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

Good afternoon, ladies and gentlemen. I'm Zubair Chaiwalla, Head of Capital Management and Investor Relations, and I welcome you all to The Commercial Bank Q3 results call. Today on the call, we have Joseph Abraham, Commercial Bank's Group Chief Executive Officer; and Mohamed Farhan, Head of MI and Acting CFO. [Operator Instructions] So I now hand you over to Joseph Abraham, the Group Chief -- CEO. Joseph, over to you, please.

Thank you, Zubair, and welcome to everyone who's joining us for this call. Thank you for joining us. For our quarter 3, our profits grew by 7.5%, which is slow and steady growth. This is primarily coming from good fee income and also from some loan growth. I would say, overall, the Qatar economy at a macro level, remains in a very, very strong position, given the expansion of the North Field and the gas inflows, which I expected to start coming through over the next few years and the continued strong demand position for gas. So if you see at a country level, Qatar's rating outlook has been revised to positive by both Moody's and Fitch, and has been upgraded from AA- to AA by Standard & Poor's. So at the macro level, you have a very strong outlook, and you're seeing that reflected in the budget surplus, which is around QAR 29 billion, which is just under $7 billion or $8 billion and -- but as a percentage is quite significant. And similarly, the current account surplus. And that position is expected to continue for the next few years, particularly as the significant chunk of expenditure on the World Cup has now been subdued. If we go one level below to the underlying economy, both private sector and government, you'll see that there has been relatively subdued growth in the private sector, particularly. And as we said, I think the government has also been repaying some of its loans at the GREs because of their strong budget position. So that's kept loan growth a little slow. However, the government has also announced plans for about QAR 70 billion, about -- just under $20 billion worth of investment in infrastructure and other sectors of the economy, which will primarily happen by the end of this year and into 2024. So that will help stimulate some growth in the economy. And the most important thing is the government has the wherewithal. It has significant financial position to be able to stimulate the economy as is needed. So that's the macro situation. As far as the bank is concerned, as I said, we showed a 7.5% growth in our profits, which is steady growth, which is what we are going after in terms of our growth. As I said, the private sector growth is a little muted. And at the same time, the high interest rates are obviously affecting people's leverage. So particularly contracting is a sector which is quite vulnerable and also I'd say some of the hospitality sector, but we are careful in our approach with these sectors, but we hope that the government stimulus will benefit these sectors in particular. At the same time, we're not chasing growth because we want to make sure that what we do doesn't appear as an NPL in a few years' time. So we're not chasing growth at all, but we're also consciously building our retail business. Now we see retail as an opportunity. We have a good brand. We have a good client base and certain measures taken by the government to promote residential ownership by both foreign residents and nonresidents is an opportunity. We're the first bank to take a roadshow to -- outside Qatar to market permanent residency programs in Qatar. We've got a good response in India. We took it to the regional, also Saudi, but we're also going to East Asia where we expect to see good result. So our aim is to build a good mortgage portfolio, small ticket mortgages, linked to nonresidents and foreign residents and also Qataris who are building their own homes. So that, we see as a leg-in. Also our loan growth, about 30% came from our retail business, which is probably the highest contribution over the last few years. So we see this as a business that will continue to grow plus some fee services, which will come off the back of that loan growth, particularly in Wealth and other areas. Overall, if you look at the 5-year targets and our guidance, you'll see that in terms of most of our ratios we're within our figures, particularly around CET1. We expect -- we hope to be achieving the CET1 or at least be in the 12% range. Similarly, capital, I think one of the challenges is that our CAR gets eroded by the Turkish lira depreciation. The movement, that has been a significant impact on because we have to -- that works through our foreign currency translation. So that is -- but hopefully now the way we are seeing the reversion to orthodox monetary policy in Turkey, we hope to see that, but we expect hyperinflation to continue given that inflation remains high, so the early hyperinflation effects will remain. But in terms of capital, I'd say that's one of the factors which has maybe caused us to be at the lower end of our -- particularly around total capital. Similarly, risk management, we are within the guidelines that you want. There's a slight -- if you take the first 3 quarters at about 91 basis points. But that's because we usually save some provisioning for the last quarter when we had the discussion with the auditors and the regulators. So usually, the last quarter has a bit of a chunky thing. So we expect to be within the ratios. Similarly, in our loan book composition, as I said, the biggest challenge has been the reduction in our loan book, which has maybe skewed some of these factors. But I think fundamentally, we remain committed there. The cost income ratio, again, is one -- where, as you've seen, our cost income ratio now is -- on adjusted is about 24%. And -- for the consolidated and 20.9% for the domestic. The -- when you look at the figures, it looks like a significant increase in our costs. A lot of it has come from Turkey, 2/3 of our cost increase, costing to about QAR 127 million or QAR 83 million came from Turkey because of the large salary and other inflation related changes that we had to make. So as you can see, that has been a factor which has been impacting your cost income. The balance, about QAR 40 million in the much larger domestic businesses are primarily around investments in our Wealth Management business where we see a lot of potential, investments in our branch service network, where we've injected young highly talented people into the bundle and we're seeing that benefit in sales and digital migration and also in some of our own property management to reduce costs. So overall, I'd say that's the reason why the cost income ratio is outside our guidance. But we hope unless there are -- if inflation comes down in Turkey, then that drag on our cost income ratio will come down. But otherwise, it will still be there. And return on equity, I think we're within the -- we are targeting towards figures that we have maintained. So overall, I'd say that in this environment, slow and steady growth is preferable to very large and rapid growth, and we will always prioritize risk over growth -- conservative risk management. So that's in a sort of summary. And I would say we've also had a very strong contribution coming in from National Bank of Oman and also United Arab Bank. They're up about 40% year-on-year in terms of the contribution. And we expect that trajectory to continue because both businesses are on a good momentum and with good teams, which are running them and moving in the right direction. So that's at a sort of high level. Economy. I'd say slow and steady growth is what's going to happen and with positive outlook adds from the stimulus measures from the government, risk management. We're not seeing any large surprises or anything coming in. But as I said, we've been conservative in booking new loans. And I think on the rest of it, we'll continue to manage the bank tightly to continue to achieve our objectives. I'll hand over to Farhan, who will be going through the financials. Just for clarification. Rehan, our CFO, has returned to Canada where his family is based. So Farhan is acting in his place. And is -- we've set replacement CFO is well progressed, and we expect that to be complete in the next 2 months or so. Over to you.

Thank you, Joseph, and good afternoon, everyone. I'm going to focus mainly on Slide #8, which has the financial analysis. Just to recap on the left-hand side, we've got the normalized columns and on the right-hand side, we have the reported numbers. This is mainly to strip out the impact of IFRS 2, on both operating income and cost as a result of the staff performance schemes that we have in place. This would then normalize the numbers, allowing us to focus on the underlying trend quarter-on-quarter. Please note that all the numbers are in QAR, unless otherwise stated. The group reported a consolidated net profit of QAR 2,365 million for the first 9 months of 2023, up 7.5% compared to the same period last year. The overall growth in profitability was driven mainly by a combination of higher operating income, higher recoveries and improved performance from our associates. As you can see, the normalized operating income is up by 8.3% year-on-year on account of both high fees and other income. Net interest income decreased marginally by 1.3% year-on-year on the on the back of decrease in interest -- net interest income at Alternatif Bank. We have managed to maintain our net interest margin at 2.7% for the year. Normalized fees and other income grew by 39% to QAR 1,260 million year-on-year, mainly due to recovery of our investor income. In terms of operating expenses, costs were higher by 15.2% year-on-year. As we know, Turkey is in a hyperinflation situation and staff costs and G&A are significant. At the bank, we continue to invest in our digital and automation space, wealth management, upgrade of our retail channels and in our staff, especially including the national talent. Most of these spends are to enhance operational infrastructure and product capability to support business growth in the future. As a result, group cost income ratio increased 24% compared to 22.6% last year. We believe cost-to-income ratio will continue at a similar level due to hyperinflation in Turkey. At domestic, CB has a cost to income ratio of 20.9%. Having said that, our operating profit improved by 6.3% year-on-year. Furthermore, net provision line, it decreased by 3.2% to QAR 721.4 million as compared to QAR 745.5 million same period last year. Net cost of risk on loans decreased to 93 basis points during the year compared to 95 basis points during the same point last year, mainly due to high recoveries. We continue our conservative approach on provisioning and expect cost to income -- cost of risk between 120 to 135 basis points for 2023. As of 30th September 2023, NPL ratio stood at 5.3% compared to 4.5% in the same period 2022, primarily due to drop in loans and advances, while our coverage ratio strengthened to 113.4% from 107.6% in the same period in 2022. This is reflecting the bank's continued prudent credit risk management. However, NPL have reduced quarter-on-quarter from 5.5% to 5.3%. Despite the higher operating expenses and the impact of hyperinflation in Turkey, net profit improved by 7.5% year-on-year. Moving on to the balance sheet. The group loans and advances were down 7% to QAR 91.5 billion year-on-year, they have in fact improved quarter-on-quarter by 2.4%, thus reversing the trend that we have seen in the last few quarters. Customer deposits, on the other hand, decreased by 13.3% to QAR 74.7 billion, mainly due to drop in time deposits. We continue our focus to increase our local deposit, which is helping us to manage our cost of funds. On our capital, this remains strong. CET1 ratio and capital adequacy ratio stood at 11.7% and 16.4%, respectively compared to 11.3% and 17% in the same period last year. The decrease is driven by mainly the Turkish lira depreciation. Despite this, our capital ratio remains comfortably above the minimum capital requirement. On our associates, both National Bank of Oman and UAB continued to give a better performance. Both NBO and UAB have seen a continued increase in their profitability. Commercial Bank is working closely with both these entities, doing execution of their strategies. Alternatif Bank reported a net profit of TRY 432.7 million, in QAR 79 million compared to a net loss of TRY 115 million, QAR 15 million in the same period last year. This is despite the sizable impact of a hyperinflation impact. CB will continue to report under the (IAS) 29 if Turkey continues to be trusted as the hyperinflation economy. And accordingly, there will be an ongoing impact on the profit and loss of CB. However, we expect this challenge to be unmaterial. Alternatif Bank represent approx 5.8% of the overall balance sheet and 3.3% of the consolidated net profit. So that's an overall summary of the 9 months results. I will now hand it over to Zubair and then we can go into question and answers.

Thank you, Farhan. We will now start the Q&A. [Operator Instructions] We already have questions in the queue. So I'll move to the first one from Chiro Ghosh.

Yes. Fine. So first, congratulations for the nice set of results, better than I think expectation of most analysts. So two questions. First is related to Qatar. So can you give some guidance or give us some clarity on the size of your loan book from the contracting and the hospitality sector from where you are expecting some concerns? And also the retail loan, which you have disbursed now, are these fixed rate -- or are these completely fixated loan? Or are they floating rated loan, especially the mortgage part of it? That's my first one. And second is related to Turkey. So the interest rate have spiked -- surged over the last quarter. So are you been able to pass these kind of high interest rate to the customers? And do you expect to see a spike in asset quality from this higher interest rate? These are my 2 questions.

Yes. Look, as I've said, we've been very careful on contracting since -- over the last 5 years. So our relative exposure is to good name contractors. And I would say in the 2% to 3% of our loan book at a macro level. So -- but we don't see any significant concerns in our loan book. So that's -- because it's something that we were very careful about over the last 4 or 5 years after we took some hits in 2016. So then we tightened up considerably. So that's stood us in good stead. In terms of the retail bank loans, we have given -- we're trying to build a retail mortgage -- I think this is -- and our personal loans have also grown and our credit card outstandings have also grown in across these three sectors. The credit cards have a cap of 12% which is at the government regulator mandated level. Mortgages, there's no cap but as we try to build it, we might put in some fixed rate for the first year or first 2 years. But that's just I would say, a tactical maneuver and it's not yet a significant size to have an impact on our overall interest earnings I think. So that's something we will look at tactically. And what was the third one? Turkey in terms of the interest costs, I -- we had actually reduced our loan because there was sort of negative yielding and with these increase in loans have become positive yielding. But we have our Turkish team on the call now, so they might want to answer this with more specific detail. You want to try and comment as well? Can you please answer this [ now ]? Hamdi-bhai can you please answer this question regarding what is the impact of the interest rates on your loan book? And will it create increasing defaults? I think that was...

Yes.

Yes.

Hamdi-bhai, okay, you're on mute. .

You are on mute.

Can you please unmute and speak? I think we're having a few technical problems getting Turkey on the line. Sorry about that.

You can answer this later also. I mean...

Okay, we'll answer it later, all right, when we get them back. I think there is some...

Sure, sure, and just one thing, a follow-up. So the hospitality is part of the services line item, right?

We are unmuted now. We can answer the question from our side, please. Hamdi, the floor is yours...

This is Hamdi Girgin from Alternatif Bank. Yes, the past interest rate rise to our customers. Our loan duration is very low, approximately 2 months in Turkey. Actual interest rate spike above the peak we are expecting previously. So we are repeat and with very low loan duration, we passed deposit rates increase to our customers. For second question, we don't expect any gross effect on our NPL ratio from interest rate rise. We are related with A+ rated customers in Turkey. So we don't have any worst expectation for our NPL ratio.

Thank you Hamdi-bhai. Right, and you had a follow-up question?

No, no. I just wanted to know that the hospitality sector is part of the services, right? This 26%. Am I correct...

Yes, yes, yes.

Our next question is from Bijoy Joy.

I have a couple of questions. I'll start with my first question on investment securities. See, a reclassification from FVTOCI and FVTPL to amortize cost of some QAR 1.6 billion, if you can throw some light on that, what exactly it is? And my second question is on the retail loans. As you said, you're focusing on the mortgage side. Is there a change in strategy? Or do you have a target set that it should be x percentage of the total loan book? And my third question is on cost to income. So with increasing inflation -- with the increase in inflation over the last couple of years, and the neighbor -- your neighboring countries are going through a lot of increasing economic activity, how do you plan to retain talent and still meet your targets for 2026, given you're also focusing on retail loans?

Yes, let me start with the last one first. In terms of our sort of cost management and, as you said, [indiscernible] I think Turkey is, let's say, a little bit depending on the inflation outlook there. But it's -- so that will -- but we're trying to manage costs tightly there and reducing headcount also so that the impacts are lower. We're also getting a new CEO onboard in Turkey in the next few months. So that will call for a reshaped strategy. So Turkey, I think, as I said, is a little bit due to the inflation outlook there. In terms of the business in Qatar, the local business. We have a long time ago moved to a system of incentives where we are much more variable base pay. And this for us is -- and share option based pay. So that's how we maintain our costs and also -- because it's linked to the performance of the bank. We don't have annual salary increases. We are one of the -- I'd say, probably unique in that aspect. We don't have annual salary increases in Commercial Bank. But what we do is we have variable pay, which has been growing significantly every year as our performance has improved. And we've also created share option schemes, which are based on -- again, most of the share option schemes have paid off with very significant multiples. Often after 10x, what was the original investment given that the share price has moved up over the last few years, the return has often been 10x and staff have been allowed to participate in that, and we've also handed out those as -- so that's how we managed to maintain and retain count and manage our costs. And I think that's going to continue. As long as the bank does well, the employees will do well and through this performance and variable thing to pay. That's our philosophy and also share options. So -- and the second...

Retail loans, targets and...

Look, I think the target for mortgages, we would like it to be a significant proportion of our loan book. I think in any business, you should be -- I think a retail diversified loan book should be 15% to 20% of your loan book to provide sustainability, long-term stability. However, we are far from that. So I would say that's probably a number of years down the road. Our focus right now is on building it in the right manner, in the right form rather than building large commercial mortgages to commercial developers. This was in the past what used to happen. So ours is much more at the individual level, which we think will provide diversification, sustainability of revenues and stability in your overall risk provisions. So that was on that. So I would say we would ideally like to be 15% to 20% of loan book, but that's a long way away.

On the investment securities, we have sold off from our FVTOCI and trading book, and we have purchased into the held-to-maturity book. The main purchase is obviously pertaining to government securities, and that's what you see in the financials as well. So Bijoy, I hope that answers your questions. Can we move to the next one? Our next question is from Edmond Christou.

I have a few questions, which I already shared them on the chat room. But let me start with the first one. I think you highlighted that the high cost -- borrowing cost has impacted the appetite for private sector for credit, which clearly shows on the industry data from the Central Bank. My question -- my first question on this is how much from what you have lended to the private sector, how much you were able to pass as a spread, how much you cut the spread in order to not hurt your private sector or the corporate client? And the second question is what's your expectation for next year credit growth given that interest rate could remain higher for longer. The other part of this question is the stage 2, I think, is around the 18% of your loan book, which has been coming down. And I think the quality of the loan book has been improving it is 18 -- 19% to be honest, so this is -- I assume this is real estate, commercial real estate, and this has been restructure exposure. So what's your view on -- if we remain in a high interest rate environment for longer, what's your expectation in terms of the pressure on the restructure exposure and potential downgrade into stage 3 into 2024? The last question is on Turkey. It's not -- will be very useful to see if you expect margin in Turkey to expand or improve in the coming quarters into next year? We see comments from other banks that next year margin could see -- could be on a positive spread. If this is the case for your bank will be much appreciated. And what's your view also on Fed cutting rate into next year? Do you see your bank benefiting from it in terms of optimizing the cost of funding? Sorry for asking a few -- more than 3 questions.

Sure, thank you. That's fine. We're always happy to take questions. In terms of the -- let me start with the first question about the high interest rates affecting demand for credit. Look, I think there is demand for credit. What I -- what it has probably done is made us very, very careful on extending credit. And because at these interest rates, people need to be generating pretty good returns to be able to service the interest. So we are very careful now on extending new credit particularly in the commercial side. So I would say that's where it is. Where we have seen the demand for credit going down is coming from the government and GREs because the governments, as I said, their budget surplus is leading them to pay down debt. So that's the reality. And that's why loan growth is relatively muted across the whole Qatari banking sector. And the government's budget surplus position has continued into 2024. Therefore, we don't expect a huge amount of government GRE-related borrowing. We think a lot of borrowing may come from -- not borrowing, but probably project finance related to the North Field expansion, the onshore components, and similarly to some of the QAR 70 billion, which is $20 million of spend that the government has announced for the next year. So there will be some effect from that. I'm not quite sure whether you'll have a huge boost in. So I would still say that loan growth would be in the 3%, I think that would be a good loan growth to have next year, this is my vie, if conservative good quality loan growth. As I said if you get 3%, I think that would be a good outcome for us, given the overall environment. In terms of stage 2 loans, look, I think, obviously, high interest rates do impact people, and you could see some migration. However, for us, the most important part is no surprises coming through in our loan book. And I think that's the positive part. So we're actively monitoring most of the clients in stage 2. And so we don't expect to see a huge migration and we're also arriving at some solutions at some of them. So I would say those figures will remain broadly where they are today. So that's just our outlook because most important is we've done a thorough analysis of our book, and we don't expect to see too many surprises coming through, which would be of concern to us if there were new ones suddenly figuring or sudden deteriorations in their outlook.

Turkey NIMs would you expect it to improve in the next quarter?

I would say Turkey NIMs, we would expect them to improve because now as the interest rates have risen on the loan book you would see the benefit of that because earlier, Turkey was having negative yielding loans. So you should see that. But again, I will hand over to Hamdi, who will be able to give a more nuanced view on that given that the Turkey regulations move really quickly and there've been a plethora of them over the last year. So Hamdi-bhai, could you answer that?

Yes, Mr. Joseph. As you say it, in Turkey, there is a normalization in...

Not to say we are expecting only 3% loan growth.

This normalization will thus to improve our net interest margin in next year. This commercial loan rate currently in commercial loans with the interest in [ Polish ] rate this cap is increasing, and we are improving our net interest margin, with interesting -- with increasing commercial loan rates.

Just a bit unclear. So just to make sure people understood that with -- there was a cap on the commercial loans. With these increasing interest rates, those caps are being increased off the loan rates. So that should benefit the net interest margin.

Okay. This is very -- and just a follow-up on this.

Yes, Mr. Edmond.

Yes. Yes. Just a follow-up, if possible on this. You talk about LNG growth and credit coming into the contracting sectors. You are not interested in growing into commercial real estate, but I will assume subcontractor will be demanding more credit going forward, you have 3% exposure, so you have a room to grow it. Is this an area where we can see this percentage growing because you want to take some market share?

Look, we will do good quality counterparties. So we are definitely extending credit to the contracting sector who's doing NFE-related contracts, and they are either subcontractors to the main contractor for the onshore component. So we haven't said we're not going to do, but we will -- particularly NFE is a target area for us for the contracting sector. So we could see that growing over the next year or 2, definitely.

Our next question is from Waleed Mohsin.

Three questions, please, to my side. Firstly, just on your comment about 3% loan growth for next year, I also wanted to get a sense if this is the outlook that you have more medium term or you would expect that some of these projects as they start coming through would change the shape of loan growth more medium term? So that's one question. Secondly, on your net interest margin. If we take out the Turkey movement in this particular quarter, the domestic net interest margin seem to have declined on a sequential basis. So just wanted to get your kind of thoughts around it. Where do you see these settling? What should we expect in terms of trends on domestic net interest margin going forward because Turkey could be volatile in the near term? And my third and final question is around your asset quality. So I mean, the way we were reading the staging is that there's a level of stability now. In fact, we think that the stage 1 is showing signs of improvement with the reduction in stage 2 and 3. Now where are we in terms of the Qatar Central Bank review process? Is it largely done? And we could expect a movement towards more normalized credit losses next year?

Look, as far as -- let me start with the last question first about the -- the review process every year is done in the last quarter. So we'll be able to get the final figures for this year -- you will see it after results, obviously, in the last quarter. But we expect between the -- even though we're running at about 91 basis points cost of risk for the first 3 quarters, we expect it to be in the 120 to 130 basis points for cost of risk for this year. And we have said previously that we expect '24 and '25 to be similar given our loan book, given where we expect things to be, we're being conservative, we think '24 and '25 will also be at this level. And then we expect us from '26 onwards as you said, the new loan origination since 20 -- 2017 has been very different in quality. So the new loan origination is probably generating maybe 30 to 40 basis points of NPLs and that too is coming in maybe in here like in credit cards and personal loans, but that's well below our legacy loan origination and the cost of risk. So we expect by '26 onwards that we should see the benefits of quite a better loan origination, better quality and also the cleanup of our legacy loan book and also some recovery. So I think that will be our message. We should see that next 2 years will be at this level. And then the third year '26 should start seeing the benefit of it coming down. And I would hope it will be below -- move towards that 60 to 80 that we have recommended, but definitely below 100 that would be -- and it depends also on some recoveries in the phasing of recoveries. But that would be our goal and our target.

Yes.

Yes.

On the domestic NIMs, I think, look. Have you got the exact...

No. Domestic NIM sequentially right it has gone down by 10 basis points. Look, this is keeping in line with the original guidance that we had given that we expect NIMs to have to go down by up to 10 to 15 basis points. Although our challenge is to maintain NIM so which we have managed to do that through a combination of factors, but domestic NIMs have gone now in line with what we had anticipated.

Anticipated, yes. I think the domestic NIMs, as we have highlighted at the beginning of the year, we see some pressure there because two factors. One is whilst normal theory is that as interest rates go up banks benefit. Beyond a certain point, it becomes very difficult to pass on the full extent of interest rate to your clients. This is for two reasons. One is, it starts straining their credit worthiness. Two is because the government has paid off a lot of their loans and because there are very limited loan growth. You've had some irrational pricing competition from some of the peers where they are pricing below cost of funds. Now we're not getting into that game, but we will defend our good quality loan book against such incursion, which then puts some pressure on the net interest margin. So that's the reason why there has been some NIM compression in the domestic book, which have been offset by Turkey, you're absolutely right on that point. But we would expect if interest rates start declining -- look, I don't want to get into the prediction of when the Fed will cut rate. But if they do decline, I would expect it to be beneficial long term for the bank contrary again to the usual thinking because our cost of funds starts going down, mainly -- particularly on our international book, and we are able to also -- we try and manage that downward trajectory of cost of funds versus income. So I think those will be the reason why it should be beneficial for us. In terms of the loan growth, whether it's 3% to 5%, I would like it to be 5% maybe in 2024. But look, I would say 3% for the next 2 years is probably -- depending on interest rates, again, we don't want to go building a huge book at very high interest rates when people's credit worthiness may be affected. So we would conservatively put 3% as -- if these interest rates remain higher for longer, as you said.

Just a couple of quick follow-ups. So on NIM, if I understand correctly, if rates stay the way they are, there could be further pressure on domestic NIM? That's just one follow-up. And then secondly, on the cost of risk, I mean, 120 to 125 basis points for the next couple of years, a pretty elevated number looking at the history of the bank. So I mean, it seems to suggest that there is more cleanup to go. Is that a fair way of thinking about it?

I would say there two things. One is in terms of the domestic NIM compression, I would say, yes, it's probably more downward potential than output. But we are trying to hold our NIM. That's why we're building certain higher-yielding retail assets in your normal corporate loans, et cetera, as that mix [indiscernible]. But definitely, we'll try and protect it, but I would say that there's more downward potential whereas our goal is to try and maintain it at current levels. So that's one point. In terms of the -- yes, you're right, we have been originating quite well. But remember, these elevated interest rates. As I said, we are conservative in our outlook. We don't want to be giving guidance, which then we can't achieve. So I would say this is a conservative figure for the next 2 years at 120 to 130 basis points because at these interest rates also, you might get a few people facing challenges. And if they remain higher, then obviously, that puts more pressure on people. So that's why we have said for these next 2 years also, we assume it will be conservative, to be conservative we assumed these higher rates.

Our next question is from [ Deep Shah ]

Yes, I have two questions. One is related to mark-to-market losses. So what are the mark-to-market losses for the bank as a percentage of capital? And how does it compare to overall Qatar banking industry? And second is related to loan book. I mean how much of the loan book is related to currencies, which are other than Qatari riyal, and how much of the deposits are other than Qatari riyal?

Yes. The mark-to-market losses, so that's the fair value OCI, that's as a percentage of our capital is a very small number. Overall, our capital is in excess of QAR 20 billion, and this is only about QAR 400 million give or take. So it's a very small percentage overall. But yes, it has split because of the way the world markets have moved. And that's the reason why it causes an issue on the capital. But like every QAR 100 million causes about 0.1% reduction in our [ accounting ]. On the loan book, our -- majority of our loans are Qatar based, and most of it is in Qatari riyals. There is some dollar-based lending, but that's not material to the overall loan book because our overall institutional FI lending and all would be probably 5% of the loan book. If not...

Let's get the exact figures, I think it's better we get back to you.

We can get you the exact figures and then we will get back to you on that one. Hope that answers your question, Deep?

I think he [indiscernible] every foreign currency loan extended outside the country needs Central Bank approval. So I think that obviously takes time and effort so that has probably restricted growth for the banking sector as a whole of the external loans in foreign currencies.

Yes, also of the funding mix or total liabilities, how much is it in -- not in Qatari riyals?

So in the funding mix, we have debt securities and other borrowings, which is about close to 19% that's entirely our long-term borrowing, EMTN and syndicated loan borrowing. That's trend primarily in U.S. dollars.

And just last question on -- of the total loan book, how much of that loan book is variable rate loan book?

Our entire loan book is actually variable and it's either linked -- foreign loans, obviously, linked to LIBOR, CIBOR. And the local loans are all linked to QMLR, the Qatar medium-term lending -- yes.

That's a theory. In reality, especially in the local book, in every rate increase a bit of a negotiation it depends on the relative bargaining power. It's not a perfect market as the international ones just repriced, but the domestic ones are in negotiation. And this is what I said as the rates went higher, your ability to pass on the full amount was challenged, and that's why there was a NIM compression or NIM pressure.

Our next question is from Waruna.

Yes, yes. So I have three questions quickly. Quickly the first one related to the expenses. Now these normalized expenses is around QAR 350 million for the third quarter. I just want to know whether this is like the new base because now I know [indiscernible] an effect on the -- sorry, effect of Turkish inflation is also kind of rising up until now. So can I assume that it is like the flow from here, the expenses can be kind of increased from this level?

The swing factor is Turkish inflation. That's really the swing factor. I think -- so I think that may cause some spike. But the rest of it, we plan to keep reasonably well controlled as I said.

But this is like the base, right? From here, it can increase if the inflation keeps on -- the next year and...

Turkish inflation keeps on -- but we're also taking mitigating measures in terms of head count, et cetera, which will need to be managed. As the Turkish team will obviously have some goals around that.

Okay. Fine. Now second one is on the nonfunded income now. Now I know that there is an offsetting impact on the nonfunded income when it comes to this performance theme. So effectively, your fee -- like fee income has substantially increased in third quarter. I just want to know whether this has come from Turkey because the thing is on your hyperinflation adjustment is also very high. I mean even net, net, net of that your profit, I think you're kind of breakeven, I think, in Turkey. So I would -- is it -- is that primarily coming from Turkey, this nonfunded income increase?

Yes. Most of those income, actually, what you see it is coming from Turkey on the [ Turkish ] market activities.

Got it. Got it. Okay. That's clear. And my last question is on the deposit side. I mean, I was -- it was very interesting to see that your current and core deposits actually have -- you have recorded a favorable movement instead of overall deposits it's been falling so what is happening here? How have you managed to achieve this?

Look, for us, we are very clear. Our deposits -- high-cost deposits can be attractive to the bank at high cost. And then it's a price game. So that's not our core business focus. Our focus has been for the last few years on building a transaction banking business. And this is very important because that's ultimately what builds long-term low-cost funding for the bank. We're not an Islamic bank, so we don't get the benefit of some of those 0 interest funding that they are -- that are available to them. So we have built this. And over the last 6 years, our low-cost deposits have gone from QAR 18 billion to QAR 31 billion through a combination of -- first of all, just increasing our customer base, doing more and more what the customer does. We have won also a number of mandates. As an example, we won a mandate for the largest gas station company Woqod in the country. So this is how -- so that leads to increased cash flows going through the bank and obviously sitting with us. So that's our focus and continues to be our focus to build transactional banking business, which will help reach our cost...

Okay. Now in terms of the cost of these funds, which you call low cost like mostly these are current and core deposits. What's like the ballpark funding cost on these deposits?

See, earlier it was 0. But obviously, as the interest rates have risen, people are pressing for some. So what we try and do is we try and migrate them to core accounts, which will be giving, say, 1.5% and then all the way up to 2% to 2.5%, depending on the bargaining power again so -- and the amount so our goal is to move them away, prevent them from either leading the bank or from moving into a fixed deposit at 5% or 5.5%. So if you can get it in the 1.5% to 3% range, that's still benefiting the bank.

Our next question is from Aybek Islamov. I think Aybek has not been able to -- so there's a question on the chat...

Yes, I'll be very quick, I think you have some questions on the chat. I just want to confirm, when you look at the Qatar domestic business, it looks like funding costs are already at the peak. And in the scenario, we have rates staying high for longer. Would you be able to pass that higher funding cost on to your borrowers, corporate borrowers in Qatar? There was a similar question earlier. I just want to confirm, should we expect margin expansion if rates stay high -- higher for longer. We have no rate cuts. Qatar domestic that...

Yes. I would say in the domestic business, the pressure is to maintain your margin. I would -- if the rates remain higher for longer, it's -- the challenge is to pass on the full extent of the rate increase. Plus as I have told you there's some irrational price competition from some competitors who are trying to grow loans in a low growth environment. So they're underpricing. So I would say there's more downward pressure than the -- a chance for the increase. That said, if loan -- if interest rates are dropping, then we will do our best to try and make sure that we can maintain our NIM and even try and expand it a bit on the reverse downward trend. But again, that will be -- we'll have to wait and see it. But as of now, I would say, in this environment, NIM -- defending your NIM is the first challenge and we're looking at all measures, including cost of funding, optimizing every aspect of our funding base. I think it's a combination of those things, which will help us to defend it or at least reduce the impact of the high interest rates, which we can't fully pass on.

And just to confirm, when you guide about your cost of risk and you're expecting cost of risk to remain quite elevated above 100 basis points for maybe 2 years, what targets do you have in mind? Are you targeting your coverage of stage 3 loans by stage 2 reserves, yes...?

It's -- I think it's targeting -- one is, of course, stage 3. Two is any migration from stage 2 to stage 3. So we're looking at our portfolio, looking at the names that could be vulnerable. Therefore, that's why these will be the ones which we required to -- in terms of -- would be required to be provisioned at least the minimum of the stage 3, which is 15%, 20% initially and then 15% where we'd like to be. We don't -- we are already reasonably well covered at stage 2 and I think we're on stage 1. So I think it's primarily for stage 3 and any possible migrations.

Thanks. Just a few questions on the chat. First one from [ Rohit Raj ]. There has been a huge jump in investment gains and losses. Where is this coming from equity or debt? It's primarily debt. There are two questions from [ Fatima Shaukat ], which sector has contributed to the high stage 2 loans? Mainly real estate.

Legacy, again it's legacy loans there are all pre-2017 loans.

And what would be a fair dividend payout guidance?

We've always guided that 50% is the maximum payout that we have guided towards, ultimately it's the Board's decision, but as you have seen over the last 5 years, we have always stayed within that guidance we gave.

We can take one last question. That's from Edmond.

Just a quick one follow-up. So just looking at Q4, so you are expecting cost of risk to pick up in Q4. And margin, I'm not sure if it's stable or falling, but I think I feel more of it's possibly falling unless CPI contribution from Turkey is higher than this quarter or the same level of this quarter, which mean -- and also your cost base or the expense is very low because of the performance of the stocks. So what measure you can take in Q4 to boost your profitability? Do you have a room for harvesting gain on the nonfunded income? Just trying to think how to model it, if you are looking at Q4. I know Q4 is one [indiscernible] quarters and it's a plug...

Look, I think the main -- yes, I think the main approach we are taking is we will try and optimize on all fronts. But I don't see -- I think the NIM compression, I will -- the challenge is more in year -- next year. That was, I'd say, we -- if it depends on where interest rates go. But I would see the big swing factor in Q4 being probably provisioning. And you should look at our last quarter impacts previous years, that you'll see the pattern there. So that's probably the main one, which will -- as I said, we're only 91 or 90 basis points for the first 3 quarters. So if we're going to get to 120, 130 you should -- you can do that reverse calculation. So I would say that's the main driver. Otherwise, overall, the revenues and I think costs will be more or less in line with the other quarters. I think that's the way to look at it.

Thank you. That's the end of our Q&A session. Joseph, any closing comments, please?

Again, I think our team is always available, Mohamed and Zubair to answer any questions you may have subsequent to the -- this meeting. And once again, thank you for joining us today for this meeting and for following us in your equity reports. We always look at them with great interest. Thank you so much. Bye-bye.

Thank you. Bye.