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

Good afternoon, ladies and gentlemen. I'm Mohamed Farhan, Head of Investor Relations, and I welcome you all to the Commercial Bank's results call. On this call today, I have to my left, Joseph Abraham, Group Chief Executive Officer of Commercial Bank of Qatar; and on to his left, Noman Ali, Chief Financial Officer. [Operator Instructions] And I hand over to Joseph Abraham.

Thank you, Farhan, and thank you all for joining us today. I'd like to introduce Noman Ali. He joins us as Chief Financial Officer. He was previously with HSBC, and he has extensive experience in the Middle East and London and also in Qatar in his previous life at Ernst & Young. So we're happy to welcome him on board, and he will continue [indiscernible] close relationships with the investors that he have had in the past. In terms of our results for the third quarter, and our net profit was up by 2.8% on a restated basis and down by 1% on a reported basis. The major item I would say is that net interest income, of course, was down by about 8%. And if you look at our overall profit, it was down by 3%, primarily because -- and I'm excluding from the LTIP figures. So that's on Page 8. So if you exclude the LTIP, we were down by about 3.8% on profit, 3.4%. And if you'd see that this is primarily due to the hyperinflationary impact of alternative bank, where there've been a net swing of about QAR 117 million. Last year this time, there were QAR 44 million profit. This year, they're in a negative situation, about QAR 70 million. So there's QAR 117 million. So that accounts for a lot of the movement in our profit figure. And unfortunately, the inflation environment in Turkey is totally not in our control, and we will be subject to the downward movements that happened there, hopefully, over the next 1 year, which will reduce the hyperinflationary impact. Our overall operating income, I'd say, was net interest income had a challenge in cost of funds, particularly as some of our issuances that we had issued earlier were mature. And therefore, these were at much lower rates, and we have to replace some of them with higher cost ones. And we will probably issue later next year when we think the interest rates are down. So there's obviously been a little bit of a replacement cost effect in that. Our operating fees coming from our businesses showed some strong growth, and this is primarily due to the buildup in our retail business, where we had strong growth in wealth and our brokerage and even our mortgages. So overall, I'd say retail continues to be a good story. In wholesale, we look at our overall loan growth has dropped by about 1%, and that's primarily due to repayments by government and public sector due to the government's healthy budget surplus situation. But overall, we have grown our private sector and other lending, but that's been offset by some of the government repayments. But we remain committed to growing our loan book in a sustainable and risk-appropriate manner. I think this is very important given the amount of provision that's been done in the -- over the past 8 years on our legacy loan book. Therefore, we remain committed to a strong risk culture and approach. And that, I believe, will stand us in good stead. And over the next few year or so, as the interest rates come down, that will make it easier for us. But this will be our approach going forward. On costs, we have seen a slight increase in our cost -- domestic costs, and that's primarily because we continue to invest in technology. We've added another 33 people to our technology team in our businesses where we see great opportunities like in wealth and in our brokerage team and in other areas of our governance, KYC, AML. So overall, we continue our focused approach to build a very strong bank with strong technology, risk compliance pillars and also a very strong business in retail and wholesale, which will enable us to capture the opportunities. So if I turn to page -- the guidance page, I think we can turn to that as #5 on the pack. Most of our guidance figures, I would say, remain if you see the 2024 guidance, I think they generally remain intact for -- in terms of our capital ratios. Our risk management ratios, I think, as I said, we may be at the slightly higher end of the -- that guidance, 5.9%. We are currently at 6%. The cost of risk is showing a low 66 basis points versus the guidance of 120 to 135. But that's because primarily most of the -- most of this was done in the last quarter when we had the discussion with the Central Bank. Our loan book, government and public sector, is 14%, and real estate is 24%. So sometimes, it's a link. As we said, the government budget surplus is paying that down. And we will grow our loan book steadily, but these affect these ratios. So they'll probably be slightly below our guidance levels. Cost to income ratio, as you can see, were marginally down. It's because primarily if you take the consolidated at 26.5%, it is because of Turkey's cost income ratio and the -- they're running because of the environment. They have a very high cost income ratio, and our return on equity is due to the fact that it is slightly below our target level. But we believe there's a chance to get back to those levels to our guidance on ROE. So we're not changing any of those. So overall, I'd say, the environment in Qatar remains, I'd say, quite slow on loan growth. And I think we continue to be careful on private sector lending. And on government lending, we will take the opportunities when they arise, and there are a number of deals in the pipeline. The government has committed to further investment in the economy. We had a downstream investments in urea, in infrastructure, in other sectors like tourism to boost visitors. So I believe all of those will come into play, but I would expect them to be more towards the second half of 2025. And we remain well positioned to take advantage of that. And at the macro level, Qatar remains extremely strong, given the demand for LNG and its leading position and the increased production that's coming. So overall, I'd say that our strategy remains very, very clear. And we are committed to execute on it, which is strong risk principles, building our retail bank very strongly given our leadership position in retail in the country and also our wholesale business and transaction banking. And the other good news, which I did not mention, was that our associates, NBO and United Arab Bank, continue to make progress, and they have contributed increase over the 4% over the previous years. And I expect 2025 to see a significant growth in this contribution, particularly from United Arab Bank as there's a lot of opportunity there given the tailwinds in the UAE and a clean position that they have now in their balance sheet from a risk perspective. So we have positive upsides coming from our associates. Turkey, I think, will continue to be a challenge for the rest of the year in terms of the hyperinflationary adjustment. But the important point is that Turkey's loan book is very, very clean. The NPL ratio is down to 2%, and it's a very small portion of our total asset base. It's only 4%. So the impacts, I would say, have been kept within controllable levels. 6 years ago, Turkey is 22% of our asset base. So it shows that our approach of derisking our Turkey business has been the right one, particularly given the context of the volatility in the economy. So we will continue to follow that approach. So overall, I'll now hand over to Noman, who will talk to you in more detail through some of the financials. And then we're happy to take any questions after that. Thank you.

Hello, everyone, and thank you for joining in. This is the first time I'm in front of you, and I look forward to our interactions in the future. Getting into the results for the 9 months ended, I would first like to talk about the adjustment of the prior year numbers in the income statement. As you know, and in the year-end 2023, we adjusted our financial statements for the underlying derivative on the share option performance scheme. Accordingly, we have to adjust our Q3 comparatives in the quarterly results. This is the last quarter with restated results. And for 2024 year-end, we will not have any restated comparatives for this. Moving on, I'll focus on Slide #8, which shows the consolidated financial highlights of the group, both on a reported basis. And then we also show the impacts excluding the long-term incentive program, which strips out the IFRS 2 share option scheme. Overall, as Joseph mentioned, the group reported a consolidated profit of QAR 2,341 million for the 9 months, representing a 2.8% increase as compared to the last year's adjusted net profit of QAR 2,277 million. It is a resilient set of results for our core business. In relation to operating profit, our reported operating profit is lower 10% year-on-year. And if we exclude the LTIP impact, the operating profit is 14% lower when compared to the 9 months of the prior year. The most notable driver for the reduction is the movement in the FX income pertaining to Turkey, which we'll touch upon more. Also worth highlighting is that our domestic operations, excluding LTIP, the operating profit is marginally below 1% compared to last year. So if we deep dive into the numbers, our net interest income decreased slightly 4% year-on-year on the back of a higher cost of funding. Despite this, we have managed to maintain our net interest margin at 2.7% for the 9 months period. We expect to grow NII in the last quarter of 2024, with NIMs expected to be maintained closer to these levels. Fee and other income were lower by 26% to QAR 928.8 million year-on-year, mainly due to the movement in FX and trading income. This is primarily driven by the higher FX swap cost and lower FX trading income in Alternatif Bank, our subsidiary in Turkey. It should be noted that the group's core net fee and commission-based income improved year-on-year by 10%, supported by transaction banking, cards, wealth management, wholesale banking and trade fees as well. In terms of operating expenses, the reported costs were lower by 14% year-on-year, mainly due to the decreased staff-related LTIP cost, the consequence of decline in share price as required by IFRS 2. When we exclude the impact of LTIP, we can see that the group's operating expenses decreased marginally by 0.6% as we continue to invest in technology and automation. As a result, the group's reported cost to income ratio improved to 25.2% compared to 26.1% last year. And at a domestic level, the cost to income ratio is now at 22.1% improved from 23.1% last year. When we exclude the impact of LTIP, the group cost of income ratio increased to 26.5% compared to 23.7% same period last year, as the bank continues to invest in technology to enhance operational infrastructure as well as customer-facing and product capabilities to support business growth. Moving on, the net provisions are decreased by 25.8% to QAR 535 million for the 9 months ended September 30 from QAR 721 million in the same period last year. Although at the CB domestic level, there was a slight decrease in the net provisions due to higher recoveries. The main decrease was due to the ECL release and the recovery in Alternatif Bank as well. The cost of risk on loans is at 120 bps for the year -- for the period, aligning with our conservative approach on provisioning. We expect at the consolidated level cost of risk of between 120 to 135 bps for 2024. As of September 30, our NPL ratio stood at 6%, while our loan coverage ratio is strong at 114.9%. The slight increase in the NPL ratio to 6% at the end of September from 5.9% in June is mainly due to the lower lending balances. Moving on to the balance sheet. The total assets were up by 2.2% year-on-year to QAR 163.2 billion. The group loans and advances were marginally down by 0.5% to QAR 90.7 billion. The slight reduction during the year, and especially from the 2Q position, was mainly driven by the repayments of certain government public sector short-term borrowing. In the fourth quarter, we are working on certain wholesale lending transactions, which may result in a slight growth, depending on the timing of the execution. In addition to wholesale, as Joseph mentioned, we have also seen good progress on our retail lending growth. On the customer deposit side, our customer deposits increased by 3.8% to QAR 77.6 billion at September 30 compared to QAR 74.7 billion in the same period in 2023. This is mainly driven by increase in term deposits. Moving on to capital. Our capital remains strong. The CET1 and the capital adequacy ratio stood at 13% and 17.8%, respectively. The CAR of 17.8% is an improvement from 14.9% we reported at the end of December '23 and 17.2% reported in June of this year. On our associates, both NBO and UAB continue to deliver better performances. Commercial Bank is working closely with both of these entities in the execution of their strategies. Moving on to Alternatif Bank. It reported a loss of TRY 420.6 million for the 9 months compared to a net profit of TRY 432.7 million last year. Although there is an improvement in performance with higher interest income, lower operating expenses and lower net provisions in Qatari riyal terms, the results were mainly impacted due to the lower FX income, which we mentioned earlier. Overall, the impact of hyperinflationary accounting is TRY 1,098.1 million for the 9 months, which is included in various lines. We will continue to report under IAS 29 till Turkey continues to be classified as a hyperinflationary economy. And as Joseph mentioned, Alternatif Bank at the consolidated level represents approximately 4% to 5% of our total balance sheet. So that was an overall summary of our results. Happy to take questions.

Thank you, Noman. [Operator Instructions] So there's a question on the chat box. I'll read it out. Impairment losses on loans and advances reported at QAR 164 million in Q3 2024 in comparison to ECL charge-off, QAR 230 million leading to a differential of QAR 240 million. There has been a difference historically as well each quarter, but the maximum it went was QAR 78 million from start of 2023 now at QAR 249 million. Would it be helpful if you could throw some light on why this difference has been there? And why did it increase in this quarter?

So I think on the ECL side, as we mentioned, we are building up the gross provisions as we go along. There has been more recoveries during the year. And especially in the last 3 months of September, we had a number of recoveries, which also resulted in the decrease in the overall balance sheet number. But overall quarter-on-quarter, as you see, our provisioning has been relatively stable. I hope that answers the question.

Second question we have is, what was the main driver for the CET1 improvement?

So the main driver for the CET improvement has been as we have been building up profit. So that has improved our CET1 ratio because of the quarterly profits we had over the 9 -- last 9 months of the year.

Another question that we have is -- this is from [ Kalid Muhamad ]. Please advise what goes into increase in other income of QAR 151 million versus last year of QAR 130 million. So last year, we had to take some losses on the other income with regard to our investments. This year, we don't have that, and we have a mark-to-market positive movement. We have another question from [ Andrew Rubena ]. Which sectors are showing an improvement in trade demand? Government sees a focus for growth for management team. Yet, repayment last year are still offsetting the improvement here, more so than at peer's bank. Why is this happening? What can be done about it?

Look, I think the government remains an important sector for all banks, and we will participate in government-sponsored companies as they do. And as we mentioned, and Noman also mentioned, we have a number of transactions currently in the pipeline for government-related entities because they are also have expansion plans. The timing of that is probably the end of this quarter or early next quarter. So then you should see some growth flowing through. In the rest of the private sector, we are looking at selectively where there are good credits with good cash flows and good debt service ratios. We are looking at that. They might be in real estate, some of them. They will be in other manufacturing. They will be in selective, even contracting for the right contractors with the right paymasters. So our view is that we will have selective growth with the right names. But we are not chasing loan growth for the sake of loan growth, I would reiterate that again. And that's why -- because if you go back to the very high level, one of the challenges that the bank has faced is the legacy loan book pre-2017, especially 2013 to 2015. We have spent the last 8 years cleaning that, and there's another 2 years to go. And then if you see our guidance on Page 5, you'll see our cost of risk dropping to 60 to 80 basis points. We want to achieve that, and that will provide a big uptick to our earnings as we normalize. And the post-2017 book has shown an NPL ratio about 40 basis points. So that shows the difference in the origination. And that's something that we will continue to stick with to make sure that we are originating the right form -- manner and form. I believe as interest rates drop over the next year, you will see better opportunities also rising and better debt service capabilities for various investments and projects that clients are looking. We will be participating in that. It's just, as I said, we will remain very selective and with the appropriate risk approach.

We have a question on dividends. There was an AGM in September to distribute dividends on a quarterly or senior basis. No dividends were distributed for 9 months. May I know if there is any plan to distribute dividend for the 9 months before the end of the year, dividend distribution?

Finally, that's the decision of the Board of Directors. But as of now, there is no plan to do such a distribution.

Those are the questions that we have got on the chat box. [Operator Instructions] Okay, Jagadish, you can go ahead with your question.

Yes. Can you hear me?

Yes.

Okay, So you have a Stage 2 loan as a percentage of overall loans is around like 21% or something. So my philosophic question is, what is your target and how many years or something you want to reduce this? That's one question. And the second question is your Stage 2 coverage ratio is around 9% or something. Are you happy with the coverage ratio or you want to increase or decrease? I just wanted to listen to your thoughts on both your Stage 2 percentage as a percentage of total loans, where do you want to take it to? And in terms of the coverage, what are you thinking, you want beef up further coverage? Yes, those are 2 of my questions.

Look, I think in terms of our Stage 2, we think a ratio of 14% to some 15% is where we would like to be. And I think that's more a normalized level within the banking system. Where that will come through, a combination or there may be some migration to Stage 3, which is what we plan for. There may be some growth in our loan book over the next few years, which will also have impact on that because mostly what we originate, of course, is Stage 1. So we'll have a combination of these factors driving the overall percentage. But our target rate is over the next 2 to maximum 3 years getting to the 15% or below level. In terms of the coverage ratio, 9%, it's still one of the stronger ones in the Qatari banking sector. So we will -- we feel comfortable with that level currently, but we will always adjust to make sure that we are not out of line with our peers. But that's also a comfortable level by international standards for a Stage 2.

Is there a guidance from the Central Bank on the Stage 2 coverage ratio that...

There's no definitive guidance by them in terms of the Stage 2 coverage ratio. But as I said, that's why we will -- by international standards, 9% is a fairly decent coverage ratio. And therefore, we will maintain it. And we'll also maintain some level of parity with our peer group in Qatar.

Okay. And so this -- you have Stage 2 at 19% since beginning of Q1 last year, 2023. So usually, my understanding is correct, if a particular loan is in Stage 2 for a year or something, and if it does well, then it will be upgraded to Stage 1. And if it doesn't do well for some period, it will be downgrade to Stage 3. So these higher Stage 2 ratios were more than 5, 6 quarters. Is it -- maybe 7 quarters. Is it because the new Stage 1s are becoming Stage 2 or there is not much action on the Stage 2 in terms of upgrading or downgrading? What has been the overall...

Yes, I think the latter part of what you said is more the reason. Upgrading from Stage 1 -- from Stage 2 to Stage 1 needs full regulatory approvals, and I would say that there's not been that much. Similarly, the downward migration, as we said, there will be some over the next 2 years. We expect that. But as the interest rate environment improves, we expect some of that to come off. And also what happened is, this is like a bucket. If you have the Stage 3, some exclusions will happen once you are provided as the regulators are. So those will get excluded. Some will drop into that bucket. And so your Stage 2 will go down, your Stage 2 will go up, but you will also see a Stage 3 bucket reducing from the exclusions because we are providing at a gross level QAR 1.2 billion to QAR 1.3 billion every year. So those level of provisioning enable you to exclude some of your Stage 3, and some of your Stage 2 will grow. So that's the way I see this, plus the growth in your overall loan book as you build your loan book, so your denominator will grow bigger. So all these -- but will there be a material -- do we see a material deterioration in our loan book? I think that's the important question. And I don't see any material deterioration between what we have currently and where we're going. We are very clear on that. So I would say that's the important point. And we have -- like I said, we expect to be in that sub-15 for Stage 2 in the next 2 to 3 years. So a combination of probably migration to Stage 2 or 3, some Stage 3 moving out and a growth in our loan book. Stage 2 to Stage 1, yes, we would see some opportunity there, but it's, I'd say, a much more challenging process to make those upgrades given that, inherently, we are conservative and even the Central Bank is conservative.

Sorry, just a follow-up question on just from Stage 2 to Stage 1. Is there a particular guidelines from the Central Bank on when will be upgraded from Stage 2 to Stage 1 or it's just that the Central Bank is being conservative and they don't want to change it? What is the situation? If you can help me understand it better.

Okay. Once you've moved to Stage 2, it's difficult to move back to Stage 1. We had to go back to QCB. So it's -- there are a few guidance. We'll have to refer that and share with you. The first question is, shall we expect higher provision in Q4 to meet the full year 2024 cost of risk guidance?

I think the answer is yes. Historically, the pattern is always that the last quarter is when you finalize your provisions with your auditors and with the Central Bank. And that's why you can see that our gross cost of risk is likely to be higher if you see the full year guidance as compared to where we are.

And the second question from [ Maes ], what is your updated sensitivity for 100 basis point rate cut? So what we have highlighted is that we will maintain -- try to maintain our new met 2.7%. When the rate cut happens, the liability book will be repriced and -- downwards. And we may have to reprice the loan book as well. As per the guidance, there will be some pressure downwards, 10 to 15 basis points as we highlighted. But our target is to maintain our NIM around 2.6%, 2.7%. We have another question on the chatbox from [ Soyco ]. Can you please explain a bit more the dynamic behind your NII and NIM and your expectation for full year 2024? And first, how you see 2025 schedule? Also under asset quality, where do you expect the key asset quality pressures to come in, in the second half 2024? I believe you said you are keeping cost of risk guided for full year 2024. Apologies joining a bit late, so I might not have heard it properly. So on the NIM, as I explained a little while ago, our guidance is to maintain our current level of NIM at 2.7. There is slight pressure downwards on that. Our net interest income, overall, we have seen a slight improvement. If we can manage about 1% to 2% of loan growth in the fourth quarter, we would see an upward movement on the NII.

And just to add, there's also a focus on how can we reduce the cost of funding as well, which will also help us to address that challenge. I think what we're doing for next year also is we had a lot of maturities of our term funding and our issuances, and we've been consciously holding off because we -- if we issue right now into this market, it's quite expensive. We did an issuance earlier this year at 5.85%. When you -- so we expect that by next year second half, we should see, and we will probably be coming out with some issuances during that period. So it's really a balancing act of managing your cost of funds through the mix of issuances, your low-cost balances and also your deposits, high-cost deposits. So I think it's a combination of these, and we are consciously holding off to look at our overall net interest cost during 2025.

The second part of that question is, where do you expect the key asset quality pressures to come in second half 2024?

Look, I think we have a historically challenged NPL portfolio and some names, particularly in real estate, which we've seen in -- which were originated pre-2016, 2017. So that's the area where there's pressure because they've had primarily around high interest costs, maybe some delays in starting their operations, reduced rentals. So you've got all these and -- but that's not specific to the second half of the year. So yes, I think it's a cumulation effect of you had the blockade on Qatar, you had COVID, you had all -- and all these factors contributing to that challenged portfolio. So the high interest rates have only -- but with the interest rates coming off, we should see some benefit to them. But I would say that most of these risks on the NPL are already factored into our calculation. We're not seeing anything new. And the post-2017 book that's been originated is still in good shape. So for us, we're not seeing any new risk surprises really coming on us.

We have no further questions. If there are no other questions, I would request Joseph to a closing remark.

Once again, thank you very much for joining us today. We will, as always, be very transparent on our guidance. And if you have any follow-up questions, because I understand sometimes questions or clarifications are required, like the one on the Stage 1 upgrade guideline, we can provide that to you. So please feel free to reach out to Farhan or Noman for any other queries once again. And thank you very much, and wish you a good day. Bye-bye.