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

Good afternoon, ladies and gentlemen, and thank you for joining us today. I'm Mohamed Farhan, Head of Investor Relations, and I'm pleased to welcome you all to The Commercial Bank's Third Quarter 2026 Earnings Conference Call. On this call, I have on to my left, Stephen Moss, who is the Group Chief Executive Officer of Commercial Bank of Qatar. And on to my far left is Noman Ali, who is the Group Chief Financial Officer of Commercial Bank. [Operator Instructions] And now I hand over to Stephen Moss. Over to you, Stephen.

Thank you, Farhan. Good afternoon, everybody. Let me first start by providing some comments on the ongoing regional uncertainty. So Qatar continues to demonstrate economic resilience supported by strong institutions, significant sovereign buffers and prudent fiscal management. The initiatives announced at the recent Qatar Economic Forum in New York reinforce the country's continued focus on economic diversification and greater private sector participation. In addition, the Northfield LNG production expansion will provide further significant GDP growth. So again, it's a backdrop of the continued regional uncertainty. Commercial Bank remains very focused on serving our customers and executing the 2026 to 2030 strategy that we announced earlier this year, supported by prudent risk management, strong liquidity and capital and a disciplined approach to growth. Since the end of February, our well-established business continuity arrangements have enabled us to maintain reliable and secure access to our banking services for all of our customers. We continue to benefit from a very proactive, supportive and forward-looking regulator. The Qatar Central Bank has maintained its prudent oversight of the banking sector, supporting liquidity, customer confidence and orderly market functioning. So let's turn to strategy execution. In January, when I announced our strategy for the period 2026 to 2030. I said that 2026 would be a year of execution. I now want to give you an update on where we stand 9 months into the year. Our strategy execution office tracks delivery across retail, wholesale treasury and the group's enabling functions, supported by detailed actions, milestones and executive accountability. The outcomes during the 9 months of the 30th September reflects our continued focus on delivering a strategy that we set out at the beginning of the year. In short, we are focusing on doing exactly what we said we would in our strategy. We've delivered robust results, managed our funding costs, continue to work on the legacy book, progressed our digital and AI agenda while maintaining strong capital and liquidity. In retail and wealth, we continue to deepen customer relationships and product penetration and strengthen core businesses across cards, employee banking and remittances. Our retail and wealth business delivered a strong performance with growth in lending and continued momentum in Wealth Management, where higher assets under management and fee income reflect our focus on expanding our fee-generating businesses. We further strengthened our wealth advisory proposition for affluent and high net worth clients, supported by enhanced advisory services and broader investment product access. We've also enhanced our premium card proposition with the launch of the new Sadara Visa Infinite credit card and the a la carte dining program. In addition, digital engagement has continued to grow with 6 million monthly log-ins up 15% year-on-year. In Wholesale Banking, lending has remained selective, with continued discipline with respect to returns. Beyond lending, we supported participation in Cat A Capital Markets through our IPO subscription services, and we also continue to advance collaboration between our wholesale and retail businesses across salary accounts, pay cards, commercial cards, wealth management and insurance, broadening customer engagement. In overview, we remain very focused on achieving flea outcomes, drawing a line under the legacy book, reshaping the bank towards a more capital-efficient and fee-driven business model, capturing growth in underpenetrated segments, including categories, SMEs and affluent clients, delivering sustainable shareholder returns and embedding AI across the bank. As I said before, AI is a key enabler of our strategy and an area where we are making tangible progress. Priority use cases continue to be actioned. At the half year, we highlighted our AI credit proposal platform, our contact center and agent assistant and our machine learning-enabled lending proposition to SMEs. In Q3, we've continued to introduce new initiatives out of our AI road map. We introduced a loan -- a retail loan AI engine to identify a customer to more likely to take a personal limit and recommends suitable amounts based on affordability and financial behavior. We've also rolled out an AI-driven support dashboard to all of our Sadara relationship managers. This brings customer insights and behavior together in one place, helping our teams identify relevant product opportunities and have more informed conversations with our premium customers. So let me briefly walk you through our consolidated performance, and Noman will go through the numbers. Core operating performance remains solid, supported by good momentum in net interest income and underlying lending, excluding acceptances. Our liquidity and capital position remains strong, and we remain focused on improving our funding mix. building customer deposits and reducing the cost of funds over time. Overall reported profit was lower year-on-year as a result as we said before, of our more balanced approach to provisioning as we set out at the beginning of the year. As opposed to the previous practice of taking a larger provisioning charge in the fourth quarter, we are provisioning more consistently through each quarter of the year. During the third quarter, we also updated our ECL model to reflect the latest macroeconomic indicators. This has contributed to higher provisions and entirely accounts for our net cost of risk being higher than our target range of 90 to 100 basis points at 108 basis points. A prolonged regional disruption may at some point, affect provisioning and recovery time lines. We will continue to assess the position through our normal governance processes, but at present, there is no change to the cost of risk targets for the period from 2026 to 2030 that we set out at the start of the year. Very importantly, we also completed the winding up of our long-term incentive scheme for employees and the related arrangements during the third quarter. The shares purchased are now held directly by the bank as treasury shares. And finally, on capital, we continue to target maintaining a strong a CET1 and total capital adequacy ratios comfortably above the regulatory minimum while creating win for selected growth. So to close, the regional conflict has, of course, created uncertainty for our customers, the business we bank, the businesses we bank and for markets. We will continue to monitor developments closely and manage the bank's operations prudently. However, I want to reiterate that we remain very focused on the execution of our 2026 to 2030 strategy as announced in January this year. Noman, over to you.

Thank you, Stephen. Hello, everyone, and thank you for joining us. Getting into the results for the 9 months ended 30th September 2026. I will focus primarily on Slide 10, which sets out the group's consolidated financial highlights. At a headline level, the group reported a net profit before the impact of Pillar 2 tax of QAR 1,644 million. The year-on-year reduction in profit was primarily driven by higher net provisions despite a strong and resilient underlying operating performance during the first 9 months of 2026. Net operating income increased by 2.9% to QAR 3,568 million. This was offset by higher net provisions, reflecting a more balanced approach to provisioning across the year as well as increase in operating expenses as we continue to invest in digital capabilities, AI and our people. The results also include a reported loss of 46.5 million from alternative bank after the impact of hyperinflation accounting. In addition, the group approved QAR 104.7 million for BEPS Pillar 2 tax. After this charge, the reported consolidated net profit after tax for the 9 months ended 30th September 2026 was QAR 1,539 million. Looking across our businesses, Retail and Wealth continued to perform strongly, delivering good and consistent returns supported by higher fee income. We also continued to strengthen our wealth proposition through enhanced digital capabilities helping us deepen penetration across the most affluent and private banking segments. In Wholesale Banking, our lending book, excluding acceptances, continue to grow Growth remains selective with a clear focus on higher-return customer segments, while we continue to deepen cross-sell opportunities across our client base. Treasury continued to make good progress in diversifying our funding mix and managing funding costs while maintaining a strong liquidity position and access to funding markets. Our associates also continue to perform well and we remain closely engaged with them in the execution of their strategies. If we deep dive into the numbers, the consolidated net interest income increased 10% year-on-year. Gross interest income increased by 3.8% year-on-year, driven by growth in loans and advances to customers as well as increase in investment securities. Alternative Bank also contributed to the increase in interest income. Importantly, interest expense remained broadly flat year-on-year despite higher average funding volumes. This reflects the benefit of our funding actions. The group's overall cost of funding declined year-on-year, supported by growth in low-cost retail deposits and the replacement of high-cost international deposits with reports. As a result, net interest margin remained resilient at 2.2%, broadly consistent with the previous 3 quarters, for the remainder of 2026, we expect NIM to remain around 2.2% with potential downward pressure of 5 to 10 basis points. This primarily reflects our continued competition for domestic deposits and the refinancing of certain medium-term debt issuances that were previously priced at a lower rate. As we move into the next phase of our strategy, optimizing the funding mix remains a key priority. In particular, we are focused on growing CASA deposits and improving the overall composition of our funding base. This will take time, but we are making progress in the right direction. Moving to noninterest income. Net fee and commission income decreased by 5.8% to QAR 692 million. However, excluding one-offs, net fee and commission income grew by 11% year-on-year, demonstrating good underlying momentum. Net income from investment securities was lower reflected reflecting reduced dividend income and mark-to-market movements on investment securities held at fair value through P&L. On operating expenses, reporting costs were high year-on-year, primarily reflecting increased staff costs and our continued investment in technology, digital and AI capabilities as we execute our strategy. As a result, the group's reported cost-to-income ratio was 32.3%. At the domestic level, the reported cost-to-income ratio was 26.9%, while alternative bank reported 74.5%. We recognize that the group cost-to-income ratio remains above our targeted level and bringing it down remains an important area of focus. Going forward, we continue to expect positive jaws from 2027 onwards with revenue growth outpacing cost growth. Moving on to provisions. Net provisions increased to QAR 979 million compared with QAR 603 million in the corresponding period of 2025. For customer loans, the increase reflects our approach of a more appropriately balanced provisioning throughout the year rather than taking a relatively lower provision during the first 3 quarters, followed by a significantly higher charge in the fourth quarter. Provisions also include an additional ECL charge following the update to our ECL model to reflect the latest macroeconomic factors. At the same time, recoveries remain strong. Our continued recovery efforts resulted in a 15% year-on-year increase to QAR 268 million, which supported the net provision position. Consequently, our gross cost of risk was 102 basis points, while the net product risk stood at 108 basis points, Net cost of risk is slightly above our full year 2026 guidance range, reflecting the conflict-related ECL charge I mentioned earlier. Our CC coverage improved to 64% at the third quarter, 26% from 60.4% at the fourth quarter of 2025. The NPL ratio improved to 5.7% compared to 6.1% at the fourth quarter of 2025. We also saw a reduction in stage 2 balances, while Stage 2 coverage strengthened to 15.2% from 10.4% at the fourth quarter of 2025. Turning to the balance sheet. Total assets stood at QAR 183.6 billion, down 4% year-on-year. Despite the overall reduction, we continue to grow loans and advances to customers and investment securities. Loans and advances to customers stood at QAR 105 billion excluding acceptances, loans and advances increased by 6.3% year-on-year to QAR 100.7 billion, driven by wholesale across government, public sector and corporate customers. Retail lending also continued to make good progress with year-on-year growth. In wholesale, we will remain selective and we continue to prioritize high return customer segments and high-growth sectors. And retail, our focus is on accelerating growth in the country customer segment while maintaining our leadership in the expatriate segment. Investment securities increased by 5.1% year-on-year to QAR 41.3 billion as we continue to invest in highly high-quality market securities. Customer deposits stood at QAR 83 billion, down 3% year-on-year. The reduction was primarily driven by decrease in time deposits, including acceptances backed structured deposits. Importantly, our focus on improving the quality and cost of deposit base continued to deliver results with CASA deposits increasing year-on-year by 3.9%. We also actively managed the broader funding mix. The reduction in wholesale deposits was replaced by report transactions and syndicated borrowing. During the conflict period, we proactively managed our funding through a combination of short-term and medium-term reports, this was time along the maturity of certain high-cost bank borrowings and more expensive international deposits. One presentational change on the balance sheet relates to the winding up of our long-term incentive schemes the chance purchase under the scheme are now held directly by the bank as treasury shares. Our capital remains strong. The CET1 stood at 12.8% at 30th September 2026 compared to 13% a year earlier. At the same time, the total capital adequacy ratio stood at 18.9%, from 17.9% at 30th September 2025. This improvement primarily reflects the issuance of AT1 capital at alternative Bank in February 2026. Lower AT1 deductions and a reduction in RWAs. Finally, on alternative bank, it reported a net loss of QAR 46.5 million after hyperinflation accounting for the 9 months ended 30th September 2026, compared with a net loss of QAR 132.7 million in the corresponding period for 2025. Whilst there has been improvement at the operating profit level, reported results continue to be impacted by hyperinflation accounting. It is also important to note that alternative bank represents only 4.8% of the group's consolidated balance sheet. So to summarize, we continue to see resilient operating performance and disciplined balance sheet growth. At the same time, we remain firmly focused on the execution of our strategy. With that, I will conclude my remarks. Thank you, and I'm happy to take any questions.

Thank you, Noman. We can now move on to question and answers. [Operator Instructions]

This is Yew Thong LNG. I just wanted to ask a little bit more with regards to the ECL sort of assumptions that we have made in terms of changes because I had a quick look at your 9 months sort of annual statement. From what I see, it feels like it, you have actually raised base case to a higher percentage and reduce the downside potential probability. Just wondering what's your thought around that? And why are you changing that assumption over there? And where exactly is this additional ECL assumption that you've made such that it resulted in higher cost of risk?

So Yew Thong, thanks for your question. So what we did in Q1 of this year, when the conflict started, at that time, we did not have the latest macroeconomic factors because it was too early in the process. So what we did at Q1 was that we had increased the weightage of the downside risk scenario from 15% to 25%. As a result of that change, we basically increased ECL in Q1. What we have done in Q3 is that we have now a better view of the latest macroeconomic factors and those macroeconomic factors have been revised. So when we have made those revisions in the macroeconomic factors, we updated that. And then we changed back the downside risk scenario the more normalized 15%, so from 25% change to 15%. As a result of the changes in the macro eptomic environment, we recorded some additional ECL as well which is reflected in our 9 months results.

Especially ahead -- so am I right to say that some of these assumptions have changed, and it probably was -- the assumption is deteriorating or deteriorated compared to Q1, but then there's an other adjustment in terms of the probability, but net-net there is a negative impact [indiscernible]

Yes, there is an increase in [indiscernible]

So we guided in our target to a higher net cost of risk of QAR 90 million to QAR 100 million. This is entirely the reason why the actual net cost of risk for the 9 months to the end of September is 108 basis points. So if you were to strip out this macroeconomic adjustment, it would be that accounts for 13 basis points of the 180, which takes us to well within the range that we announced. So intellectually, it's right that we're over you should worry if we were still within the 90 to 100 range. You can go well -- hold on a minute. Given the current situation, you're missing 13 basis points. Hence, we're at 180.

[Operator Instructions] We have a question on the Q&A from [indiscernible]. Can you please comment on the lower tax rate compared to similar period last year? Should we expect large effect in Q4 2026?

Yes. So the reduction in the tax charge is only because the profit for the 9 months is lower than the 9 months of the previous year, that is driving the lower tax charge. Similar to last year, we are providing for the BEPS Pillar 2 tax charge with the reduction in the tax charges mainly driven by lower profit for the 9 months.

I just [indiscernible] add to that. The [indiscernible] tax is a top-up tax on the domestic profit. In Turkey, we pay our tax are associated have their own taxes as well. So on the domestic tox, the calculation is after deducting the AT1 payment and also you have allowance for fixed assets and staff costs. So net of all those assets, the tax at the 50% rate. So effective rate actually comes down. We have a second question [indiscernible]. Can you talk a bit about where you are seeing credit demand? And how is this compact impacting yield perhaps was reduction in acceptances and a bit of detail on the cost of fund movements?

Sure. So I think from a loan growth perspective, if you see the breakdown of the segments on the loan section. So on the right-hand side, you will see how the sectors have more. So we primarily see loan growth opportunities in the public and government side. So that's where we see the growth primarily coming from. You will also see that on contracting, we -- our exposure is less than 2%, which is generally a more high-risk sector. So we have stayed away from that. And real estate, as you can see, is also decreasing. So those are the primarily movement from a balance sheet perspective. As you have mentioned, yes, acceptances balance has come down. So that is more of a timing thing. But yes, compared to last year, it has come down. On the cost of funding side, as I mentioned, the key focus is that we are able to proactively manage our cost of funding, we have, through the contract period has an opportunity where we had some high-cost international deposits, which would come in for renewal. So we changed our funding mix a bit and had some low -- lower cost repo funding, which kind of helped us maintain the deposit rate. And as I mentioned, that there is a downward pressure on the NIM that will be driven by some of the cost of funding pressures because of the pressures on the domestic deposits as well as whenever we go to the market or with our EMTN issuance because post forward, we had an EMTN issuance which matured in May. So you'll see some funding pressures. But overall, we are proactively managing it and having more discipline on the asset side as well when you're looking at new business, we are looking at the returns at a business level, sub-business level, and whenever a new transaction jumps in on the wholesale side, we look at relevant return hurdles. So that's how we are approaching the situation.

We have a follow-up question from Andy. Group effective tax rate has been guided at 12.5%. It is now going to be near 10% for 2026 and in future, just this year and the back to 12.5% has guided for future years.

Yes. So I think the tax rate will be around -- for the full year, the effective tax rate will be between 11% to 12.5% as we mentioned that from a BEP Pillar 2 tax perspective on the domestic. You have -- the charges and offset again the sports levy, which comes around 12.5%. And then obviously, we have some tax coming from alternative bank. So the effective rate will be around between the range of 11% to 12.5%.

We have the next question from Rahul.

This is Rahul Bajaj from Citi. Quick questions from my side. The first one, again, on clarification on the tax point, if I look at the 9-month statement, I think that average for the 9 months is probably close to 8.5%, 9% for the effective tax. So are you alluding to tax rate to be significantly higher in the fourth quarter for us to get to that 11% to 12% effective rate that you mentioned earlier, Noman. So that's my first question. My second question is on this noncredit related provisions that you have on the P&L, that has been slightly more volatile provision or investment securities, provision on property, whatever you take there -- how should we expect that line to believe? You provided some decent guidance on the credit side of things, how credit provision will behave in basis point terms. But any idea on the noncredit provision that would be useful as well? And third and final question on -- I mean, are there parts of the loan book where you are slightly more vigilant and observing some initial signs of stress? Or there's absolutely no part of the loan book that you're seeing any stress and distance?

Okay, Rahul. I'll just take the first question on the tax. You're right, on quarter-on-quarter in Q3, you saw a lower tax charge that because we had a higher provision we had taken in the Q2. So we actually caught up for the 9 years with a lower tax charge in the Q3.

And then on the second question, Rahul, sir, on the e-sale movements on loans to customers we discussed on other financial assets, the main reason is that, that is driven by balance. So if you look at our loans due from banks, from a balance sheet perspective, there has been quite a considerable reduction in those balances between QAR 8 to QAR 10 billion. And then that has mostly driven the reversal of those numbers. From the other provision side, as we mentioned in the previous quarters that we are building some provisions in relation to the real estate book. So I think if you look at what we have by the end of the year, we will have, I think, as part of our strategic plan, we'll continue to build some provisioning as we go along. And then in relation to the stress on the book, as we touch or like what we see is on the retail side, we have seen that the portfolio has been quite resilient. We have not seen until now a significant spike in delinquency, the population has been quite sticky. So we have not seen any issues there. On the corporate side, again, from our current perspective, at least for our book, we have not seen any significant credit deterioration apart from what we are provisioning for on the legacy book. As you know, some of the sectors which are impacted by the current situation would be the contracting sector. But as I mentioned, our exposure to the contracting sector is less than 2% and then hospitality tourism is also impacted by the current situation. but we have been quite selective from a post legacy book and lending to those sectors. So touch wood, I think we have not seen any a significant credit deterioration, and we continue to provide conservatively in relation to our legacy board.

I mean just [indiscernible]. I stand by testament. It still remains surprising. We're not seeing stress in the retail book is resilient. So yes, it's -- I remain surprised, but we clearly are keeping a close eye on it [indiscernible]

We have a few questions from [indiscernible] on the Q&A box. The first question, also you mentioned you have calibrated your macro assumptions. What are your current macro assumptions for Qatar?

So I think what we have done is that we have looked at the macroeconomic factors in the country, a reduction in increase in inflation. So looking at the consumer price index. So those are the kind of key factors we have looked into as well as the volumes of imports and exports. So those factors have been that those factors are part of the macroeconomic factors in our ECL model. And every quarter, we will review and see -- assess those factors and amend accordingly.

The second question from Valentina is can you give us more color on the interest rate sensitivity of your NIM?

Yes. So I think on the interest rate sensitivity, what we expect is that any 25 basis point increase or decrease in rates will say, a 25 basis point hike in rates will increase our NII by around QAR 40 million, which equates to around 3 basis points on NIM.

The third question for Valentina, in which loan segment asset quality pressure, have you most prominent? And how do you see cost of risk developing from here? How much progress you have made in the legacy loan cleanup?

So in relation to legacy loans as part of our strategy, we are -- we have made a share that we will draw a line under the legacy book. And as part of our strategic plan and what we have communicated previously, we see an elevated net cost of risk for 2026 and 2027. And then we will see a normalized net cost of risk from 2028 onwards between 70 to 90 basis points. So as we continue with our current plan of providing that will materially take care and address the legacy book issue. And hopefully, we will be able then firmly, we believe that we will be able to draw a line under the legacy book. In relation to the sectors, which is impacting us, as I explained, you will see some impacts coming from the hospitality sector, which is mostly in the services line. contracting sector is being implemented. But there, we have limited exposure. Real estate is under pressure, but the thing is that our real estate is primarily driven by legacy book, and we have not seen any significant new bookings from a retail perspective from that perspective. So we -- with our risk colleagues are really looking at the overall position quite carefully. As I mentioned, we have not seen any significant credit deterioration so far, but -- and this is something which we are actively monitoring.

Just to add to the cost of risk point, that's net cost of risk. So we've been very clear for 2026 and '27, it's QAR 90 million to QAR 100 million and QAR 70 million to QAR 90 million in the period to 2030, which, as Noman said, we'll take care of the legacy book as we've undertaken to do as a core part of our strategy we announced in January. If you look at the gross cost of risk, you'll see it's much higher and as I said before, if we have higher recoveries, and we have a very, very effective recovery machine, we will take earlier and higher growth provisions, but whilst remaining within a net cost of risk glidepath.

We have the fourth question from Valentina. Also, you need to appreciate any color on how the [indiscernible] is impacting Qatar banking system and CB liquidity and how you are addressing the pressure?

I mean, it's [indiscernible] I said at the beginning. The banking system has been very robust. It's been well supported by the regulator. And from -- I mean, I just such a couple of examples. The net foreign currency reserves at the same bank actually went up, relates announced maybe a month ago, year-on-year and there's been a clear undertaking that money will be brought back from overseas as is required. And so far, that has not happened in terms of the QIA investments. So it's handling the situation very, very robustly and well, as you'd expect, given the wealth of the country.

And just to add, Central Bank is also proactively monitoring the situation and what we have seen in the past in Qatar in relation to blockade and similar situations. So the banking system is quite -- they have seen similar pressures on liquidity and have been able to manage it quite well and us as well as other banks throughout the contract period have been proactively managing liquidity and we are comfortable at present.

We have a question from [indiscernible] from Goldman Sachs. Can you please briefly talk through your strategy around ordinary bank over the near term and over the medium and long term?

Well, alternative bank, as Noman said, it represents approximately 4.8% precisely of our consolidated balance sheet in terms of assets. And we intend -- we don't intend to grow from that level. We have -- the strategy is very much now predicated on using alternative Bank as a gateway to Turkish corporates from a wholesale perspective to the Middle East and vice versa. So that's his strategic strength, and we've demonstrated that recently in a conference that we held in September and maybe early October and the interest in attendance at that conference was truly amazing in terms of the seniority and the attention and the focus of the [indiscernible] outcomes as well [indiscernible] tracking. So strategically, that's really one of the key competitive edges of alternative Bank. As we go forward, it's really playing to that. We need to demonstrate the synergies of being part of the group. Clearly, that international connectivity is one and then technology risk know-how, et cetera. It's really showing the best practices across the group and alternative bank will benefit from that.