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

Good afternoon, ladies and gentlemen. I'm Mohamed Farhan, Acting Chief Financial Officer, and I welcome you all to Commercial Bank's First Half 2024 Results Call. On the call today, we have Joseph Abraham, who is our Group Chief Executive Officer. [Operator Instructions] Now can I request everybody to please put yourself on mute? And now I hand over to Joseph Abraham.

Good afternoon, everyone, and thank you for joining us today. As Farhan said, it's our first half results. And I'm glad to say that we have shown our performance about 1% growth compared to the last year's reported basis and about 16% when you look at the restated earnings. However, I prefer to focus on the earnings, which are excluding the LTIP because that creates a bit of noise in the system. So let's look at, first of all, the loan growth. The loan growth this year has been about 3.2% on a year-on-year basis. And on a quarter-on-quarter, it's about 2.2%. So we have seen some pickup in loan growth. We had guided for a 3% growth for the full year and we remain with that guidance because some of the loan growth has been public sector and government overdraft, which can be volatile. So we're being conservative. But I would say that the opportunity for loan growth is probably more upside than downside on our 3% guidance for the full year. So that's a positive. The government has also announced a number of measures to boost the economy, including the $5 billion entertainment and luxury resort complex in Simaisma and other measures. So I believe that as we had said earlier in the year that we think growth will be more towards the second half of the year. So I think that's one feature, where we continue our guidance of 3%, but the one change would be that there's probably a little more upside to that than downside for the full year loan growth. The second piece was on net interest margin. We had said earlier that net interest margin had more downside risk from 2.8% to, we said up to 15 basis points, 2.65%. I think we have done quite well in managing our net interest margin at 2.7% and that's going to continue to be where we intend to be. Some of the pressures were due to higher reserve ratios, which have been imposed on the banks. But I would say that, again, we will try very hard to maintain our net interest margin at this rate. And with some of the rates coming down, we think there's an opportunity to continue to do that. I know that's contrast to the usual thinking that rates coming down is bad for our banks. But we actually see it as reasonably positive for us, particularly given our large CASA balances where we could see some of that benefiting as rates come down. I think the third area I would say is that -- and I would then move you to Page 5, which is our guidance page so if you could just have a look at the guidance page. One thing we had guided was on our capital ratios. As you recall, we had guided for a 17% for total CAR for the full year. We've already achieved that. And our CET1 is also above these ratios. And I think, again, there's probably a little more upside in the capital -- total CAR ratio, but we will be above the 17% guidance for the year. Our cost of risk is running around where we had predicted it to be -- sorry, the NPL ratio. The cost of risk is lower than our guidance where we said 64 basis points. But I think our cost of risk is always back-ended because it's the last quarter where you see the finalization of provisions with the -- with our auditors and with the central bank. So there's always, I'd say, back ending of that. So we remain within this guidance level for 120 to 135 basis points for our cost of risk. And we also expect to have some strong recovery supporting that. The loan growth in the government and public sector, as we said earlier, this is because of the government's budget surplus, which is running at 18%, they have paid down, and we don't see much change in that ratio. And we're selectively building the book. It might be in the sector. So we can see this ratio, and we expect it to remain like this 15% and 22% for the rest of the year. In terms of cost-to-income ratio, again, we are very close to our guidance and we expect to be within guidance at the end of the year. And our return on equity is also within guidance and we will continue to try and improve that. The other feature, which we've seen, I think, in our results is our associates and subsidiaries. Our results -- Turkey remains a challenging situation, given the high inflation and the policies that are being implemented including restrictions on loan growth. So Alternatif Bank last year made a contribution of QAR 65 million to our P&L this year, it's a negative QAR 30 million. So that's a net swing of about QAR 90 million, QAR 95 million. I think we will continue with this challenging situation for Turkey for the rest of the year. But I think the positive thing is that the outlook for Turkey, I do believe is becoming positive. And next year, we should see inflation coming down. The hyperinflationary accounting adjustments have also come down. So I remain positive on our Turkey contribution, but that was likely to be, I'd say, by this next year and probably the second half of next year when we should see the benefits of Turkey coming. That said, United Arab Bank, as I said earlier, is definitely turning around and turning around well. It's contribution is up 15%. And similarly, NBO, which is a larger entity is also improving. And we expect that steady improvement in both these associates to continue to contribute to our bottom line. So overall, I'd say, the second half of 2024, we should expect more of the same with a little bit more upside perhaps in our loan growth and other -- and overall outlook. So that would be my -- and our guidance figures remain more or less unchanged as we've shown you. That's more or less all I have to say, and of course, happy to take any questions later, but I will hand over to Farhan who can talk in more detail on the financials.

Thank you, Joseph. Regarding the financials for the first half 2024, I would like to first talk about the adjustments, our prior period numbers in the statement of income. As you are aware, in the year-end 2023, we adjusted our financial statements based on auditors requirements for the underlying derivative on the share option performance scheme. Accordingly, we have adjusted the Q2 2023 numbers and we will have to adjust every quarter until the end of the year for the previous year. The impact of that is the income that we took on the derivative is eliminated at consolidation, resulting in half year 2024 profit going to QAR 1,571 million as compared to adjusted net profit of QAR 1,352.5 million for the same period in 2023. I will now look -- talk about the financial statements focused mainly on the Slide #8, which shows the consolidated financial analysis of the bank. On the left-hand side, we've got half year reported figures. And on the right-hand side, we've got the figures excluding the long-term incentive program, LTIP, which is really to strip out the impact of IFRS 2 share option scheme and the related fees. The group reported consolidated net profit of QAR 1,571 million for the 6 months ended 30th June 2024, representing a 1.1% increase as compared to last year reported profit of QAR 1,554.3 million for the first half 2023, which was adjusted to QAR 1,352.5 million for the same period in 2023. The overall growth reported profitability was driven mainly by lower operating costs, lower net [Technical Difficulty] and improved performance from our associates. As you can see, reported operating profit is up 0.6% year-on-year on account of lower staff cost. If I was to exclude the LTIP impact on the right-hand side, you can see the operating profit is 10.4% lower than last year for first half 2024. On the domestic operation, excluding LTIP, the operating profit is 1.4% above last year. While at Alternatif Bank, we have a year-on-year drop in operating profit. Net interest income decreased largely by 3.5% year-on-year, mainly on the back of higher cost of funding in the market due to increase in deposit cost. Despite this, we have managed to maintain our net interest margin at 2.7% for the half year. We expect net interest income to continue to grow in 2024 with net interest margin expected to be maintained closer to these levels. Fees and other income fell by 17.7% to QAR 626 million year-on-year, mainly due to lower FX and trading income. Meanwhile, the group's core net fee and commission-based income improved year-on-year by 20%, supported by transaction banking, cards related, wealth management and trade fees. In terms of operating expenses, the reported costs were lower by 27.2% year-on-year mainly due to decreased staff-related LTIP cost, consists of declining share price as required by IFRS adjustments. When we exclude the impact of LTIP, we can see the group operating expenses increased marginally by 2.1% where we continue to invest in technology and automation and in our people. As a result, the group reported cost-to-income ratio improved to 22.9% compared to 29.1% last year. At domestic, cost-to-income ratio now is 20.5%, improved from 25.4% last year. Now when we exclude the impact of LTIP, the group cost-to-income ratio increased to 25.9% compared to 23.5% same period last year as bank continues to invest in technology to enhance operational infrastructure, product capabilities and to support our business growth overall. Moving on to net provisions, decreased by 25.8% to QAR 427 million for the 6 months ended 30 June 2024 from QAR 575 million in the same period in 2023. Although at CV domestic level, there was a slight decrease in the net provision on loans due to higher recoveries, the main decrease was due to ECL release and recoveries coming from Alternatif banks. The net cost of risk on loans is at 64 basis points for the period and aligning with our conservative approach on provisioning, we expect at consolidated level, cost of risk to between 120 to 135 basis points for 2024. As of 30th June 2024, the NPL ratio stood at 5.9%, while loan coverage ratio is strong at 110%. Moving to balance sheet. Group loans and advances were up by 3.4% to QAR 92.1 billion. The main reason for the increase was due to increased government and public sector borrowing and retail lending. Customer deposit increased by 1.4% to QAR 77.2 billion as of 30th June 2024, compared to QAR 76.1 billion the same period in 2023. The increase is mainly due to increasing current and [ COR ] deposits. Our capital ratio remains strong. CET1 ratio and capital adequacy ratio stood at 12.3% and 17.2%, respectively. Capital adequacy ratio of 17.2% is an improvement from 14.9% we reported in December 2023 and 16.4% reported in March 2024. On our associates, both NBO and UAB continue to deliver better performance. Both NBO and UAB have seen an increase in their profitability, where our associates contribution grew by QAR 13 million, i.e., 8.9% year-on-year. And Commercial Bank is working closely with both these entities in executing their strategies. Alternatif Bank reported a net loss of TRY 22.3 million, QAR 3 million for the first half 2024 compared to a net profit of TRY 498 million, QAR 88 million in the same period last year. Although there is an improvement in performance with higher net interest income, lower operating expenses and lower net provision in Qatar riyal terms, the results were mainly impacted due to lower FX and trading income as Alternatif Bank had high amount of income under treasury money market activities in the first half of 2023. Overall, the impact of hyperinflation accounting is TRY 760 million, QAR 88 million for the first half '24 across various lines, including the non-monetary loss and those absorbed within the operating income, costs and the tax line. The Commercial Bank will continue to report under IAS 29. Turkey continues to be classified as a hyperinflationary economy. And accordingly, there have been ongoing impact to the [ profit and loss ] of The Commercial Bank. However, Alternatif Bank at consolidated level, represent only 3% of the overall balance sheet size. So that's an overall summary of our results. What we now do is move on to question and answers. And if you can have any questions, please raise your hand, and you can ask your questions in the chat box if you want to type it.

So we have a question from Rahul Bajaj. Rahul, please unmute yourself and go ahead.

I have three questions to begin with. The first one is on the FX line, the income from FX. So that line was negative in the first quarter. It was negative in the second quarter again. Can you give us, please, some more color why is the FX-related income turning negative in the last 2 quarters. If I go back in 2023, on average, that line generated about QAR 100 million, QAR 130 million of revenue every quarter in the last 4 quarters of 2023. So that's my first question. The second question has got to do with margin. We saw a sequential decline in margins, so Q-on-Q decline in margins if I'm reading it correctly. And you're talking about maintaining the first half run rate of margin for the full year. So does that mean that you're kind of trough on the margin front and sequentially, we will see some margin expansion in the next couple of quarters? Am I reading it correctly? Or should we see that the second quarter run rate is where we will be flat. How should I think about this? So that's my second question. And my third and final question in two parts, actually. There are two elements in the second quarter income statement, on which I just wanted some clarity. The first is the tax line. I see there is a positive sort of tax credit in 2Q. Can you explain what is driving that? And can that continue in the next few quarters? And similarly, in the second quarter sort of -- if I look at the EPS calculation, the AT1 coupon payment is missing. And the restatement that you have done, you've also removed the AT1 that you paid last year. When I checked the second quarter of 2023 financials, there was an AT1 payment of QAR 40 million, QAR 41 million last year when you disclosed it. But in the restatement, you removed it and you removed it from this quarter, as in 2Q of 2024. May I know the reason for that? Is there any change in the total yearly AT1 payment that you will do?

Thank you, Rahul, for the questions. So I'll take the same order that you raised the questions. On the FX line, of course, when we see the domestic, we see an increase in the FX income, but the drop in first quarter and the second quarter is mainly coming from Turkey. Now if you look at Turkey, last year, there was a significant fluctuation between Turkish lira and the U.S. dollar in the -- throughout the year. And Turkey was able to make use of that opportunity to book derivative products and earn a higher significant trading income in their trade indexing.

And I would also add that there's a long position that was being held in dollars in Turkey, which benefited us last year. Obviously, with the relative stability that has happened in the Turkish lira this year, that has not contributed anyway as much. But I would say that I think the Turkey contribution is always going to be volatile, and that element is going to be much reduced given relative currency stability. However, the ForEx line in the domestic business continues to grow on a steady basis, and I think that's the key part of our overall strategy.

And then the second question was on margin, 2.7%. Yes, end of first quarter, it was 2.8%. End of second quarter, consolidated 2.7%. We gave guidance, if you remember, there will be some pressure from 2.8% to come down between 15 to 10 basis points. We were looking at 2.6%, 2.65%. We have ended up for the first half at 2.7%. We are taking measures and we want to protect these margins. That's something that we are targeting throughout the year as well. On the third question on AT1, so AT1 payments are made every 6 months. So in the first half, when we reported, the AT1 payments were included. So when we make the second payment, we will include in the second half. So for now, I think it's excluded for the second quarter.

There was a question on tax, Farhan.

Yes, sorry. Tax is purely because of Alternatif Bank. Now two things happened. One is Turkey relaxed the tax rules to allow hyperinflationary impact cost to be deducted from their taxable income, okay? So as a result, we saw the taxable income going down and there was effective rate came down. Number two, the numbers that you are seeing here is in Qatar riyals. So in Qatar riyals, there was a 37% depreciation of the Turkish lira against the U.S. dollar. So you see a lower tax payment in Qatar riyal terms. So those are the two reasons that you see a lower number. And also, they made losses. As a result, the tax liability is also lower.

Understood. All good. Just one final question, Farhan. On the tax point, is there any update on the corporate income tax in Qatar that was supposed to kick in next year?

We are discussing with CB -- the Qatar Tax authorities. We are also engaged with the big audit firms. So far, no clear guidance have come, but there is a discussion that they may come with BEPS implementation at 15% and also potential domestic tax. But up to now, Rahul, there is no clear guidance on that. And we expect maybe in the next 3 to 4 months, something to come out from the GTA. We have a question from [ Halom ] and please unmute yourself, please go ahead.

I have two questions. The first one is on the NIM again. Could you give us a bit more insight on your funding strategy? How are you planning to fund the loan growth in the second half of the year? And whether you expect some -- ease the pressure on the funding cost that is still rising as of this quarter? And another question is on the loan growth. If you could comment, which sectors have contributed to the growth? And where do you stand in terms of diversifying away from the real estate exposure?

I think in terms of the funding, I would say at a very, very micro level, our fundamental strategy over the last few years has always been to try and increase our transaction banking and CASA, current account and savings balances, and that has effectively doubled over the last few years. So that strategy continues unchanged. What has happened is over the last, I'd say, 1.5 years, particularly as the interest rates have gone up, people have become more sensitive on CASA to get higher rates, et cetera. So one of our strategies now is to continue to build the CASA balances across a wider range of clients to -- and the second is also to see if we can reduce the price of the increases that we had to push through on our CASA, whether we can bring in some reduction in that. So that's one leg of our overall macro strategy for our funding. The second, of course, is we will be going to the market to do some issuances of our long-term bonds and syndicated loans. We've been quite cautious. We've had syndicated loans, which have been oversubscribed, but we've been cautious in taking the full amount. And most of these are on a floating rate basis because we believe that interest rates are likely to reduce significantly at the end of this year and next year, and we're already seeing elements of that. So just by delaying the issuances to the second half and last quarter of this year, we will see some interest rate benefit in our issuances as compared to issuing earlier. So that, again, continues to be a core part of our funding strategy. And I think the third part, of course, will be how we move on any downward trajectory in interest rates, both on the lending side and the deposit side. I think we're already making some moves to reduce our cost of funding across certain large depositors. And I think this is very important for us to continue. And I think, of course, we will try our best to make sure that our downward trajectory on interest rates on our deposit side is faster than that on our lending side. So I think it's a combination of all these measures. One is continue to grow CASA, try and reduce the cost of our CASA, which had gone up. Second is managing our issuances that we take advantage of already what we're seeing in the -- of the dollar curve reduction. And third is, of course, we'll continue to manage the timing of interest rate movements, both on the deposit and the asset side, trying obviously to keep that in favor with the asset side. And that's why we feel that we are seeing some ability to do some of that, and that's why we had earlier said we could go down as low as 2.65% for our net interest margin. That's why we are at 2.7%, and that's why we believe we should be able to keep it for that for the rest of the year, but it needs some quite strong measures, and we're focused on that right now.

Okay. We have a question from -- we have 2 questions on Aybek. The first one is based on NIM guidance, it looks like NII will fall in mid-single digits in 2024. What are the levers that CBQ could use to mitigate weakness in the NII?

I think the NII, obviously a major component of it is linked to loan growth. So we'll do our -- but again, I think in a tough high interest rate environment, you need to be very careful how you grow your loans. And I said very clearly that we are not going to grow our loans just for the sake of loan growth and then have credit issues later. We have done a lot of work in the last 6 years to provision and clean. So we want to make sure that we maintain that. So good quality will always trump asset growth for the sake of asset growth. So that, I think, is there, but we are seeing actually a relative good pipeline for the rest of this year. So we're hoping, as I said earlier, we'll get that 3% loan growth, but maybe with some upside potential, hopefully. But I think the second piece was around -- sorry, what was the second question?

Second question is, I haven't read that yet. As we speak out the [Technical Difficulty], can you describe the impact on the share count and the equity of the bank. So just to highlight you, you remember, in December 2023, we took a full deduction of the value of the shares, 1.1% from our capital. So currently, that deduction is still continuing as of end of the first half of 2024. We have a plan to reduce it in a phased manner in the next 3 years. So when that reduction take place, we will see that 1.1% reduction on capital coming back. There's another question from Aybek. Some of the Qatari banks offered interim dividends for H1 2024. We have not had interim dividend announcement from CBQ. Can you comment on the full year dividend and what kind of payout should we expect?

In terms of dividend, we've always said that we have an internal guidance of 50% maximum payout as we build our capital until we get to the 2026 guidance figures, which, for us, is a capital level of 18.5% to 19% on Page 5 and CET1 of 13 to 14, that continues unchanged. Of course, the dividend is a decision of the Board at the end, but we have stuck to that. I would say that the full year dividend, of course, last year, we paid QAR 0.25. Like I said, that depends on what we finally come out with. But in terms of the interim dividend, I think we have not announced any interim dividend. We have to -- I think we have to amend Articles Association to do that and that will be done in due course. So that will give us the flexibility to announce something, if we want to later on in the year. But that, again, is finally a decision of the Board of Directors. Nothing is firmly put in place yet on that.

We have another question on the dividends, which is from Hamad. We have seen initiative with interim dividend from banks and QE companies, why don't CBQ follow this. As investor, why should I wait for 1 year to get payout ratio of 30%? Very disappointing announcement.

Sure. I understand. Like I said, we are making the moves to amend Articles Association to enable us. We have to go through the necessary corporate governance aspect. So we are doing the necessary changes to enable us to do so. Once that is done, then at the discretion of our Board of Directors, we will make any announcements.

We have another question from Aybek. Does the renegotiation of loans impact the loan yield negatively?

I would say actually, most loans in Qatar, which in Qatari riyal are meant to be floating rate. But I've said many times earlier, that ultimately, it's always a negotiation. And the interest rates on the way up had reached quite a high point, so that was impacting borrowers. And therefore, we were not able to pass on the full extent of interest rate repricing to all the borrowers. That was the reality. That's why contrast to the logic that high interest rates are better for banks, I actually said that it can be negative sometimes. And that's why I think when you're on the way down, when interest rates are coming down, that will be our intent to try and make sure that some of -- the full extent of interest rate rises that we were not able to pass on, we try and now absorb on the way down. So that's how we will manage it. Of course, ultimately, it's again a discussion and negotiation between the bank and the clients. But that is sort of intent to try and make sure we capture back some of that, that we were not able to pass on fully on the way out. Where we will see the benefits is in our foreign currency funding, our syndicated loans, particularly and because those will reprice immediately, as we're already seeing so far coming down. And as I said, in our issuances, we have held off issuing. We've only done one $500 million issuance, but we've held off issuing quite a significant amount. And I think when we do that in the second and third quarters and next year, we'll get the benefits of the yield curve having come down. So that's how we'll make sure that our interest rate costs are coming down.

We have a question from Abdulla Al-Shaar. Segmental reporting shows corporate banking fees, commission and other income of negative QAR 67 million in 2024 against positive QAR 267 million last year. In the meantime, unallocated intergroup fees has gone up to QAR 368 million in 2020 against a negative QAR 157 million. Can you please explain what these abnormal variances are? If you look at the segmental, you are looking at the consolidated, so the drop -- we have shown total fees and other income. So the reduction is mainly coming from the Turkish reduction in fees origination. So that's where you see a negative impact coming from there. But in the case of parent company at CB Domestic, we have seen an increase in total fees. In the meantime, the second question, unallocated intergroup fees has gone up by QAR 368 million in 2024 against a negative QAR 157 million. I'll have to come back to you on that because I didn't understand this picture very clearly. We have another question. Please, can you talk on the real estate exposure? It remains a concern in the market. And CBQ exposure is still somewhere above its [ peer ].

I think -- I'm sorry, I admitted to speak about the real estate exposure. There was a question earlier. The real estate exposure for us is a journey that we've been on. We used to be at 28% and it's now at 22%. It showed a slight movement. As I said, the real estate exposure may go up a bit due to -- we had earlier seen some drop in our loan book. But again, it doesn't mean we don't do real estate. We will do real estate at the right quality. This is the most important part. It's not about real estate exposure per se. So we might have 1 or 2 transactions, which we believe are of the right quality, then we will do it. But at a macro level, we want to make sure it remains and that was coming from doing more with the government and public sector. As I mentioned earlier, due to the budget surplus that the government is running, the government and public sector is actually paying down there. So you might see paydown in the government and public sector resulting in an increase in the proportion percentage. So I would say it's a combination of both these things. Will the government and public sector increase their borrowing significantly in the next year where we have proposals out there? If some of them come through, it may happen. But again, the budget surplus is one overarching theme unless the government starts spending some of that. So I think that is one item, which would have effect on our real estate ratio. And the second is, of course, if we get a few good transactions, then we may do them. So I think we should -- the overall amount of the real estate exposure is probably also important. And I think that's something that we will grow, if at all, very slowly. This is the way, but in the right area. So you might see a marginal increase due to either one of these factors. But we think this -- the guidance, we'll keep it -- that's why I said the guidance for the real estate ratio for this year remains -- we're unlikely to get to that, and that's why it will remain where we are currently, where we are at H1 '24, at 15% and 22%, it might even go up a bit slightly.

We have a question from Hamad again. We should have followed the news and announced last year October with regard to interim dividend, where we should have changed the article of association. I think you should be ahead of the proposal to the Board.

Thank you for your suggestion. We appreciate your input.

We have a question. How much of fees growth from Qatar and how much is from Turkey? So the fees growth from Qatar is 24% year-on-year, mainly on the back of transaction banking, wealth management fees, trade fees, and we have a security business, which is CBFS, and also some of the fees that's coming from cards fees. So that's the growth in the domestic operation. In the case of Turkey, we have seen a year-on-year reduction by 29%. That's purely in Qatar riyal terms. So we have no more questions from the participants. I would like to hand over to Joseph for any final remarks, please.

Thank you for joining us today. And as always, our team are open to answer any questions that you may have or if there was a need for more clarification on some of the more detailed questions. And of course, we will be on this call again at the end of the next quarter. So thank you, and wish you a good afternoon.