Good afternoon, ladies and gentlemen. I'm Zubair Chaiwala, Head of Capital Management and Investor Relations, and I welcome you all to the Commercial Bank Q3 results call. Today on the call, we have Joseph Abraham, Commercial Bank's Group Chief Executive Officer, and Mohammed Faran, Head of MI and Acting CFO. You will be put on mute for the duration of the speaker's presentation, and I will come back to you before the Q&A. I now hand you over to Joseph Abraham, the Group CEO. Joseph, over to you, please.
Thank you, Zubair, and welcome to everyone who's joined us for this call. Thank you for joining us. For our quarter three, our profits grew by 7.5%, which is slow and steady growth. This is primarily coming from good fee income and also from some loan growth. I would say overall, the Qatar economy at a macro level remains in a very, very strong position, given the expansion of the North Field and the gas inflows, which are expected to start coming through over the next few years, and a continued strong demand position for gas.
So if you see at a country level, Qatar's rating outlook has been revised to positive by both Moody's and Fitch, and has been upgraded from double A minus to double A by Standard & Poor's. So at the macro level, you have a very strong outlook, and you're seeing that reflected in the budget surplus, which is around QAR 29 billion, which is just under $7 billion or $8 billion, but as a percentage is quite significant, and similarly, the current account surplus. And that position is expected to continue for the next few years, particularly as the significant chunk of expenditure on the World Cup has now been subdued. If you go one level below to the underlying economy, both private sector and government, you'll see that there has been relatively subdued growth in the private sector particularly.
And, as we said, I think the government has also been repaying some of its loans at the GREs because of its strong, budget position. So that's kept loan growth a little slow. However, the government has also announced plans for about QAR 70 billion, which is about just under $20 billion worth of investment in infrastructure and other sectors of the economy, which will primarily happen by the end of this year and into 2024. So that will help to stimulate some growth in the economy. And, the most important thing is the government has the wherewithal. It has a significant, financial position to be able to stimulate the economy as is needed. So that's the macro situation.
As far as the bank is concerned, as I said, we showed a 7.5% growth in our profits, which is steady growth, which is what we are going after in terms of our growth. As I said, the private sector growth is a little muted, and at the same time, the high interest rates are obviously affecting people with leverage. So, particularly contracting is a sector which is quite vulnerable, and also, I'd say some of the hospitality sector. But we are careful in our approach with these sectors, but we hope that the government's stimulus will benefit these sectors in particular. At the same time, we're not chasing growth because we want to make sure that what we do doesn't appear as an NPL in a few years' time.
So, we're not chasing growth at all, but we're also consciously building our retail business. Now, we see retail as an opportunity. We have a good brand, we have a good client base, and certain measures taken by the government to promote residential ownership by both foreign residents and non-residents is an opportunity. We're the first bank to take a roadshow to outside Qatar to market permanent residency programs in Qatar. We got a good response in India. We took it to the region also, Saudi, but we're also going to East Asia, where we expect to see good results. So our aim is to build a good mortgage portfolio, the small ticket mortgages linked to non-residents and foreign residents, and also Qataris who are building their own homes.
So that we see as a leg, and of our loan growth, about 30% came from our retail business, which is probably the highest contribution over the last few years. So we see this as a business that will continue to grow, and plus also fee services, which will come off the back of, that loan growth, particularly in wealth and other areas. Overall, if you look at the five-year targets and our guidance, you'll see that, you know, in terms of most of our ratios, we're within our, our figures. Basically around CET1, we expect. We hope to be achieving the CET1, or at least be in the 12% range. Similarly, capital, I think, one of the challenges is that, our CAR gets eroded by the Turkish lira depreciation.
The movement that has been a significant impact on, because we have to that works through our foreign currency translation. So that is. But hopefully now that we're seeing the reversion to orthodox monetary policy in Turkey, we hope to see that, but we expect hyperinflation to continue, given that inflation remains high. So the hyperinflation effects will remain. But in terms of capital, I'd say that's one of the factors which has maybe caused us to be at the lower end of our, particularly around total capital. Similarly, risk management, we are within the guidelines that you want. There's a slight, if you take the first three quarters at about 91 basis points, but that's because we usually save some provisioning for the last quarter when we have the discussions with the auditors and the regulators.
So usually, the last quarter has a bit of a chunky thing. So we expect to be within the, the ratio, ratios. Certainly in our loan book composition, as I said, the biggest challenge has been the reduction in our loan book, which has mainly skewed some of these factors. But I think fundamentally, we remain committed to that. The cost income ratio, again, this one, as you've seen, our cost income ratio now is on adjustment about 24%. And for the consolidated and about 20 to-
Twenty.
20.9% for the domestic. You know, when you look at the figures, it looks like a significant increase in our costs. A lot of it has come from Turkey. Two-thirds of our cost increase, cost increase of about QAR 127 million, but 83 came from Turkey because of the large salary and other inflation-related changes that we had to make. So as you can see, that has been a factor which has been impacting our cost income. The balance, about QAR 40 million in the much larger domestic businesses, are primarily around investments in our wealth management business, where we see a lot of potential.
Investments in our branch service network, where we've injected young, highly talented people into the bank, and we're seeing that benefit in sales and digital migration, and also in some of our own property management to reduce costs. So overall, I'd say that's the reason why the cost income ratio is outside our guidance, but we hope unless there are, you know, if inflation comes down in Turkey, then that drag on our cost income ratio will come down, but otherwise it'll still be there. And return on equity, I think we're within the; we are targeting towards the figures that we have maintained.
So overall, I'd say that, you know, in this environment, slow and steady growth is preferable to very large and rapid growth, and we will always prioritize risk over growth, conservative risk management. So, that's the, in a sort of summary. And I would say we've also had a very strong contribution coming in from National Bank of Oman and also, United Arab Bank. They're up about 40% year-on-year in terms of the contribution, and we expect that trajectory to continue because, both businesses are on a good momentum and, with good teams which are running them and, moving in the right direction. So that's at a sort of high level, economy.
I'd say slow and steady growth is what's going to happen, and with positive outlook, perhaps from the stimulus measures from the government, risk management, we're not seeing any large surprises or anything coming in, but as I said, we've been conservative in booking new loans. And I think on the rest of it, we'll continue to manage the bank tightly in to continue to achieve our objectives. I'll hand over to Faran, who'll be going through the financial. Just for clarification, Rehan, our CFO, has returned to Canada to where his family is based. So Faran is acting in his place, and our search for a replacement CFO is well progressed, and we expect that to be complete in the next two months or so. Over to you.
Thank you, Joseph, and good afternoon, everyone. I'm going to focus mainly on slide number 8, which has the financial analysis. Just to recap, on the left-hand side, we've got the normalized columns, and on the right-hand side, we have the reported numbers. This is mainly to strip out the impact of IFRS 2 on both operating income and costs as a result of the share performance schemes that we have in place. This will then normalize the numbers, allowing us to focus on the underlying trend quarter-on-quarter. Please note that all the numbers are in QAR unless otherwise stated. The group reported a consolidated net profit of QAR 2,365 million for the first nine months of 2023, up 7.5% compared to the same period last year.
The overall growth in profitability was driven mainly by a combination of high operating income, higher recoveries and improved performance from our associates. As you can see, the normalized operating income is up by 8.3% year-on-year, on account of both high fees and other income. Net interest income decreased marginally by 1.3% year-on-year, on the back of decreasing net interest income at our native bank. We have managed to maintain our net interest margin at 2.7% for the year. Normalized fees and other income grew by 39% to QAR 1,264 million year-on-year, mainly due to recovery of our investment income. In terms of operating expenses, costs were higher by 15.2% year-on-year.
As we know, Turkey is in a hyperinflation situation, hence staff costs and G&A are significant. The bank, we continue to invest in our digital and automation space, wealth management, upgrade of our retail channels and in our staff, especially including the national talent. Most of these trends are to enhance operational infrastructure and product capability to support business growth in the future. As a result, group cost income ratio increased 24% compared to 22.6% last year. We believe cost income ratio will continue at similar level due to hyperinflation in Turkey. At domestic, CB has a cost income ratio of 20.9%. Thanks to that, our operating profit improved by 6.3% year-on-year....
If I go to more on the net provision line, it decreased by 3.2% to QAR 721.4 million, as compared to QAR 745.5 million, same period last year. Net cost of risk on loans decreased to 93 basis points during the year, compared to 95 basis points during the last same period last year, mainly due to high recoveries. We continue our conservative approach on provisioning and expect cost of risk between 120-125 basis points for 2023.
As of 13 September 2023, NPL ratios stood at 5.3% compared to 4.5% in the same period 2022, primarily due to drop in loans and advances, while our coverage ratio strengthened to 113.4% from 107.6% in the same period in 2022. This is reflecting the bank's continued prudent credit risk management. However, NPL have reduced quarter-on-quarter from 5.5% to 5.3%. Despite the higher operating expenses and the impact of hyperinflation in Turkey, net profit improved by 7.5% year-on-year.
Moving on to the balance sheet, although group loans and advances were down 7% to QAR 91.5 billion year-on-year, they have, in fact, improved quarter-on-quarter by 2.4%, thus reversing the trend that we have seen in the last few quarters. Customer deposits, on the other hand, decreased by 13.3% to QAR 74.7 billion, mainly due to drop in time deposits. We continue our focus to increase our low-cost deposit, which is helping us to manage our cost of funds. On our capital, this remains strong. CET1 ratio and CAR stood at 11.7% and 16.4%, respectively, compared to 11.3% and 17% in the same period last year. The decrease is driven by mainly the Turkish lira depreciation.
Despite this, our capital ratio remains comfortably above the minimum capital requirement. On our associate, both National Bank of Oman and UAB, continue to give a better performance. Both NBO and UAB have seen a continued increase in their profitability. Commercial Bank is working closely with both these entities during execution of their strategies. Alternatif Bank reported a net profit of TRY 432.7 million, in QAR 39 million, compared to a net loss of TRY 115 million, QAR 15 million, in the same period last year. This is despite the sizable impact of our hyperinflation impact. CB will continue to report under the IAS 29, Turkey continues to be classified as a hyperinflation economy, and accordingly, there will be an ongoing impact on the profit and loss of CB. However, we expect this charge to be not material.
Alternatif Bank represent across 5.8% of the overall balance sheet and 3.3% of the consolidated net profit. So that's an overall summary of the nine months results. I will now hand over to Zubair, and then we can go into question and answers.
Thank you, Faran. We will now start the Q&As. If you wish to ask a question, please use the Raise Hand feature, or you can send a text message to us. If your name is announced, please unmute yourself, announce your name and organization, and you can then ask your question. Once your question is answered, please mute yourself and allow others to ask their question. We already have questions in the queue, so I'll move to the first one, from Chirag Ghosh. Chirag, please go ahead, unmute yourself and ask your question.
Can you hear me?
Yes, we can, Chirag.
Yeah, fine. So first, congratulations for the nice set of results, better than I think, expectation of most analysts. So two questions. First is related to Qatar. So can you give some guidance or, give us some clarity on the size of your loan book from the contracting and the hospitality sector, from where you are expecting some concerns? And also the retail loan which you have disbursed now, are these fixed rate or are these completely fixed rated loan or are they a floating rated loan, especially the mortgage part of it? That's my first one, and second is related to Turkey. So the interest rate have spiked, surged over the last, quarter. So are you been able to pass these kind of high interest rate to the customers?
Do you expect to see a spike in asset quality from this higher interest rate? These are my two questions.
Some guidance, contractors, contractors.
Yeah, look, as I said, we've been very careful on contracting since over the last 5 years. So our relative exposure is to good name contractors, and I would say it's in the 2%-3% of our loan book at a macro level. So, but we don't see any significant concerns in our loan book. So that's as far as we... Because it's something that we were very careful about over the last 4 or 5 years, after we took some hits in 2016. So then we tightened up considerably. So that's put us in good stead. In terms of the retail bank loans, we have given. We're trying to build a retail mortgage book.
I think this is, our personal loans have also grown, and our credit card outstandings have also grown, been across these three sectors. The first, the credit cards have a cap of 12%, which is at the government regulator-mandated level. Mortgages, there's no cap. As we try to build it, we might put in some fixed rate for the first year or first two years. That, but that's just, I would say, a tactical maneuver, and it's not yet of a significant size to have an impact on our overall interest earnings, I think. So that's something we will look at tactically.
... What was the third Turkey? Turkey, in terms of the interest costs, we had actually reduced our loan because they were sort of negative yielding, and with these increasing loans have become positive yielding. But we have our Turkish team on the call now, so they might want to answer this with more specific detail. Do you want to dial in Levent as well? Can you please answer this, Sinem, Sinem? Hamdi Bey, can you please answer this question regarding what is the impact of the interest rates on your loan book, and will it create increasing defaults? I think that was-
Yeah.
Hamdi Bey? Okay, you're on mute. You're on mute. Can you please unmute and speak? I think we're having a few technical problems getting Turkey on the line. Sorry about that.
You can answer this later also, I mean.
Okay, we'll answer it later, all right? When you get some back, I think-
Just one thing, a follow-up. The hospitality is part of the services line item, right?
We are unmuted now. We can answer the question from our side, please. Hamdi Bey, close your phone.
This is Hamdi Bey from Alternatif Bank. Yes, we passed interest rates rise to our customers. Our loan duration is very low, approximately two months in Turkey. Actually, interest rate spike was the peak we are expecting previously, so we are prepared. And with very low loan durations, we passed the deposit rates, the increase to loan customers. This for second question, we don't expect any worse effect on our NPL ratio from interest rate rise. We are working with A-plus rated customers in Turkey, so we don't have any worse expectation for our NPL ratio.
Thank you, Hamdi Bey. All right. Hamdi Bey, you had a follow-up question?
No, no. I just wanted to know that the hospitality sector is part of the services, right? It's 26%. Am I right?
Yes, it does.
Okay, cool. Yeah, that's all from my side. Thank you.
Thanks, Leo. Our next question is from Bijoy Joy. Please, go ahead and unmute yourself and ask the question.
Thank you, gentlemen, for the call. I have a couple of questions. Let's start with my first question on investment securities. I see reclassification from FVOCI and FVTPL to amortized cost of some QAR 1.6 billion. If you can throw some light on that, what exactly it is? And my second question is on the retail loans. As you said, you're focusing on the mortgage side. Is there a change in strategy, or do you have a target set that it should be X% of the total loan book? And my third question is on cost to income.
So with the increase in inflation over the last couple of years, and you know, your neighboring countries are going through a lot of increasing economic activity, how do you plan to retain talent and still meet your targets for 2026, given you're also focusing on retail loans? Thank you.
Okay, let me start with the last one first.
Um, okay.
In terms of our sort of cost management, and as you said, stuff like that, I think Turkey is, let's say a little bit dependent on the inflation outlook there. But it's so that will, you know. But we're trying to manage costs tightly there and reducing headcount also so that the impacts are lower. We're also getting a new CEO on board in Turkey in the next few months, so that will call for a reshaped strategy. So Turkey, I think, as I said, is a little bit due to the inflation outlook there. In terms of the business in Qatar, the local business, we have a long time ago moved to a system of incentives, where we are much more variable-based pay. And this, for us, is...
And share option-based pay. So, that's how we maintain our costs, and also because it's linked to the performance of the bank. We don't have annual salary increases. We're one of the, I would say, probably unique in that aspect. We don't have annual salary increases in Commercial Bank. But what we do is we have variable pay, which has been growing significantly every year as our performance has improved. And we've also created a share option schemes, which are based on... And most of the share option schemes have paid off with very significant multiples, often up to ten times what was the original investment. Given that the share price has moved up over the last few years, the return has often been ten times.
Staff have been allowed to participate in that, and we've also handed out those as... So that's how we manage to maintain and retain talent and manage our costs. I think that's going to continue. As long as the bank does well, the employees will do well, and through this performance and variable link pay.... That's our philosophy, and also share options. So, and the second?
Retail loans target.
Look, I think the target for mortgages, we would like it to be a significant proportion of our loan book. You know, I think in any business, it should be, I think, a retail diversified loan book should be 15%-20% of your loan book, to provide sustainability, long-term stability. However, we are far from that. So I would say that's probably a number of years down the road. Our focus right now is on building it in the right manner and the right form, rather than building large commercial mortgages to commercial developers. This was in the past, what used to happen. So ours is much more at the individual level, which we think will provide diversification, a sustainability of revenues, and stability in your overall risk provisions. So that was on that.
I would say, we would ideally like to be 15%-20% by loan book, but that's a long way away.
On the investment securities, we have sold off from our FVOCI and trading book, and we have purchased into the held-to-maturity book. The main purchases are obviously pertaining to government securities, and that's what you see in the financials as well.
Next question.
Next. So, Bijoy, I hope that answers your questions. Can we move to the next one?
Yeah. Thank you. Thank you so much.
You're welcome. Our next question is from Edmond Christou. Edmond, please go ahead and unmute yourself and ask the question.
Hello, good afternoon. Thanks for the presentation. I have a few question, which I already shared them on the chat room. Let me start with the first one. I think you highlighted that the high cost, borrowing cost has impacted the appetite for private sector for credits, which clearly shows on the industry data from the central bank. My first question on this is, how much from what you have lent to the private sector, how much you were able to pass as a spread? How much you cut the spread in order to not hurt your private sector or the corporate client? The second question is, what's your expectation for next three year credit growth, given that interest rate could remain higher for longer?
The other part of this question is, what the stage two, I think, is around the 18% of your loan book, which has been coming down, and I think the quality of the loan book has been improving. It's 18-19%, to be honest. So this is, I assume, this is real estate, commercial real estate, and this has been restructured exposure. So what's your view on if we remain in a high interest rate environment for longer, what's your expectation in terms of the pressure on the restructured exposure and potential downgrade into stage three into 2024? The last question is on Turkey. It's not, you know, will be very useful to see if you expect margin in Turkey to expand or improve in the coming quarters into next year.
We see comments from other banks that next year, margin could see, could be on a positive spread. If this is the case for, for your bank, you know, it will be much appreciated. And, what's your view also on, Fed, cutting rate into next year? Do you see your bank benefiting from it in terms of optimizing the cost of funding? Thank you. Sorry for asking a few more than three questions.
Sure. Thank you. That's fine. No problems. We're always happy to take questions. In terms of the high interest rates affecting demand for credit. Let me start with the first question about the high interest rates affecting demand for credit. Look, I think there is demand for credit. What it has probably done is made us very, very careful on extending credit. And because at these interest rates, people need to be generating pretty good returns to be able to service the interest. So we are very careful now on extending new credit, particularly in the commercial side. So I would say that's where it is. Where we've seen the demand for credit going down is coming from the government and GREs, because the governments, as I said, their budget surplus is leading them to pay down debt.
So that's the reality, and that's why loan growth is relatively muted across the whole Qatari banking sector. And, the government's budget surplus position will continue into 2024. Therefore, we don't expect a huge amount of government GRE-related borrowing. We think a lot of borrowing may come from-- not borrowing, but probably project finance related to the North Field expansion, you know, the onshore components, and similarly to some of the QAR 70 billion, which is $20 billion of spend that the government has announced for the next year. So there'll be some effect from that. I'm, I'm not quite sure whether you'll have a huge boost in... So I would still say that loan growth would be in the 3%. I think that'd be a good loan growth to have next year. This is my, my view.
It's, you know, conservative, good quality loan growth. That said, if you get 3%, I think that would be a good, good outcome for, for us, given the overall, environment. Stage Two. In terms of Stage Two loans, look, I think, obviously, high interest rates do impact people, and you could see some migration. However, for us, the most important part is no surprises coming through in our loan book, and I think that's the positive part. So we're actively monitoring most of, the clients in Stage Two. And, so we don't expect to see a huge migration. And, and we're also arriving at some solutions with some of them. So I would say those figures will remain broadly, you know, where they are today. So, that's, that's our, our outlook.
Because most important is, we've done a thorough analysis of our book, and we don't expect to see too many surprises coming through... which would be of concern to us if there were new ones suddenly figuring out or sudden deterioration in the outlook.
Turkey NIMS, will you expect it to improve in the next quarter?
I would say Turkey NIMS, we would expect them to improve, because now that the interest rates have risen on the loan book, you will see the benefit of that. Because earlier, Turkey was having negative yielding loans. So you should see that. But again, I will hand over to Hamdi, who will be able to give a more, nuanced view on that, given that the Turkey regulations move really quickly and there's been a plethora of them over the last, year. Hamdi, could you answer that?
Yes, Mr. Joseph. As you say, in Turkey, there is a normalization.
expecting only 3% loan growth.
This normalization will-
Yeah
Help us to improve our Net Interest Margin in next year. That there is a commercial loan rate cap currently in commercial loans. With the interest policy rates, this cap is increasing, and we are improving, improving our Net Interest Margin with interest, with increasing commercial loan rates.
Okay. Thank you. Just a bit unclear. So just to make sure people understood that with, there was a cap on commercial loans, with these increasing interest rates, those caps are being increased or the loan rates, so that should benefit the interest margin.
Okay, this is very clear. Just a follow-up on this.
Yes.
Yeah. Yeah, just to follow up, if possible, on this. You talk about LNG, LNG growth and credit coming into the contracting sectors. You are not interested in growing into commercial real estate, but I will assume subcontractor will be demanding more credit going forward. You have 3% exposure, so you have a room to grow it. Is this an area where we can see this percentage growing because you want to take some market share?
Look, we will do good quality counterparties. So we are definitely extending credit to the contracting sector who's doing NFE-related contracts. You know, and they are either subcontractors to the main contractors for the onshore component. So we haven't said we're not going to do, but we will, particularly NFE is a target area for us for the contracting sector. So we could see that growing over the next year or two. Definitely.
Thank you. Good luck.
Thank you.
Thank you, Hamdi. Our next question is from Waleed Mohsin. Walid, please go ahead and unmute and ask your question.
Yes. Thank you much, Zubair. Thank you for the presentation. Three questions, please, from my side. Firstly, just on your comment about 3% loan growth for next year, I also wanted to get a sense if this is the outlook that you have more medium-term, or you would expect that some of these projects at the start coming through would change the shape of loan growth more medium-term. So that's one question. Secondly, on your net interest margin, if we take out the Turkey movement in this particular quarter, the domestic net interest margin seem to have declined on a sequential basis. So just wanted to get your kind of thoughts around it. Where do you see this settling? What should we expect in terms of trends on domestic net interest margin going forward?
Because Turkey could be volatile in the, in the near term. And my third and final question is around your asset quality. So I mean, the way we were reading the, the staging is that there's a level of stability now. In fact, we think that stage one is showing signs of improvement, with the reduction in stage two and three. Now, where are we in terms of the, Qatar Central Bank review process? Is it largely done, and we could expect a movement towards more normalized credit losses next year?
Look, as far as, let's let me start with the last question first, about the, the review process, every year is done in the last quarter. So we'll be able to get the final figures for this year. You know, you'll see it after the results, obviously, in the last quarter. But now we expect it to be in the, even though we're running at about 91 basis points cost of risk for the first three quarters, we expect it to be in the 120-130 basis points, for cost of risk for this year. And we have said previously that we expect 2024 and 2025 to be similar, given our loan book, given where we expect, you know, things to be. We're being conservative. We think 2024 and 2025 will also be at this level.
Then we expect as from 2026 onwards, because as you said, the new loan origination since 2017 has been very different in quality. So the new loan origination is probably generating maybe 30-40 basis points of NPL. And that is coming in maybe in, like, in credit cards and, you know, personal loans. But that's well below our legacy loan origination and with cost of risk. So we expect by 2026 onwards that we should see the benefits of quite a, you know, better loan origination, better quality, and also the cleanup of our legacy loan book and also some recoveries. So I think that would be our message.
You know, we should see that next two years will be at this level, and then the third year, 2026, should start seeing the benefit of it coming down. You know, I would hope it'll be below, you know, move towards that 60-80 that we have recommended, but definitely below 100. That would be our... It depends also on some recoveries, you know, the phasing of recoveries. But that would be our, our goal, and our target.
On the domestic NIMS?
Yes. On the domestic NIMS, I think, look, have you got the exact figure?
Domestic NIM, sequentially, right, it's gone down by about 10 basis points. Look, this is keeping in line with the original guidance that we have given. We expect NIMS to have, to, to go down by up to 10-15 basis points. Although our challenge is to maintain NIMS, so which we have managed to do that through a combination of factors. But domestic NIMS have gone down in line with what we had anticipated.
Yeah. I think the domestic NIMS, as we've highlighted earlier, we see some pressure there because two factors. One is, you know, while the normal theory is that, you know, as interest rates go up, banks benefit. Beyond a certain point, it becomes very difficult to pass on the full extent of interest rate to your clients. This is for two reasons. One is, it starts straining their creditworthiness. Two is because the government has paid off a lot of their loans, and because there is very limited loan growth, you've had some irrational pricing competition from some of the peers, where they are pricing below cost of funds. Now, we're not getting into that game, but we will defend that good quality loan book against such incursion, which then puts some pressure on the net interest margin.
So that's the reason why, you know, there has been some NIM compression in the domestic book, which has been offset by Turkey. You're absolutely right on that point. But, we would expect, you know, if, interest rates start declining. Look, I don't want to get into the prediction of when the Fed will cut rates, but if they do decline, I would expect it to be beneficial long term for the bank. You know, contrary, again, to the usual thinking, because our cost of funds starts going down immediately, particularly on our, international book. And, we are able to also, you know, we try and manage that downward trajectory of, cost of funds versus, income. So I think those would be the reason why it should be beneficial for us.
In terms of the loan growth, whether it's 3%-5%, I would like it to be 5%, maybe in 2024. But look, I would say 3% for the next few years is probably, you know, depending on interest rates, again, we don't want to go building a huge book at very high interest rates when, you know, people's creditworthiness may be affected. So we would conservatively put 3% as if these interest rates remain higher for longer, as you said.
Thank you so much. Just a couple of quick follow-ups. So on NIM, if I understand correctly, if rates stay the way they are, there could be further pressure on domestic NIM. That's one follow-up. And then secondly, on the cost of risk, I mean, 120-125 basis points for the next couple of years, pretty elevated number, looking at the history of the bank. So, I mean, it seems to suggest that there is more cleanup to go. Is that a fair way of thinking about it?
I would say there are two things. One is, in terms of the domestic NIM compression, I would say yes, there's probably more downward potential than upward. But, we are trying to hold our NIM, you know, that's why we are building certain higher yielding retail assets than your normal corporate loans, et cetera, as that mix and whisper. Definitely, we'll try and protect it, but I would say that there's more downward potential, whereas our goal is to try and maintain it at current levels. So that's one point. In terms of the... Yes, you're right, we have been originating quite well, but remember these elevated interest rates. As I said, we are conservative in our output. We don't want to be giving guidance, which then we can't achieve.
So I would say this is a conservative figure for the next two years at 120-130 basis points. Because at these interest rates also, you might get a few people facing challenges, and if they remain higher, then obviously that puts more pressure on people. So that's why we have said for these next two years also, we assume it will be conservative, to be conservative, we assume these higher rates.
Got it. Thank you so much. That's very helpful. Thank you.
Thank you. Thanks, Waleed. Our next question is from Deep Shah. Deep, please go ahead and ask your question.
Hello. Can you hear me well?
Yes, we can hear you.
Yeah. I have two questions. One is related to mark-to-market losses. So what are the mark-to-market losses for the bank as a percentage of capital? And how does it compare to overall Qatar banking industry? And second is related to loan book. I mean, how much of the loan book is related to currencies which are other than Qatari riyals? And how much of the deposits are other than Qatari riyals?
Yeah, the mark-to-market losses, so that's the fair value OCI. That's as a percentage of our, of our capital, is a very small number. Overall, our capital is in excess of QAR 20 billion, and this is only about QAR 400 million, give or take. So, so it's a very small percentage overall. But yes, it, it has flipped, because of the way the world markets have moved. And that's the reason why it, it causes, an issue on the capital. But you know, like every QAR 100 million causes about 0.1% reduction in our capital. And on the loan book, our, majority of our loans, are Qatar-based, and most of it is in Qatari riyals.
There is some dollar-based lending, but that's not material to the overall loan book, because our overall institutional FI lending and all would be probably, you know, about 5% of the loan book.
Let's get the exact figures.
We can get the exact figures.
I think it's better we get the exact-
I can get back to you on that one. Hope that answers your question.
Yeah.
I think every foreign currency loan extended outside the country needs central bank approval. So I think that obviously takes time, effort, so that it probably restricted growth for the banking sector as a whole, of the external loans in foreign currencies.
... Yeah. Also, of the funding mix or, or total liabilities, how much is it in, not in Qatari riyals?
In the funding mix, we have debt securities and other borrowings, which is about close to 19%. That's entirely our long-term borrowing, EMTN, and syndicated loan borrowing. That's, that's primarily in US dollars.
Just last question on, of the total loan book, how much of that loan book is variable rate loan book?
Our entire loan book is actually variable. It's either linked to foreign loans, obviously, linked to LIBOR or SAIBOR, and the local loans are all linked to QMR, the Qatar medium-term lending.
I mean, that's the theory.
Yeah.
You know, in reality, especially in the local book, in every rate increase, there's a bit of a negotiation. It depends on the relative bargaining power. It's not a perfect market, as in, the international ones just reprice, but the domestic ones are negotiated. And this is what I said: as the rates went higher, your ability to pass on the full amount was challenged, and that's why there was a NIM, NIM compression on NIM pressure.
Thank you. That's all from my side.
Thanks, Deep. Our next question is from Varuna. Varuna, go ahead and ask your question, please.
Hi. Can you hear me?
Yes, we can.
Yeah, yeah. So I have three questions. Quickly, the first one related to the expenses. Now, these normalized expenses is around QAR 350 million for the third quarter. I just want to know whether this is like the new base, because now I know the cash had an effect on the... Sorry, effect of Turkish inflation is also, you know, kind of pricing up until now. So can I assume that this is like a flow from here, the expenses can be kind of increased from this level?
The swing factor is Turkish inflation. That's really the swing factor. I think, so I think that may cause some spike, but the rest of it, we plan to keep reasonably well controlled, I'd say.
But this is, this is like the base, right? From here, it can increase if the inflation keeps on, you know, affecting the-
If the Turkish inflation keeps on, but we're also taking mitigating measures in terms of headcount, et cetera, which will need to be managed, as the Turkish team will obviously have some goals around that.
Okay, fine. Now, second one is on the non-funded income. Now, I know that there is an offsetting impact on the non-funded income when it comes to this performance team. So effectively, even fee income has substantial increase in third quarter. I just want to know whether this has come from Turkey? Because the thing is now, your hyperinflation adjustment is also very high. I mean, even net-net, net of that, your profit, I think, you're kind of breakeven, I think, in Turkey. So, is that primarily coming from Turkey, this you know non-funded income increase?
Yeah. Most of the income, actually, what you see increasing, coming from Turkey, from the treasury money market activities.
Got it. Got it. Okay, that's clear. My last question is on the deposit side. When I was, you know, it was very interesting to see that your current and call deposits actually have, you know, you have recorded a favorable movement instead of, you know, overall deposits been falling. So what is happening here? What, how have you managed to achieve this?
So for us, we are very clear, you know, our deposits, you know, high-cost deposits can be attracted to the bank at high cost, and then surprise came. So that's not our core business focus. Our focus has been, for the last few years, on building a transaction banking business. And this is very important, because that's ultimately what builds long-term low-cost funding for the bank. We're not an Islamic bank, so we don't get the benefit of, you know, some of those, you know, zero interest funding that they, that they are, that are available to them.
So we have built this, and over the last six years, our low-cost deposits have gone from QAR 18 billion to QAR 31 billion through a combination of, first of all, just increasing our customer base, doing more and more what the customer does. We have won also a number of mandates. You know, as an example, we won a mandate for the largest, you know, gas station of Woqod in the country. So this is how. So that leads to increased cash flows going through the bank and obviously sitting with us. So that's our focus and continues to be our focus to build a transactional banking business, which will then lead to more profits.
Okay. Thank you, Joseph. Now, in terms of the cost of these funds, you which you call low cost, like, mostly these are current and core deposits, what's like the ballpark, you know, funding cost on these deposits, deposits?
See, earlier it was zero, you know, but obviously, as the interest rates have risen, people are pressing for some. So what we try and do is we try and migrate them to, you know, call accounts, which will be giving, say, 1.5%, and then all the way up to 2%-2.5%, depending on the bargaining power again, yes, or, and the amount. So our goal is to move them away, prevent them from either leaving the bank or, or from moving to a fixed deposit at 5% or 5.5%. So if you can get it in the 1.5%-3% range, that's still benefiting the bank.... Sounds good. Yeah. Thank you. Thank you very much.
Thanks, Varuna. Our next question is from Aybek Islamov. Aybek, please go ahead and ask your question. I think Aybek has not been able to. So there's a question on the chat.
Apologies. Uh,
Sorry, yeah, Ibek, go back.
Yeah, I'll be very quick. I can get some questions on the chat. I just want to confirm, you know, when you look at the Qatar domestic business, it looks like funding costs are already at the peak. And, you know, in a scenario we have rates staying high for longer, would you be able to pass that higher funding cost onto your borrowers, corporate borrowers in Qatar? There was a similar question earlier. I just want to confirm, should we expect margin expansion if rates stay high, higher for longer, we have no rate cuts, Qatar domestic?
I would say, yeah. I would say in the domestic business, the pressure is to maintain your margin. I would, if the rates remain higher for longer, you know, it's the challenge is to pass on the full extent of the rate increase. Plus, as I told you, there's some irrational price competition from some competitors who are trying to grow loans in a low growth environment, so they're underpricing. So I would say there's more downward pressure than the, chance for an increase. That said, if, loan, if interest rates start dropping, then we will do our best to try and make sure that we can maintain our NIM and even try and expand it a bit, you know, on the reverse downward trend. But, again, that'll be... We'll have to wait and see it.
But as of now, I would say in this environment, NIM, defending your NIM is the first challenge. And we're looking at all measures, including cost of funding, optimizing every aspect of our funding base. I think it's a combination of those things, which will help us to defend it or at least reduce the impact of the high interest rates, which we can't really pass on.
Thank you. Just to confirm, you know, when you guide about your cost of risk and you're expecting cost of risk to remain quite elevated, above 100 basis points for maybe 2 years, what targets do you have in mind? Are you targeting your coverage of Stage Three loans by Stage Three reserves?
It's, I think it's targeting, one is, of course, stage three, two is any migrations from stage two to stage three. So we're looking at the portfolio, looking at the names that could be vulnerable. Therefore, that's why these will be the ones which we're required to, you know. In terms of, we're required to be provisioned, you know, at least the minimum of the stage three, which is 15, 15%, you know, 20% initially, and then 15, where we'd like to be. We are already reasonably well covered at stage two, and I think we're at stage one. So I think it's primarily for stage three and any possible migrations.
Okay. Thank you. Thank you.
Thanks. Just few questions on the chat. First one from Rohit Raj: There has been a huge jump in investment gains and losses. Where is this coming from, equity or debt? It's primarily debt. There are two questions from Fatema Al- Sakka. Which sector has contributed to the high Stage Two loans? Mainly real estate.
Legacy. Again-
Legacy.
Legacy loans. These are all pre-2017 loans.
What would be a fair dividend payout guidance?
We've always guided that 50% is the maximum payout that we have guided towards. Ultimately, it's the board's decision, but as you've seen over the last 5 years, we've always stayed within that guidance.
We can take one last question. That's from Edmund. Edmund, go ahead and ask your question, please.
Just a quick one, follow-up. So just looking at Q4, so you are expecting cost of risk to pick up in Q4. And margin, I'm not sure if it's stable or falling, but I think I feel more if it's possibly falling, unless CPI contribution from Turkey is higher than this quarter or the same level of this quarter. Which mean. And also your cost base or the expenses is very low because of the performance of the stocks. So what, what measure you can take in Q4 to boost your profitability? Do you have a room for harvesting gain on the non-funded income? Just trying to see how to model it if you are looking at Q4. I know Q4 is one standard quarter, it's a plug.
Look, I think the main-
Yeah.
Yeah. I think the main approach, I think, is we will try and optimize on all fronts, but I, I don't see—I think the NIM compression, I will... The challenge is more in the year, next year.
Right.
That was, I'd say we, if it, you know, depending on where interest rates go. But I would see the big swing factor in Q4 being, probably, provisioning. You know, and you should look at our, last quarter impacts, in previous years, et cetera. You'll see the pattern there. So that's probably the main one, which will, as I said, we're only 91 or 90 basis points for the first three quarters. So if you're going to get 120, 130, you should, you can, do that reverse calculation. So I would say that's the main driver. Otherwise, overall, the revenues and, I think costs will be more or less in line with the other quarters. I think that's, that's the way to look at it.
Thank you. Thank you.
Thanks.
Thank you. That's the end of our Q&A session. Joseph, any closing comments, please?
Again, I think our team is always available, Mohammed and Zubair, to answer any questions you may have subsequent to this meeting. Once again, thank you for joining us today for this meeting and for following us. Your equity reports, we always look at them with great interest. Thank you so much. Bye-bye.
Thank you, bye.