Good afternoon, ladies and gentlemen. Welcome to the Commercial Bank Q1 2024 investor call. I'm Mohamed Farhan, Acting Chief Financial Officer, and I welcome you to Commercial Bank Q1 results call. On the call today, we have Joseph Abraham, who is a Group Chief Executive Officer. During the duration of the call, we'll put you on mute, and once the presentation is complete, I'll come back to you for questions and answers. Now I request everybody put yourself on mute, and now I hand over to Joseph Abraham.
Thank you very much, Farhan. Thank you to everyone for joining us today for our first quarter results announcement. As you can see, the headline number, in terms of our profit, we had an increase of profit from QAR 577 million to QAR 802 million, but this 577 includes the impact of the long-term share incentive program adjustments. When you normalize that, it's actually from QAR 708 million to QAR 728 million, which is a 2.7% growth. Now, Farhan will talk in more detail about the financials, but I thought I will just go to a very brief level to the economy and then to our guidance on slides four and five.
So in terms of the economy, much as what we guided for in the pipeline of this year, we said that the economy and loan growth remains muted, and the government has announced measures to actually stimulate the economy with about a $20 billion package, which we expect to be happening in the second half of the year. And we said loan growth is expected to be in the second half of the year. We have a strong pipeline of loans, which are all in progress, and as I said, we expect them to start coming onto the books in the second half of the year. So we remain with our guidance about a 3% loan growth for the year. Now, of course, for quarter-on-quarter, we saw a reduction in our loans by about 2%, and year-on-year was about 4.5%.
This is again primarily driven by the government budget surplus, resulting in a paydown of government and public sector loans. We have seen increases in our loan book. There's a pleasing increase in our retail lending, about 5% up year-on-year. Again, that's a smaller component of our business, but I see that as having good opportunities in the future also. The second piece is at a macro level, the Qatar economy remains very strong, with government budget surpluses, and therefore the government had the wherewithal to spend and actually stimulate the economy, and we expect that trend to happen in the second half of the year.
In terms of the guidance that we'd given at the beginning of this year on slide five, at the beginning of this year, we saw that our capital had come down because of the change asked by KPMG in the way the share option scheme was taken through our accounts. So that resulted in our capital being 14.9%, and we had said that we will come back to 16.5%-17% by the end of the year, and about 16.5%. We have come in at 16.4%, so very close to what we had guided at for the first quarter. And our CAR is total, CET1 is at 11.7%, and we remain comfortable with this guidance that we will be getting to over 17% by the year-end.
Similarly, if you look across our other areas, the only area that I would say is the NPL ratio, which is running at 6%. This is primarily due to a drop in the loan book rather than any deterioration in our loan book. So that's the denominator effect. And as we had said, we expect this could result in, you know, one or two, 10-20 basis points movement depending on the movement in the loan book. The reshape of our loan book continues, but again, with the drop in the overall loan book, the percentages, particularly of real estate, have gone up slightly outside our guidance, but we expect that to come within guidance when the loan growth finally kicks in.
Our cost to income ratio, again, we remain with our guidance, with both, at the domestic level and at, the consolidated level, which includes Turkey, which Turkey, again, is a major contributor to the, increase in the cost to income ratio last year, because of the hyperinflation, salary adjustments that have to be made, and we expect that trend to continue, but we continue to manage the domestic cost to income ratio quite tightly. Our return on equity is already, within the guidance range, and, we believe we could probably exceed it for this year. That's at a very high level. I would say that its business remains, you know, steady on course, and, we will continue to focus on building out our, various businesses: wealth management, brokerage, mortgages, all within retail, and our cards business.
And similarly, our transaction banking remains strong, generating low-cost balances for us, and similarly, as the right loans come across, which we have in our pipeline, we will execute on them. Again, we are very careful on loan growth. Just because there may not be a good opportunity doesn't mean that we will go down the risk curve. I want to make that very clear. The last eight years we have spent cleaning up our loan books, so we're not going to chase loan growth for the sake of loan growth, and we remain conservative on our risk approach, particularly for some of the private sector entities. So on that basis, to me, it's steady as it goes, and we believe that the second half of the year we'll see some upward movement in our loans and advances, which will then follow through into our overall earnings.
Farhan, over to you.
Thank you, Joseph. Regarding the financials for Q1 2024, I would like to first talk about the adjustment of prior period numbers in the statement of income. As you are aware, in the year-end 2023, we adjusted our financial statement based on the auditor's requirement for the underlying derivative on the share option performance schemes. Accordingly, we have to adjust Q1 2023 numbers, and we will have to adjust every quarter till the end of this year for the previous years. The impact of that is the income that we took on the derivative is eliminated at consolidated level, resulting in profit going to QAR 801.6 million in the Q1 2024 period as compared to adjusted net profit of QAR 577.3 million for the same period in Q1 2023.
I will now talk about the financial statement focusing mainly on slide number eight, which shows the consolidated financial analysis of the bank. On the left-hand side, we've got the quarter-on-quarter trend reported, and on the right-hand side, we've got the figures excluding the long-term incentive program, LT. This is really to strip out the impact of IFRS 2 share option scheme and the fees paid. Group reported a consolidated net profit of QAR 801.6 million for the quarter ended 31st March 2024, representing a 6.7% increase as compared to last year reported net profit of QAR 751.3 million for Q1 2023, which was adjusted to QAR 577.3 million for the same period in 2023. The overall growth in reported profitability was driven mainly by higher operating profit. As you can see, the reported operating profit is up by 18.9% year-on-year on account of lower staff costs.
If I was to exclude the LT impact, on the right-hand side, you can see the operating profit is 4.5% lower than last year for Q1 2024. On the domestic operation, excluding LT, the operating profit is 1% above last year, while at Alternatif Bank, we have a year-on-year drop in operating profit. Moving to net interest income, which decreased marginally by 3% year-on-year, mainly on the back of the higher cost of funding in the market due to increase in deposit cost. This led to our net interest margin to slightly fall to 2.7% as compared to 2.8% for the same period in 2023. We expect NII to continue to grow in 2024, with NIMs expected to maintain closer to these levels. Fees and other income fell by 4.2% to QAR 291.7 million year-on-year, mainly due to lower FX and trading income.
In terms of operating expenses, the reported costs were lower by 46.1% year-on-year, mainly due to decreased staff-related LT cost as a consequence of declining share price as required by IFRS 2 adjustment. When we exclude the impact of LT on cost, we can see that the operating expenses increased marginally by 0.6%. As a result, the group reported cost to income ratio improved to 19% compared to 30% last year. At domestic cost to income ratio, now it is at 16.7%, improved from 27.5% last year. But when we exclude the impact of LT, the group cost to income ratio increased to 25.9% compared to 24.9% same period last year as the bank continued to invest in technology to enhance operational infrastructure and product capability to support business growth.
Moving on to the net provision on loans, it decreased by 18.5% to QAR 130.4 million for the quarter ended 31st March 2024 compared to QAR 160 million in the same period 2023. Although at Qatar domestic level, the net provision on loans have increased, the main reason for the decrease was due to ECL release and recoveries at Alternatif Bank level. The net cost of risk on loans decreased to 58 basis points during the period as compared to 66 basis points in the previous period. However, we continue with our conservative approach on provisioning and expect at the consolidated level, cost of risk between 120-135 basis points for 2024. Therefore, the overall net provision, as you can see from the presentation, decreased by 12.1%, again, mainly due to ECL release and recoveries.
As of 31st March 2024, the NPL ratio stood at 6% compared to 5% in the same period in 2023, primarily due to decrease in the loans and advances exposure during the year. Had the loan balances remained the same as of December 2023, the level of NPL would have been at 5.9%. On the overall group loans and advances, which were down by 4.7% to QAR 89.7 billion, the main reason for this decrease was due to the effect of rising interest rate and the repayment of large corporates and public sector, and at Alternatif Bank level, due to the Turkish lira depreciation. Customer deposit increased by 4.3% to QAR 79.4 billion at 31st March 2024 compared with QAR 76.1 billion in the same period 2023. The increase is mainly due to increase in time deposits. Our capital ratio remains strong.
CET1 ratio and capital adequacy ratio stood at 11.7% and 16.4% respectively. Capital adequacy ratio of 16.4% is an improvement from 14.9% we reported in end December 2023. On our associates, NBO and UAB continue to deliver better performance. Both NBO and UAB have seen an increase in their profitability, where our associate contribution grew by QAR 9.2 million, about 30.2% year-on-year. Commercial Bank is working closely with both these entities in the execution of their strategies. If I were to touch on Alternatif Bank, it reported a net profit of TRY 78.7 million, QAR 8.6 million for Q1 2024 compared to net profit of TRY 11.1 million, QAR 2.1 million for Q1 2023. There is an improvement in the performance of Alternatif Bank.
However, the results were impacted by the hyperinflation accounting that resulted in non-cash net monetary loss of TRY 347.5 million for the year ended 31st March 2024 versus TRY 218.2 million in the same period in 2023. Overall, the impact of hyperinflation accounting is TRY 474 million in Q1 2024 across various lines, including non-monetary loss and those absorbed within the operating income, cost, and tax. Alternatif Bank will continue to report under IAS 29 till Turkey continues to be classified as a hyperinflation economy, and accordingly, there are again ongoing impacts to the profit and loss of Alternatif Bank. Alternatif Bank represents approximately 5.1% of the overall balance sheet while at 1.1% of the consolidated net profit. So that's an overall summary of the results that I have presented. Now, what I will go into now is the question and answer session.
If you have any questions, please raise your hand, or you can ask a question in the chat box. Okay, we have the first question from Chiro Ghosh. Please unmute yourself and ask the question.
Hi. Can you hear me?
Yes, we can.
Yeah, perfect. Just a very simple question. So what I'm understanding in Qatar that the primary loan driver going forward would be related to North Field Expansion. I'm sure CBQ might not be directly participating in it, but would try to, you know, lend to other contractors and other companies associated with it. So just want to get a sense that whether your loan growth would again be driven by the contracting and the real estate sector, or you would be looking at other things also, if you can give some clarity on the loan growth.
Yes, I think the North Field Expansion, as you said, there'll be some contractors, subcontractors, working, you know, domestic onshore. And that's where we would be looking at opportunities. Again, we are very selective in the contracting sector, but North Field is a good paymaster and, therefore and very strategically important. So we see that as a segment which is attractive within the overall contracting sector. But we are very, very careful on contracting exposures. But that's not limited to that. We also see opportunities even with some of the government and public sector as they expand or they have their expansion plans or they, you know, they might look at bringing some of the offshore borrowings onshore. We see all these opportunities coming through across both the government and public sector areas too.
I would say it'll be a combination of various sectors which will contribute to the loan growth, not just real estate contracting.
Just one more quick question on it. If you can give some kind of guidance that what kind of legacy bad loan might still be existing in your book? I know over the last few years, you have really tried to clean up your book, but there might still be some.
Yeah, what we had said, and we said even at the beginning of this year, at the last call, is that we expect our cost of risk to be running at about 120-150 basis points for the next two to maximum three years. And that's when we would have, I would say, probably, you know, I don't want to be famous last word, but probably broken the back of the legacy NPLs. And then the good thing is that our new loan formation, which has been from 2017 onwards when we brought in a revised risk approach, is running at, you know, running at about 30-40 basis points. So that's where I would say you'd see a change in the overall cost of risk. But that's probably two to maximum three years down the road.
I would say hopefully two, but I'm being conservative in saying three.
Fair enough. Thank you very much. That's all I want to say.
Thank you, Chiro. We have another question from Salem.
Hello. Can you hear me? Hello?
We can hear you.
Thanks for taking the question. I have a couple of questions. The first one, could you break down the fee income by sources, especially given the a bit constrained lending activity in 1Q? What is your overall expectation over the 2024 year in terms of the non-funding income? Another question is on the international markets. Do you think and what is the growth rate of the loan portfolio coming from the international operations? Do you have any revised strategy or plan to tap other markets than Turkey? The third one is on the Stage 2 loans, which is still significantly higher versus Qatari peers. Approximately, what percentage of that loans could be requested to Stage 1 or Stage 3, going forward? Thank you.
Thank you. I'll take the first question on fees income. Yes, we have seen a year-on-year growth in fees, mainly driven by transaction banking, credit card, and FX-driven income. Last year, we had a good amount of income coming from Alternatif Bank, especially under the Treasury money market activities. We have seen a slight drop in that coming from Turkey. Our focus remained on sort of getting the non-interest-bearing fees and other income up. So the transaction banking is one of the areas that we are focusing on. On the international market, exposure.
I will say in international market.
The third question was on the Stage 2 loans. Yes, we highlighted in December that our Stage 2 percentage is about closer to 20%. It remains at that level. We have a coverage of about 10% on that Stage 2 portfolio.
The sector is at about 15% for Qatar overall. I would say that we would probably normalize over time through migrations. So I would say that, that may be where we go in terms of coming to the sector average.
Okay. Thank you. We have a question here.
Thank you.
We have a question here from Chetan. Q1 change is approximately QAR 1 billion higher. However, under notes, 20 CET1 change by QAR 2.5 billion. I just want to go. So if you look at the capital ratio, it has moved from 14.9% to 16.5%, 16.4%. So that actually, on the retained earnings as well as the current year first quarter profit being included, gave a benefit of about 3.5%, including the Basel III new guideline allowed us to add about 50 basis points of revaluation assets, benefit that's coming through. So that's a 3.5% benefit from 14.9%, which takes up to about 17.5%.
But in terms of the new Basel III implementation, we had an impact coming from the market risk driven by equity and other AT1 portfolio, which was a 1.1% reduction. So if you see on slide number on the capital, if you go to the capital slide. Okay.
So you can see the 14.9 has a positive benefit of 2.6% on the increase of capitalization of profit as well as Q1 profit. And on the risk-weighted asset driven by market risk due to the new Basel guideline, there's a 1.1% reduction. So we are at 31st March, 16.4%. Question from Valentina. Please unmute yourself and go ahead.
Yes, hi. Good afternoon. Thank you very much for the presentation. My question is, again, on your capital ratios and targets. So I see that you have changed your CET1 targets, for this year. You have, lowered it a little bit to 11.5%-12% from last year's targets of 12.2%-12.7%. I appreciate this reflects the recent developments with the employee options scheme, but, you left your midterm target, 2026 target, and changed it 13%-14%, which seems a little bit, high versus the current level. So can you please elaborate a little bit more on how you plan to reach these midterm CET1 targets and, what are the key risks there? And, apologies, but, my connection was a little bit bad, so I couldn't hear the answer to your question on Stage 2 loans, which, I also noticed that are a bit, too high.
I was just wondering what migration rates which you're expecting to NPLs and, if you can, elaborate on the composition of the Stage 2 loans?
Yeah, look, in regard to the Stage 2 loans, what we said was that, we are about 20%. The Qatari average is about 15%. So we would expect over time to migrate down to the Qatari average of 15%, which would also mean a migration into, Stage 3 of some percentage of that. So that's where we see that, happening. So that's probably about QAR 4 billion or so, you know, if we look at absolute numbers, which would also tie in with our cost of risk figures that we are given, for forward-looking. And the second part was.
On CET1.
On CET1.
So on the CET1, yes, the five-year target that we are given is between 13%-14%. We have improved to 11.7% in Q1 2024. While the quarter progresses, you will see that the quarterly profit getting added. We have this employee share scheme also. Once we sort of go ahead with the unwinding of the scheme, we see some benefit occurring from that as well. So our guidance target remains for the five-year that we have given. And as highlighted at the beginning of this call, we will be working towards that.
Just to give a little bit more flavor on that, the unwind of the LTIP scheme because that is about 1%-1.1% impact over the next three years will result in a 1.13%-14%.
Okay. We have another question, from Bijoy. Please unmute yourself and go ahead, Bijoy.
Thank you, gentlemen, for the call. My first question is on the risk-weighted assets increase that has come in. If you can throw some light on which sectors are contributing to it.
See, the risk-weighted assets in terms of the credit book remain sort of at the same level or slightly below because our lending portfolio came down. In the new Basel 3.5 and IV guideline, which is quite punitive in terms of market risk and operational risk, we have seen the market risk related to equity and the FXs having a multiplier of 3.5 and another 12.5 times multiplication. So that's where the RW has increased for this quarter. So that's an area that we will focus on, and we'll be looking at in detail to see how we can manage that going forward.
Understood. And if you can throw some light on your AT1 exposure.
Currently, on the AT1, we have about, roughly we have associates about QAR 1.3 billion. And on the third parties, it's about QAR 600 million-QAR 700 million. So these are amounts that we have which we are thinking that manageable. And these are also within the regulatory limits of exposure that we can based on our capital.
Yeah. Thank you. And just to add to what Mr. Joseph said, that on the lending growth, there will be some foreign exposures can come to domestic market on the government side. If you can throw some light, why would that happen given the foreign will be cheaper?
Yeah, I think it's just maybe some ways to stimulate the economy. So, you know, because there is, as you said, the government and public sector has the flexibility to support the loan growth in the economy. So I think this is, obviously, the banking sector has remained muted in the first quarter. So I think there may be moves to help grow the sector. This is and the government has the way with all to be able to do that given its budget surplus. And so it has the fiscal flexibility to be able to do things like this to stimulate growth, whether it's spending on infrastructure or, or, or, you know, rejigging their loan composition profile as well within their financial capabilities given they don't have to always look at it from a purely financial basis.
Is it also possible that on the FX side, there could be some deposits can come to the banking sector to ease the liquidity? That's one question. Just to follow up on that, if you can throw some light on the net FX open position, by when do you think this is there any target set over the next one to two years as to how it will phase out?
Look, I think in terms of the deposits, I think in terms of liquidity is actually fine in Qatar, you know? In fact, when we go to the international bond markets, we find there's a lot of appetite for Qatari paper, given its relative scarcity compared to the issuances by some of our regional neighbors. So there's very strong demand for Qatari bank paper. So, from that point of view, there's no problem of raising funding or term funding for the Qatari banks. Liquidity is, I think, quite strong from that perspective. In terms of the open position, I think that is a macro issue, which will ultimately be determined by the authorities. But there's no timeline which has been set for it, as of now.
Similar to the UAE and other jurisdictions, Qatar has not imposed any Basel III NOP requirements on the capital because it's considered a pegged currency.
Understood. But if you compare CBQ versus other banks, CBQ's net FX position is larger than others and stands out. So do you have any plans at the bank level to reduce it?
We are slowly and steadily reducing. I'm not sure that our position is how it compares with all the other banks on a size basis. But I would say that we are slowly and steadily reducing it, and we have seen a reduction over the last 18 months of about, I'd say, almost 20%.
Okay. Thank you. Thank you. That's it from my side. Thank you so much.
Thank you.
There's another question again on the CET1. So the CET1 target division, some haven't heard the full answer. In terms of the guidance, I just want to tell you that our guidance has still remained around 13%-14% for the five-year strategic plan by 2026. The 2024 target is also around 11.5%-12%. Currently, we are at 11.7% as of end of first quarter. We believe that, you know, during the course of the day, we will be coming within the 2023 and 2024 guidance.
We remain committed to our 2026 guidance to be 13%-14%. We'd like to be at the upper end of that guidance based on where we see our profit accumulation. As we said, one other factor which is that the LTIP scheme impacted us by 1.1%. As that is unwound over the next two to three years, you will see that coming back into capital also. So there are a couple of factors, profit accumulation plus the unwind of the LTIP scheme, which will also benefit capital. That's why we feel comfortable with the 13%-14% and why we think we would come at the upper end of that guidance.
Thank you. If there are any other questions, please, from the audience. Okay.
Yeah. Hi. Sorry. I'm not able to raise my hand. Can you hear me?
Yes, Ankit. Please go ahead.
Yes, sorry. So just one question from my side on net interest margins. So if the interest rates remain higher for longer and because there are now expectations of lower number of rate cuts in the second half, what would be the implications on our margins?
I would say that where we are is we're trying to hold the margins steady. At the beginning of the year, we had said that we were at 2.8%. We said we could see a 10-15 basis points downward potential given at the beginning of the year, we said that we thought interest rates would remain at these elevated levels and that any cuts would be right at the end of the year. This was our view. That's why we guided for a 10-15 basis points reduction. We continue with that guidance. We could see a maximum, of course, we will try and preserve our margin. Like we said, we could see another 5 basis points coming off. That's where we see the downward trajectory.
Okay. No further questions.
Just one more, sorry, follow-up on the capital ratios. Do you think the central bank will implement this net open position guidelines on net open FX positions, like imposing a capital charge for banks having net open? Do you see a risk in the next two or three years?
Frankly, as I said, at the beginning of this year, that would be very challenging for the entire banking sector. And it's not being implemented in our neighboring areas like UAE or, I think, Saudi because they've got the logic of a pegged currency, which Qatar is also a pegged currency. So on that basis, we had said that the maximum, we might see a little bit of phasing of any requirement. We have not seen it, the guidance is that not to be implemented so far. So like I said, I don't see that happening in the next two to three years. The maximum would be some element of phasing, maybe some percentage being asked to be added, you know, included in your capital going forward. So I would see a phased approach as the maximum implementation likelihood, the worst-case scenario.
Thank you. I don't see any further question. Before we close, Joseph, any closing remarks, please?
Yeah. Thank you very much for joining us today. As you know, Zubair, who's been handling our investor relations for many years and is well known to all of you, has decided to move to London. So we'd like to thank him. And of course, it's very important that we keep open the access and channels and the transparency with regard to questions. So we had Muhammad Afzal who will be joining us and, of course, Farhan. And so they'll provide you all they have already provided the details. But Mohamed Farhan and Muhammad Afzal will be taking over the investor relations function till we get a full-time person, so. Thank you again.
Thank you.