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 Quarter 1, 2025 Results Call. On this call today, I have on to my left, Joseph Abraham, who is the Group Chief Executive Officer of Commercial Bank of Qatar. And on to my far left is Noman Ali, who is the Chief Financial Officer. During the duration of the call, we will put you on mute. And once the presentation is complete, I'll come back to you for question-and-answers. Now may I request everybody to please put yourself on mute. And now I hand over to Joseph Abraham.

Thank you, Farhan, and good afternoon to everyone, and thank you for joining us on this call. Our Q1 results have been announced. And I would just like to highlight that whilst at the top line is shown a decline of 18%, there are 2 major factors. One is, of course, the share options scheme variability, which because of the movement in the share price, that has been a big change from last year. And the second is on a conservative basis, we have implemented the 15% global tax charge due to the ownership of our Turkish subsidiary. So that's brought us within that net. So these are the two main factors. So if I was to remove the tax charge, then our profit will be down in minor amount of 1.5% to 2%. Now our Turkish subsidiary also because of hyperinflation compared to last year first quarter when they made a very small loss, this year they made a loss of QAR 32 million. So that has resulted in a further depreciate. If you were to net out the tax charge and the change in -- the adverse change in the Turkish subsidiaries performance, then actually, the performance of the bank has -- the profit has gone up by 2%. And I think that's a fundamental point that needs to be kept in mind. We are working on the Turkish subsidiary prospects for the year, and we believe that it will move into a more positive performance. We have also reduced our headcount by 30%. The branch network has been streamlined. And therefore, we have taken the necessary measures, given that Turkey remains a continuing volatile environment, and we are managing within that scope, but we expect it to be breakeven by the end of the year from an overall loss position. The second piece is the tax. That is 15%, but though the effective tax rate may be lower by 10%, 12% -- sorry, 10% after you do the various deduction. But we are looking at ways at how we can mitigate this effect. I think one of the key aspects will be the level of fixed assets of your overseas subsidiary. If we can bring it below the QAR 50 million threshold, then we might be able to do something. So all these are being explored, which could help mitigate the tax charge. But overall, I'd say that we continue to be focused on executing our strategy. That means good quality loan growth, it means building out our retail business and you'll see our fees income have gone up well in our overall business. And I think also, we are seeing significantly improved performance from National Bank of Oman and United Arab Bank. So associate banks, which a couple of years ago were a drag on us, have now turned around and we expect them to be contributing positively. So it's only the Turkey subsidiary which needs work, and we are on that in a very focused manner. I'll hand over to Noman, our CFO, and then he will talk you through the results. Thank you.

Hello, everyone, and thank you for joining in. Getting into the results for the first quarter of 2025, I'll focus mainly on Slide #8, which shows the consolidated financial highlights of the group, both on a reported basis and also after excluding the long-term incentive scheme, which strips out the impact of IFRS 2 share option scheme. Overall, the group reported a net profit before Pillar Two tax of QAR 704.3 million for the first quarter 2025 as compared to QAR 801.6 million for Q1 2024. The 12% variance includes a loss of QAR 31.9 million from our Turkish subsidiary Alternatif Bank and the impact of the long-term incentive scheme related changes of QAR 84.8 million. If we exclude the impact of the long-term incentive scheme and the -- and if Alternatif Bank performance was similar to Q1 2024, a net profit before tax would have been 2% higher. Further, due to the likely implementation of the global minimum tax of 15%, the BEPS Pillar Two tax, a tax charge of QAR 52.9 million was also reported. Overall, this resulted in a decrease in reported net profit after tax to QAR 651.4 million. I would like to highlight that the group may benefit from certain relief from the executive regulations, which are not currently enacted in relation to the BEPS Pillar Two charge. Once the executive regulations are enacted, and if the reliefs are applicable to the group, this may result in a reduction in the tax expense. In relation to operating income, our reported operating income is lower by 9.5% year-on-year. This is primarily driven by contraction in net interest income, which was slightly offset by higher fee and other income. If we deep dive into the numbers, our net interest income decreased year-on-year, the key reason for the decline was, firstly, the timing of the downward rate revision where the assets were repriced at a faster pace than the liabilities; and secondly, due to higher cost of funding during the quarter. As a result, our net interest margin stood at 2.2%, and for the rest of the year, we are expecting to keep it in the range of 2.2% to 2.3% as well. As Joseph mentioned, our total fees and other income were higher by 19.8% to QAR 349.4 million year-on-year, mainly due to increase in the group's core net fee and commission-based income, which improved year-on-year by 24% supported by retail banking fees, including cards, wealth management and remittances; and on the wholesale banking side, in particular, in relation to payments. In terms of operating expenses, the reported operating costs were higher year-on-year, primarily due to the bank's continued investment in people, digital innovation and service proposition enhancements along with the increase in operating costs from our operations in Turkey, including certain rightsizing initiatives. Further, the lower operating expense in the first quarter of last year of 2024 were also attributable to decreased staff-related LTIP cost as a consequence of IFRS 2 due to the decline in share price last year. If we exclude the LTIP impact on operating costs, the year-on-year increase is 7.8%. As a result, the group's reported cost-to-income ratio reached 31%. At a domestic level, the cost to income ratio on a reported basis is now at 26.2% supported by investment in key identified areas. Alternatif Bank's reported cost-to-income ratio of 88.4% compared to 66.4% in the same period in 2024. Moving on, the net provisions decreased to QAR 149.1 million for the first 3 months of 2025 from QAR 240.5 million in the same period in 2024. In relation to provisions on loans to customers, although our gross provisions remained consistent in line with previous years, we saw higher recoveries at CB domestic level nearly QAR 22 million higher than last year. Therefore, our net cost of risk on loans was 34 bps, whereas the gross cost of risk on loans is at 72 bps for the 3 months ended 2025. Aligning with a conservative approach on provisioning, we expect at the consolidated level that the gross cost of risk of between 115 to 130 bps and the net cost of risk of between 80 to 100 basis points for 2025. As of 31st March 2025, the NPL ratio decreased to 5.9% from 6.2% at the year-end, while the loan coverage ratio, including ECL stood at 85.4%. Moving on to the balance sheet. Our total assets are up by 1.7% to QAR 169.1 billion. The gross cost -- the gross loans and advances increased by 5.8% to QAR 94.9 billion, due to higher government and public sector borrowings. At the same time, it is important to mention that on the retail side, we see good progress on lending growth, which grew 11.9% year-on-year. Customer deposits decreased by 3.8% to QAR 76.4 billion at 31st March 2025. This is mainly driven by a decrease in time deposits. Further, we continue to grow our low-cost deposits, which increased by 5.7% year-on-year reflecting our efforts to diversify funding sources and strengthen balance sheet resilience. Our capital remains strong. CET1 and the capital adequacy ratio stood at 12.3% and 17.1%, respectively. The capital adequacy ratio of 17.1% is an improvement from 16.4%, which we reported in March 2024. As Joseph mentioned, our associates NBO and UAB continued to deliver better performances. Commercial Bank is working closely with both these entities in the execution of their strategies. In relation to our Turkey subsidiary Alternatif Bank, it reported a loss -- net loss of TRY 311 million, equivalent to QAR 31.9 million for the 3 months ended 31st March 2025 compared to a net profit of TRY 78.7 million equivalent to QAR 8.6 million for the same period in 2024. Although there is an improvement in performance with higher operating income, the results were mainly impacted by higher operating costs primarily due to certain rightsizing initiatives, including FTE reductions and more focus on digital banking. Overall, the impact of hyperinflationary accounting is TRY 485.5 million, equivalent of QAR 49 million for the 3 months ended 31st March across various lines. Commercial Bank will continue to report under IAS 29 until Turkey continues to be classified as a hyperinflationary economy. Alternatif Bank at a consolidated level is approximately 3.7% of the overall balance sheet size. So that's an overall summary of our results. Happy to take any questions.

Okay. Thank you, Noman. Now we can move to question-and-answers. [Operator Instructions]. We will go to the first question that we have from Chiro Ghosh.

This is Chiro Ghosh from SICO Bahrain. Just a couple of questions I have. First one is if I recollect correctly, you are expecting NIMs to recover back. Please remind me if my memory serves me right or not. So you're expecting NIMs to recover back in 2025, maybe around 10 basis-point-odd. First quarter does not look like -- so if you can give some kind of guidance how we should look at the full year? Also, parallelly, I saw that over the last 2 quarters, the loan growth has been quite good, but it has been funded by the interbank. So is this model sustainable? Or if you move back to deposits, your margin will get pressurized or not? That's my first question. And second one is related to the fee income. The fee income was quite strong in this quarter. So is there any one-off element in it or you can continue these kind of fee income growth? Yes, these are my 2 questions.

So first of all, in relation to NIMs, we ended the year with around 2.4% of our net interest margin and our guidance for the year was that we will see around 10 to 15 bps of pressure -- downward pressure on the NIMs. We currently are at around 2.2%, and we expect to maintain between 2.2% to 2.3% of NIM during the year. Secondly, in your -- in relation to your question on the mix of interbank versus loan -- growth in the loan book, so we're really focused on increasing our loan book and especially on the corporate and retail side. So we expect a healthy pipeline, which will continue to increase the loan book and lesser on the interbank side. And thirdly, your question on -- yes, so on the funding side, obviously, we are focusing on increasing our low-cost deposits. And what we saw in the quarter was that our low-cost deposits increased by 5.7%. So we are focusing more on getting our CASA deposits higher during the quarter.

I would just add to that, that we also have plans for Qatari riyal bond issuance to support the Qatari riyal issuance. And we are also -- you will look at how the market situation is evolving, we will also be doing some overseas issuances, which will also -- we were just waiting for some of this volatility to go down in these markets, which has delayed it. So a combination of local currency bond issuances, of course, CASA growth and some -- of course, we will also grow deposits locally plus the overseas currencies issuances will be what's funding. So will it have an effect on our costs? I think, some of the interbank is quite high cost. So I would expect it to be -- the change in funding mix to be neutral to slightly positive, if anything, as compared to interbank.

I think the other question is on the fees. What are the one-offs, if you have. Any one-off included in the results that you released. Actually, the most of the fees are through our normal transaction banking and cash management. There is about 10% element is one-off through a realization of some gains on the sale of assets that have been included. Other than that, a majority of those are normal standard fees that we recover through our normal business activities.

Okay. Just to divide -- just to -- so you said the NIM will drop by, say, roughly 10 basis points to 20 basis points, right, for the full year versus '24?

No. So we -- currently, the first quarter, our NIM ended at 2.2%. We will maintain between 2.2% to 2.3%.

We have another question from Rahul Bajaj.

This is Rahul Bajaj from Citi. I have 3 questions, actually. The first one is on tax rate. I see that the effective tax rate is below the 15% threshold. What has resulted in effective tax rate being lower? And you mentioned about some executive regulations, which if it works out you will probably see even lower tax rates. So do we have room for tax rate to go back to, say, 2023-2024 levels, i.e., close to 0? Or we will remain in that kind of 5% to 7%, 5% to 10% sort of effective tax rate going forward? So any view on that would be useful. That's the first one. The second one is on cost of risk. First quarter cost of risk was quite low, around 35, 36 basis points on a net basis. But you are sticking with your full year guidance of 80 to 100 basis points on a net basis. Does that imply that going forward, one, the recoveries which will be a lot lower? And two, we will see an acceleration in cost of risk. Is that a fair understanding? And kind of linked to the cost of risk point, the way oil price has reacted in the last few weeks, I understand Qatar is more LNG-linked, but how do you see implication of energy price moves on your cost of risk going forward? So that's kind of my second question on cost of risk. My third and final question on margins. This is more on Turkey. I see Turkish margins have also gone down sequentially in 1Q. And this was slightly counterintuitive because we saw rates come down in Turkey. So ideally margins in Turkey for most other banks has gone up during 1Q. Why couldn't CBQ see Turkish margins expand in 1Q? That's kind of my third question.

Right. So just if we start with the first question on the tax one. So the effective rate is lower because of 2 elements. One is that there is a sports levy of 2.5%, and that is deducted from the 15%. So that brings it down to like 12.5%. And then there are other admissible deductions as well in relation to certain items like salaries and...

If I were to just add to that, Noman. On the domestic that you comment, you obviously exclude the associates and the Alternatif losses. So from the domestic stack, you will take out the AT1 payment that we had to make on AT1. Also the OECD guidelines allow us to reduce substance-based income exclusion with regard to fixed assets as well as staff costs. So there is an exclusion of a particular amount from that particular income base as well. Then the third element is, as Noman said, that we will be excluding the sports levy that we paid 2.5%. So the effective tax rate is actually coming to around 10% and not 15%.

And then the question on whether we can see a lower -- so basically, the draft executive regulations have a point in relation to whether your tangible fixed assets for your foreign operations are less than EUR 50 million, so then you can benefit for a 5-year period. So we are looking at various scenarios, and it may bring it down to much lower levels, Rahul, from a tax perspective. So as these are draft regulations, we are doing the work and then hopefully, we can come to some solution there. But it can go similar to the levels in 2023 and '24 as well. Coming on to the second question in relation to cost of risk. So yes, I mean, we are still guiding towards a net cost of risk of around 80 to 100 bps. Recoveries are going stronger, but yes, we need to be mindful of -- making sure that our -- we continue with a conservative approach to provide provisions and then sometimes the recoveries are a bit lumpy, but overall, we are guiding towards 80 to 100 bps. In relation to the oil price, just any thoughts on -- yes, so I guess the thing is that from our perspective, as you mentioned, LNG lesser impact. We are not seeing any material concerns that at this stage from a provisioning perspective, we believe we will continue with our conservative approach on gross provisions, and we will be in the right range.

I think regarding the effect of the lower oil prices. I mean, the main entity is Qatar Energy, which I would say is a state-owned enterprise, and it has its long-term contracts primarily, which are linked to oil prices, but I think the direct impact is very limited. And similarly, the other one is Qatar Airways, one of the big entity, obviously, cost of fuel will be beneficial to them, if anything. But again, from a risk perspective, we really don't see any change in our cost risk. The rest of the portfolio is really, as I said, much more linked to the overall economy. And it's in real estate, it's across different sectors. We think that direct impacts are very limited. And because the indirect effects coming from the overall economy are, I think, relatively limited because I think Qatar as overall economy is not that impacted currently by the lower oil prices. And I think Qatar will continue to run our budget surplus and our current account surplus. I think Saudi is the one with a significant impact on their budget from the lower oil price. I think Qatar is relatively insulated.

Rahul, your third question was on the margin in Turkey. So Turkey, if you see, they have actually increased some lending. Their lending book has grown year-on-year on Turkish lira terms. And they have been able to sort of maintain the asset yield at the same level as last year. But the issue is, if you remember that CBRT increased rate last year up to 50%, almost 49% and the trend was that it was going to come down to 42% and 40% by end of first quarter. It didn't happen because of the political turmoil and they increased the CBRT rate to 46.5% again. So that had a cost of funding impact in Turkey, and that was the result of their net margin coming down from 4.7% to 2.7% in the first quarter.

Understood. All clear. Just one quick follow-up. On the tax regulation, is there a time line that we know of, when we know when the new regulations will be known?

I mean, we are expecting the executive regulations to be finalized in 2 to 3 months, Rahul.

I have a question on the screen from [ Rohit Raj ]. In this quarter, there is no charge for LTIP, so does this quarter represent a BAU in terms of cost-to-income ratio? When does the majority of LTIP expire and what happens to the treasury shares when LTIP expires? So I'll just answer the first one. The share price did move from 4.3 end of last year to 4.2 in the end of first quarter. So as a result, there is a very nominal charge on the IFRS 2 impact on the staff cost compared to 91 million charge last year. So there is an impact in the cost of ratio, but it's a marginal impact. In terms of the majority of LTIP expires, what happens to treasury shares when LTIP expires? Now if we unwind the scheme, what happens is that the entire reduction of the LTIP from our capital will come back to the capital. So that's what we have indicated from the beginning. So there is some process that's going on at the moment. We are not going to extend the LTIP scheme. We are trying to manage it down. We have another question from Bijoy.

I have a question on your cost of deposits. Your cost of deposits have been high versus when I check the overall market. In the market, the deposit rates have come down. And other banks have also reported a reduction, but your cost of deposit remains quite high. Any particular reason for that?

Yes. One of the main reason why the cost of funding has gone up is if you remember in 2018-'19, we had our issuances, which were funding at around 2%, 2.25%. When we actually go for the reissuance of those when it matures, those are coming at around 5%, 5.5% at the moment. So that's why we are currently watching in terms of our next issuance, in terms of the pricing. So that's something that we are currently assessing.

Understood. And also, your capital adequacy has improved. So if you can help me understand, is it majorly because of the risk-weighted assets?

I mean the capital adequacy ratio at the end of 2024 and start of Q1 '24 was on the lower side. What we have done is, obviously, over the year, we have built up the profits and that has resulted in the increase in the healthy capital adequacy ratio. It's just the building up of the profits.

Understood. And just one final question on Turkey. How do you see the market? Any outlook would be helpful.

Maybe [ Ozambe ], you can give your views on the outlook in Turkey for the...

Of course, Mr. Joseph, thank you for the question. Actually, the first quarter was quite stable in terms of the economic activity in the country. Central Bank started rate declines starting from December 2024. And the rates were declined from 50% to 42.5%. But during March, there was a turmoil with the rest of the Mayor of Istanbul. So there was like volatility in the market. CBRT took an immediate action and increased the interest rates, as Mr. Farhan mentioned previously on the previous question. So now interest rates increased. There is still regulations on the growth caps and the CBRT, Central Bank trying to manage the inflation. So currency increased from 36.5 levels to 38 levels in terms of the U.S. dollar, Turkish lira parity. So it's now stable. In half an hour time, CBRT will make the April decision on the interest rate. So our expectation of the market is to keep it stable. So economic activity slowed down again because of the increasing interest rate for the last 1 month, also affected the cost of deposit, obviously. So they have a pressure on the net interest margins. But overall, the expectation of this year deposit rate is to decrease to 25% level. So after the April meeting, I think the country will continue its monetary policy as expected and with the plan. So that's to basically more or less the economic outlook for Turkey today. If you have any further questions, happy to answer.

Thank you, [ Ozambe ]. We have a question from Rahul Bajaj.

This one is on loan growth. So very strong loan growth, especially in the wholesale segment coming in, in 1Q. Just wanted to get more color on this. Where is this coming from? Is to what extent this growth is LNG related? And I remember at the start of the year, you've alluded to 2% to 2.5% growth outlook, loan growth outlook for the full year, what would be the outlook now with very strong 1Q?

I would say that we still maintain our outlook. I mean, this is -- we see ups and downs, particularly in government and public sector borrowing, depending on the release of their budgetary allocation, et cetera. So what we would say there was maybe a jump in government and public sector in the first quarter, but we would anticipate that the overall year will stick to the 2% to 3% loan growth in line with GDP.

We have a question from Aybek Islamov.

Just one question from me, right? So regarding Turkey, can you remind us what is the carrying value of your Turkish subsidiary on your balance sheet as of Q1 '25? Just one question.

Yes. So we have -- the original investment is equal to about QAR 4 billion. In the foreign currency translation reserve, we carry a balance of about QAR 2.6 billion, so net about QAR 1.4 billion.

On the balance sheet, it is net of these 2 figures. So effectively, the original value is QAR 4.1 billion and then the currency depreciation has been reflected through the foreign currency translation reserve. So there are 2 separate items.

We have a question from [ Andy ]. Sorry if I missed this, but can you give some color on the loan book growth? Which sector client categories were strong and were -- was there a portion of government repayment netted off again this quarter?

So I mean, as we mentioned that the loan growth is coming from two-folds. One is that we saw some increase in the public sector borrowings on the wholesale side and then we also saw increase on the retail side. Our retail book increased by 11.9% year-on-year. Still, when you look at the total loan book, our retail is around 15% of the total loans to customers, and we are aiming to increase it further. As Joseph mentioned, on the wholesale side, we will still target loan growth, the outlook would be in line with GDP around 2% to 2.5%, 3% as the GDP grows. So we will aim for that kind of growth at the present.

We have another question from [ Elena ] [indiscernible]. I see your NPL decline on 1Q 2025. As a proportion of your loan book, how much they are our Stage 2 loans?

So on the Stage 2 loans, at Q1 2024, our NPA -- Stage 2 -- sorry, the Stage 2 loans were around 20%. And we have decreased it to 19% at the end of the first quarter of 2025. So there is a decrease. What we are really aiming for us to further decrease it down to range of 15% to 16% over the course of the year.

And the other question on here was the NPL decline in first quarter. The NPL decline is -- the absolute NPL number remains the same is because of the denominated effect where the lending has increased. That's why you will see a marginal drop in our NPL ratio. We don't see any other questions. If anyone has any question, please go ahead. If not, I would kindly request Joseph to give the closing remarks.

Thank you, everyone, for joining us. Again, I think as I would reiterate, we have a clear strategy in place. The key elements, I believe, will be Turkey's turnaround, which is -- which we're implementing. Looking at some of these ways to mitigate the tax effect because I think these are very important in terms of absolute impact. And just continuing -- as I said before, we are not chasing loan growth for loan growth sake. We believe in the quality. We spent the last 8 years cleaning up some legacy portfolios. We are coming to the end of that journey in the next 2 years. So we are, therefore, very clear on our loan growth strategy, quality is always important. And I think those are the key messages, and I believe we'll continue our retail business continues to grow well, providing necessary diversification. We continue seeing that as a strong growth opportunity across a number of new business lines which we have created over the last few years like wealth management, brokerage and of course, remittances. So overall -- and our UAB and NBO will continue to perform well, we see a positive outlook for both these entities. So that's the overall outlook for the rest of the year. Thank you very much for joining us today. As always, if there are any questions, please feel free to reach out to our team. Noman and Farhan, and of course, myself are always available. So thank you very much.

Thank you.