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

[Audio Gap] profit of QAR 3 billion for the year ended 2023, up from -- by 7.1% compared to the same period last year. The overall growth in profitability was driven mainly by the combination of higher operating income, higher recoveries and improved performance from both our associates, UAB and NBO. As you can see, operating income up by 3.7% year-on-year on account of higher fees and other income mainly. Net interest income decreased marginally by 2.4% year-on-year, mainly on the back of decrease in net interest income in Alternatif Bank, our subsidiary in Turkey. We have managed to improve our net interest margin to 2.8% for the year, up by 10 basis points as compared to prior year 2022. Quarter-on-quarter, of course, net interest margin increased to 2.9% in Q4 2023 from 2.7% in Q3 2023. We expect NII to grow in 2024, with NIM expected to be maintained closer to these levels. Fees and other income grew by 21.9% to QAR 1,622.2 million year-on-year, mainly due to higher investment income in CB and FX and trading income coming from our Alternatif Bank in Turkey. In terms of operating expenses, costs were higher by 26.6% year-on-year, mainly due to the impact on one-off expense in Turkey and the inflationary environment, while CB continued to invest in automation and the digital space. As we know, Turkey is in a hyperinflation situation, as both staff costs and G&A were up year-on-year in Alternatif Bank. Actually, The Commercial Bank continues to invest in technology and enhance operational infrastructure and product capability to support our business growth. As a result, group cost income ratio increased to 26.2% compared to 21.5% last year. We believe the cost-to-income ratio will continue to achieve a level due to hyperinflation in Turkey, with our minimum wage level have been further increased in 2024. Moving on to net provision for loans. It increased by 0.3% to QAR 990.7 million from the year ended December 31st 2023 compared to QAR 987 million in 2022. Net cost of risk on loans decreased to 105 basis points during the year in 2023 compared to 121 basis points in previous year, mainly due to strong recoveries during the year. We continue with our conservative approach on provision and expect cost of risk between 120 basis points to 135 basis points for 2024. Overall, net provision decreased due to recoveries in other financial assets. As of December 31st 2023, NPL ratio stood at 5.9% compared to 4.9% in the same period in 2022, primarily due to a decrease in loans and advances exposure during the year. Despite higher operating expenses and the impact of hyperinflation in Turkey, as you can see, net profit improved by 7.1% year-on-year. On the balance sheet side, group loans and advances were down 6.7% to QAR 91.5 billion. The main reason for the decrease was Alternatif Bank, whose loans decreased by QAR 2.8 billion due to Turkish lira depreciation and focus on loan underwriting. At domestic level, the decrease was partly due to public sector, large corporate repayments of our loans and advances. However, it is important to highlight that we have seen an increase in lending and retail sector year-on-year. Customer deposits decreased by 8% to QAR 76.5 billion at December 31st 2023 compared to QAR 83.2 billion in the same period in 2022. The decrease is mainly in current and call deposit balances. Our capital remains strong. CET1 ratio and capital adequacy ratio stood at 10.7% and 14.9%, respectively, compared to 11.6% and 17.3% in the same period 2022. As we mentioned before, we have restated our financials to show employee incentive phantom [ share schemes ]. The new auditors have opined that the underlying derivative to hit the employee share scheme to be treated as a deduction against the capital, although there is no legal ownership of the shares by CB. Please note that this is only a temporary situation, and when the scheme matures and the capital deduction will come down, and as a result, the ratio is expected to improve. Also, for full year 2023, net profit of QAR 3 billion post distribution has not been capitalized in the above 14.9% capital adequacy ratio. So despite this, our capital ratio remains comfortably above the minimum capital requirement. And more on the associates performance, NBO and UAB continue to deliver better performance. Both NBO and UAB have seen an increase in their profitability, where associates contribution grew by QAR 72 million, [ 32.3% ] year-on-year. Commercial Bank is working closely with both these entities in the execution of their strategies. In terms of our Turkish subsidiary, Alternatif Bank reported a net profit of TRY 467 million in 2023 compared to net profit of TRY 123 million in 2022. The result was in fact impacted by the hyperinflation accounting that result in noncash net monetary loss of TRY 2.349 billion in 2023 versus TRY 932 million in 2022. Overall, the impact of hyperinflation accounting is [ TRY 1.468 million ] in 2023 across various lines, including the non monetary loss observed between the operating income, costs and the tax allowance. CB will continue to report under IAS 29 until Turkey continue to be classified as a hyperinflation economy. And accordingly, there will be an ongoing impact to the profit and loss of CB. Please note that Alternatif Bank represent approximately 5.3% of the overall balance sheet. And in terms of profitability, their contribution at constant level is only 2.8%. So that's the overall summary of our results. I will now hand it back to Zubair, who can go into our question and answers.

Thank you, Farhan. We will now start with the Q&As. [Operator Instructions] I will pause for a moment to see if anybody asks a question. So we have our first question through text from [ Abdullah Ali Shaukat ]. We see a number of large restatements related to derivatives, consolidation and provisions. What are these? And is it normal to adjust retained earnings?

Yes. In fact, the adjustment on the balance sheet were 2/3. So, one is the capital deduction on the employee share scheme was put through, QAR 1.1 billion, and on the other hand, there was a deemed loan that they have to take on the other liabilities. In terms of the restatement of the 2022, it has gone through the opening balance. So in terms of the derivative scheme that we have on the freemium on the corporate, we have taken a positive impact in 2022, and with the help of KPMG, our auditors, we have agreed to put that back into the P&L under the opening balance instead of restating the 2022. That plus the KPMG also has advised us to take that cost involved in the scheme as a P&L audit. And for 2022, that cost was put through the opening balance. So these are basically adjustments that we have agreed with KPMG and in line with the normal expense that they will put through.

Thanks, Farhan. [Operator Instructions] There's one more question on the chat. This is from [indiscernible]. Can you elaborate on the employee share scheme and its cost to the bank and shareholders? So basically, the employee share scheme, it's a share option to the employees, and they will get the value of the share, the difference in the value of the share based on share price at the start and at the end of the scheme. This was as both Farhan and Joseph had mentioned, hedged through a derivative. So in terms of accounting, the accounting of the employee share scheme follows IFRS 2 accounting. And the derivatives were used to follow derivative accounting, but with the restatement, it now goes through the equity. So that's exactly how an employee share option scheme would get accounted. There is a QAR 1.3 billion related to total return swaps. Are these related to employee plan? These are not related to employee plan. We now have a first question on the screen from [ Saloni ]. Saloni, please go ahead, unmute and introduce yourself and ask your question.

I'm Saloni from Bloomberg BI. My question is about the fee income for Q4 and probably for 2023 compared to 2022. Because of the adjustment you mentioned, it's a bit hard to understand what has happened to the fee income. And please comment on this part.

Okay. Just to highlight you on the fee income from the employee share scheme, impact is only QAR 63 million, but the significant increase on the fees and other income comes from 2 folds. One is our investment income has improved year-on-year. And the number two is in Turkey, the treasury money market under FX desk has actually performed very well, taking advantage of the volatile Turkish lira situation in the country. So combined, those 2 has referred to the significant increase under the fees and other income.

Okay, there is one more from the chat. This is from [ Fatima Al Shaukat ]. Can you share the light on Turkey operation, NIM and asset quality?

On the asset quality side, I must say that the NPL ratio is at 1.5%, significantly dropped year-on-year because -- and also on the coverage ratio, they are around 200% on total. So there, our book is somewhat cleaned up. And I think now, their focus is looking at the transaction banking and improving their performance for business growth.

Okay. The next question is from [ Dana Al Altman ]. The reduction in loans came mainly from Stage 1 loans. Will this impact cost of risk? If so, what is the guidance for 2024?

Can you just repeat the question again?

So the reduction in loans has come mainly from Stage 1. So what is the impact on cost of risk? And what is the guidance of 2024?

Okay. We expect the cost of risk to be within our guidance range that we have given. Yes, when you see a reduction in Stage 1 loan outstandings, you will see because that the balance is coming down, the cost of risk slightly going up. So that means [indiscernible], but when we build our balance sheet and in the loan book growth, we will see this having a little bit of reduction in the impact.

I would say that basically, the -- as you said correctly, it's mainly due to the government and public sector loans being repaid and a lot of them are obviously Stage 1. That doesn't mean that there's a deterioration in the bank's credit quality in the sense that I think what is there, we have identified in the system. And that's why we're conservatively provisioning by 120 basis points per annum. That's why we said that will continue for 2 years or 3 years until we actually finish the revamp of our legacy loan book. If you see the post 2017, 2017 onwards loan book, the cost of risk is running in our books at 40 basis points to 50 basis points. So that I think will come through after 2 years to 3 years, that benefit of that as we have cleaned up the legacy loan book. And that's I think a positive that we are looking for. The second piece is that we build out our retail book. We also diversify -- in the small ticket diversified individual lending, where we have seen some positive growth. And we see that also as an area of growth for the future. So I would say that just a reduction in Stage 1 does not automatically mean a deterioration in the overall quality of our loan book. It's just, as I said, the government has a lot of surplus money running a budgetary surplus and they're deploying at these high interest rates, they're deploying it to reduce the cost to their entities.

The next question is from Ankit Mittal from HSBC. Three questions. What is the outlook on loan growth for 2024, outlook on NIMs in 2024, and how many interest rate cuts does the bank factor in?

I would say that the outlook for loan growth is big -- we are saying 2% to 4%, which is in line with the GDP growth, and that's our view. There's a rationale behind this. The first is that we don't know how much more government and public sector can be paid down. So -- because the government will continue to run budgetary surpluses. So that's the sort of a factor which we can't predict entirely. But however, we are also being very careful in our incremental loan growth. As I said, at these high interest rates with the amount of leverage that some of the entities have, we are choosing our borrowers very carefully, so that we don't compromise risk in a chase for revenue because that always comes up. And for us, our prices when we get to that 60 basis point cost of risk, which we see as a few years down the road. So we don't want to compromise on that. And in terms of the NIM, I want to -- there's always a view that rising interest rates mean that NIMs improve for banks. That's true point, but once you cross a certain threshold, particularly in markets in the Middle East, where there's a lot of individual negotiation, there's a inability to price on the full aspect of your cost increase. So I think that is -- so I actually see that if the interest rates start reducing and frankly, we are not factoring in any interest rate reductions in the immediate term, short term, maybe in the third quarter, I might be completely wrong because many people much smarter experience than we have got that wrong, too. But our fundamental view is that managing our cost of funds is going to come from how we issue our bonds. Now we had a lot of bonds which matured last year. And that's why we consciously delayed because we felt we were at a very high point to lock in 5-year bond issuances at those prices. And I think that has worked out to an extent. So this year, we will basically and consciously phase out raising of term funding through [indiscernible] issuances towards this year and probably next year. Hopefully, we should get some of the benefit -- lower cost of funding in that benefit. So our outlook is that NIM, I think if we can maintain our NIM and maybe a slight improvement that will be [indiscernible], plus, we are building out our transaction banking business, which will help with the monetary low-cost funds. So that's for us, maintaining the NIM will be a good achievement in this environment, and if possible increase it, but I would say, we will try not to see it reduce. And 2.8% is one of the highest net interest margins in the country banking sector.

The next question is again, Saloni on the call. Please go ahead and ask your question.

I want to ask about the cost of funding part. Please, could you specify, given the guidance you just referred on NIM, how do you see the cost of fund developing in 2024? For example, the -- there was a significant drop in deposits, and I see the drop in CASA share as well. So how do you plan to manage the funding side?

I think regarding the CASA drop, that was a very year-end situation, a very year-end situation. We saw a number of public sector low-cost funds moved to other entities. So -- and we've actually seen they have built back already. So -- but for us, you are going to always ask, your CASA gets very large, then the movements of CASA also get very large. So that's something that we must get used to in terms of -- and we are working on improving our connectivity, so we can anticipate and get prior information when these large movements happen. But we actually continue to grow our CASA business because we've won a number of mandates, so we continue to win mandates from public sector entities, which will help to build our CASA. Retail Bank is also providing a new engine of growth for CASA. Last year, we added 75,000 new account openings last year. And these people then get their salary credits. So for the first time, it cost QAR 3 billion in monthly salary credits as a bank. And that's a core focus, as we do more in the retail side, we'll build it. And I think the third piece is being very careful on our bond issues, et cetera, because [indiscernible] effects on our cost of funding. But that's why I say in this market, maintaining our cost -- our NIM will be our primary objective and it has come through. I think there's no magic formula. We have to manage all these moving parts very, very carefully. The mix of our currencies that we borrow in, the tenor. But fundamentally, the business level is by building out retail and the cost of funds, which I think is an incremental new area and also continuing with the corporate.

Next question is from -- sorry, yes. Next question is from Ankit. How is the liquidity scenario in the banking sector? Do you expect further rebalancing in deposit mix from nonresident residents? And can you mention what is the NSFR ratio as of 2023?

In terms of the rebalancing, because if you go back to last year, there was a little bit of pressure. I think one of the rating agency said Qatar's banking sector was too dependent on external liabilities. So as a result of that, there are a few haircuts by nonresident liabilities. We were never at the extreme. And I think the extreme end was about 28% or 30%. We are currently at 10%, 10%, 11% of our deposits are from fixed term deposits. And these are long-term, we don't see any [indiscernible] in this. And these are primarily on Asia. So we don't -- we think the market has sort of settled. That issue is more or less settled in terms of the adjustment of the foreign currency. What is the second part of the question?

The second part is, do you expect further revamp?

I think, as I said, I think we are now sort of settled at where the market should be. I think the entire Qatari market is below 20%. I think the benchmark was -- UAE, which was at 14% or something. So I think we're much closer to that level now.

And the next question is from Goldman Sachs from -- what do you think is the solution to the elevated NPL and Stage 2 in the sector? Do you expect any government support to solve this issue?

Look, I think there's some talk that there may be something out there. We don't know. Nothing has been formally said. But if you go back post the financial crisis in 2000, there was some scheme where some loans were taken off the bank's balance sheet. I think with the strong fiscal position of the government, and yes, there may be something in that. But again, like I said, it's just a rumor mill. We don't have anything concrete yet.

Abdullah Shaukat, again, what is the potential impact of Basel guidelines on capital adequacy? Is it included in the guidance of 16.5% to 17%?

It is included. It is included. In fact, there is also opportunity for us to add our retained properties every quarter into the capital. So I think those are included in our guidance.

That's it. No more questions. Any closing remarks, Joseph.

Thank you, everyone, for joining us. And we look forward to talking to you again after the first quarter. Thank you very much.

Thank you.

Thank you.