct.

On the other 2 questions, Rahul, on the OpEx, you're quite right, there was a one-off in the first quarter, QAR 9 million. So QAR 316 million represents a more normal quarter for us, and that is the guidance going forward. In terms of investment income, the half year investment income is a more normalized number now for us going forward.

I think the only -- cost-to-income ratio, I would say the key factor, which will -- in terms of our incremental cost is probably Turkey again. And again, the continuation of high inflation there will obviously lead to inflation adjusted -- adjustments, which would therefore come through on those, I would say. In terms of the core domestic Qatar business, I think it's reasonably well controlled. We expect a little bit marginal increases, but if any. But it's the Turkey business, which is, again, we see inflation continuously. You could see some further adjustments there. We try -- we're actually adjusting it probably at the bottom end of the Turkey market but it's just that the inflation outlook is so high there.

Just one clarification, Joseph. Just on the lending growth side, so this LNG expansion has been a key theme over the last 2 to 3 years -- talked about in the last 2 to 3 years. Are you seeing projects being moved forward? Are you seeing downstream industries getting set up? When do you see or where do you see the loan pipeline fructify for the banks? I don't think we have seen anything major materialize as such. But any thoughts there would be very useful.

Yes. I would say that for the LNG expansion, that's continuing at pace. A lot of it is done internationally through project finance.

Yes.

With the lower -- apart from maybe UAB which obviously has the capability, the local banks can only participate as subcontracts to the overall contraction. And that's why we are seeing some growth but finally in parity or not [indiscernible] and that's the nature of the -- I think the business that will be coming down the road on the North Field Expansion, a subsection of the overall project finance, which is arranged for the subcontractor regardless the nature of that.

Thanks, Rahul. Our next question is from Lee Beswick.

Can you hear me?

Yes, we can.

Yes, can you just talk about your exposure, if any, to a small apartment market within the real estate portfolio and what size that would be ? Or just apartments in general as opposed to lending to builders. Is that something that you'd look at separately? Residential, yes sorry. Yes, residential, yes.

We can get some specific figures on that, but it's not a huge growth area for us, where we are strategic, where we've always focused on reducing our real estate exposure, which is a lot of which is these residential apartments and that has been coming down over time now. But I think we are -- we want to grow individual mortgages. There's the -- we find rather than doing a big ticket sort of property lending, whether residential or commercial, which was the past. We've curtailed that, as one of our strategic agendas, reduced real estate as a proportion of our loan book. Where we see opportunities are in retail business where individual mortgages, we're talking about $1.5 million maximum is a growth area because it offers both permanent residency opportunities for people in Qatar, and we see this as a growth opportunity both for residents and nonresidents. And that's where our focus will be. But in terms of growing our, let's say, commercial office space or commercial residential to big builders, it's not a growth area for us. And it's been actually coming down over time.

Okay. And secondly, just in -- I don't know, again, I don't know whether you'd have the detail of this, but the new QCB loan-to-value ratios that they announced about a week or so ago, would that have an impact on your current book or the lending growth going forward? And is that something where you would be lending above those loan-to-value ratios previously and would have to cut back or you've lend them already?

I don't think those will be having an impact from our existing book. Where we see the opportunity, in fact, is that -- is really to enable greater lending to the individual mortgage, individual loan that's not a well developed sector, I think that's the objective why they're given slightly higher loan-to-value threshold than before. So I mean they even have a segment for nonres [ CF ] which was earlier not available at all. Now they do at 16%, which again was a discussion documented. It shows the trust of the initiative to try and develop Qatar's individual mortgage market linked to permanent residency, both from existing residents and nonresidents and we see that as a viable growth or viable retail mortgage growth to provide diversification away from the significant concentration in the banking sector in commercial and residential real estate, but down to large owners.

Okay. And sorry, just a last question. What -- for residential mortgages, in particular -- obviously, I mean apartments, but you may not have the information, what's the basis of the valuations? Are they done on an income basis? Are they done on the land plus building basis? How do you typically look at valuations for these apartments?

Yes, we usually look at a combination of both income and the -- for a value in the market. But ultimately, when we look at the comparators, also what other apartments are selling for and then we try and keep a conservative approach. So this will be actually a combination of both.

So you would already assume some kind of downside for price within the evaluation that you look at?

In the book that we -- that was on our book but also I think for new ones, we take the current values. So those -- again, it depends because someone is marketing a new-build property, then we will look at it and if it's a 80% or 85%, we look at the valuation. But with some of the reputed developers, we may allow them at that value because that market price which they're selling it. But we are also looking very closely at the individual's servicing capacity. And we believe -- that's why we believe the diversification across the larger pool of individuals will be much better than the large single-ticket owners or developer. Because if I look at our mortgage book, our existing mortgage book, below $2.5 million, nearly QAR 10 million, but that has actually performed significantly better than our large-build mortgage book. And that's why it gives us confidence that the individual mortgage segment is one where there is both demand and capacity and also capacity to form something that most people want to maintain with this.

Thank you, Lee. The next question is from Waruna.

I hope you can hear me?

Yes, we can.

Yes. I have 3 questions. First of all, related to the acceptance, I understand like it's -- this is not a profitable business. That's why you hesitate to let it go. But I just want to understand the background of this. What led to this? That's my first question. Second question on the ROE target that you have for '23. It looks like -- I mean you could actually given -- I mean, so what you have achieved so far, you could exceed that. I just want to hear your thoughts on that. And thirdly, on the Turkish Alternatif Bank, I want to hear your views on going forward, given the fact that the benchmark rates have increased. And I mean, there were certain measures that the government took to promote lending to certain sectors by regulating rates in the first -- earlier in the year. How this is going to affect -- how this is going to change in the future? That's my third question. But just one more question -- clarification, if I may make. You mentioned about the individual mortgage portfolio. Did I hear you correctly saying that it's QAR 10 million in your books. Those are my questions.

Again, so let me clarify. The individual mortgage, I was talking about the threshold for smaller-ticket mortgages. So we classify smaller-ticket mortgages as QAR 10 million and below. So that's the one that we have found that the credit history and the repayment history is actually quite good compared to larger-ticket mortgages, which were large to get above that value. So that's why we feel comfortable in -- that was Lee's question about how we develop individual mortgages, we feel comfortable that there's good segment to expand in given our fast track record. And the benefits of permanent residency that are being provided to people who invest in individual mortgages. So it's a combination of these it's why we that positive area to grow in.

Yes. Let me take the other questions, Waruna. Firstly, around acceptances, yes, I think definitely leading up to the World Cup the last few years, we did see an increased demand for this product. Post the World Cup, that has been reducing. And also, as I said, it's because of NIM enhancing so we took a very conscious decision to reduce this amount. In terms of ROE, yes, you're quite right that there is a possibility to exceed the guidance. But we've not changed the guidance as of now. So we will keep this, there's still a lot to do in the second half of the year. So that's why we've kept the guidance as is. And you're quite right, in terms of your third question in Turkey, there is a possibility that the lending will actually increase and therefore, NII will increase in the second half of the year from our subsidiary, Alternatif Bank. So that's something that the team is working on, and we will obviously still go through each individual case and review it by a [ auditor ] before we go ahead with any new lending there.

And also, I think it depends on the normalization of the government policy.

Yes.

We see some initial moves there, but it's been slower than expected in the first move, and therefore, you might have a slower trajectory to normalization than was initially expected.

Okay. Got it. And just one quick follow-up on the -- you mentioned something on the -- your policy on the -- for the expect -- the need to expect rates in the mortgage space. So what's the loan to value, did you say 60%? Is that what you said?

No, I think the nonresidents, earlier that was a category which did not really exist, but the Central Bank has specifically announced mortgage guidance, which cover nonresidents who want to buy in Qatar to get the benefits of permanent residency in Qatar. So that they were out LTV of 60% for non-res.

Our next question is typewritten and that comes from [ Shrikant Wagle ]. Apart from net interest -- net impairment losses on loans, bank also reported other provisions in 2Q '23 amounting to QAR 117 million. Any clarity on same will be really useful.

Yes, we did do that. That's really related to real estate provisioning that we have on our books. It's just a conservative measure that we've taken at this stage. And we will look at that more closely in the second half of this year. Hope that answers your question, [ Shrikant ]?

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

Thank you, again, for joining us today. As always, Zubair and Rehan and the rest of the team are available for any further clarifications or questions. But as we said, we look forward to the second half of the year and continuing on our current trajectory. Thank you very much.

Thank you, everyone.

Thank you.