Good afternoon, everybody, and welcome to The Commercial Bank's first half in 2023 financial, investor call. On the call, we have Group Chief Executive Officer Joseph Abraham to my right, and to his right, we have the CFO Rehan Khan. I hand you over now to Joseph for the call.
Good afternoon, everyone. Thank you for joining us today. We've announced our half -yearly results, which are up 8.5%, and this is the highest half -yearly results that have been declared by Commercial Bank and also our highest quarterly results at over QAR 800 million. This has been done against, I think, I'd say, quite a challenging context in terms of loan growth, which I believe is where you have some questions. I would say that in this period, and we have a slide, which explains that, while the loan growth has or we've seen negative loan growth, actually, a lot of it is in areas where it is not really affecting our income, primarily around acceptances, which are relatively much low income.
Also, it's a conscious decision, also Turkey has contributed to that because there was a negative lending margin in Turkey. It was challenging operating. Also I would say that we continue to emphasize credit quality, and I think this is in terms of new loan acquisition or growth. This is very important because at these interest rates, it is putting pressure on borrowers. We are not chasing loan growth for the sake of loan growth, particularly at suboptimal pricing, which doesn't properly reflect reward and risk. Given the outlook for higher interest rates to remain elevated for some time, we believe being cautious now will continue to pay us good dividends in terms of credit quality in the future.
We have done a considerable amount of work in the last few years in cleaning up our book, and we want to continue that. That's the context. But overall, otherwise, I'd say, the results are positive, and we're pleased with them. I will let Rehan now talk about the financial ability. But I've asked for slides, particularly around loan growth, around the NPL ratio, which again, because of the denominator effect that has seen some movement upwards, but. Finally, around costs also, which again, I would say, so we will explain, that's not a fundamental deviation from our core operating movement over the last years. Rehan?
Thank you, Joseph, and good afternoon, everyone. I'll focus mainly on slide eight, and this shows the quarter -by -quarter financial performance. As you know, on the right-hand side, we have the reported numbers, and we normalize them, taking into account IFRS 2, which is in relation to the staff performance scheme that we have. What that does is make sure that we then can focus on the underlying trends. There's no change in terms of operating profit. You can see QAR 2,113 million in the reported, QAR 2,113 million in the operating profit. There is a gross up in the reported numbers, both in terms of income and costs.
As it's a fully hedged scheme, it's appropriate to take that out and focus on what the trends are across the quarters for us to see. As Joseph said, we have improved our profitability by 8.5% year-on-year and 7% quarter-on-quarter from QAR 751 million to QAR 803 million. If we first look, I think, look at the balance sheet before we go into detail on the P&L. You can see that our lending volume now stands at just over QAR 89 billion, and we have included an additional slide nine, which just shows the movements year-on-year, so that it is transparent in terms of what we have done.
Largely, this is a conscious decision. We obviously are constantly reviewing our positioning in terms of the balance sheet. You can see that the large variance is firstly due to acceptances. This is NIM compressing, actually, and that's why we have taken the conscious decision to reduce this almost by QAR 5 billion year-on-year. Similarly, on Alternatif Bank loans, given the interest rate environment, Alternatif have also consciously reduced the amount of the loan book. This may go up again in second half of the year if interest rates continue to go back up. Certainly year-on-year, they're down QAR 3.2 billion. This is in country riyal equivalent.
MoF, we talked about in previous quarters, that's almost down to nothing now at the end of June, so that's down by QAR 1.2 billion. Retail, as we've said, is one very big focus area for us, and we've seen around QAR 755 million increase year-over-year. We're very pleased with the progress that we're making across the different products in retail, and we expect that to continue. The last is primarily wholesale and international lending, where again, we've consciously seen number one, some repayments and transfers to other banks, and we've allowed that to happen. Secondly, very conscious about the current high interest rates, and therefore we've not booked new loans in the second quarter.
If I would say that all others refers primarily to our domestic business?
Yeah.
You can see that the real impact is, you know, as a proportion is only about QAR 3 billion. It's about 4.2% down. Out of that, about almost one -third is where we had some credit quality concerns and let it go to be refinanced by another bank. That's our prime goal, to ensure that we don't get stuck later with some problematic, challenging loans. That's the conscious position. Some, as we said, there are price competition et cetera, in the market. I'm not going to get into that, but, you know, again, every bank has its own strategy. We believe that, you know, when the market come back, when those loans be available again, because you will move on price.
We are comfortable with this position. Will we see such further growth, loan reduction in the next two quarters? We don't think so. We believe most of this is done. Again, I think if you look later in our guidance, our guidance is at the lower end. Initially, we said 3%-5%, I think given the context of interest rates being higher for longer, we have said it will be from here, we expect 0%-1% growth. That's our thing. Again, I would emphasize, our focus is on, you know, the two aspects related to interest income. One is the interest revenue, the other is cost. We are focusing a lot on managing the cost through building the cost on et cetera.
I'd like to say that we won a recent significant large mandate in the, you know, in the public sector, which again shows you the quality of our client and transaction making acquisition, which remains a core focus.
Yeah. If you just go back to the results on slide eight, you can see that the increase in profitability is driven firstly by an increase in operating income. Increased contribution from our international entities, so Alternatif, NBO, and UAB, all three have improved their performance year-on-year. That more than offsets the increase in OpEx that you can see. Of course, we know that This is largely in Turkey, given the very high inflationary situation. We've also taken more credit provisions in the first half of this year versus last year.
Very much in line with the guidance, you can see now, our cost of risk is up, at 111 basis points, 112 basis points, and we've given a guidance of 120 basis points -135 basis points for the year, and this is trending in that direction as we expected. The other thing, just keeping on the ratios, of course, you can see our NPL ratio is at 5.5% now. This is largely a function of the reduced lending. We did see a little bit of migration to Stage 3, but nothing significant. It's really going up from 5% to 5.5% quarter-on-quarter, is mainly the reduction in the loan book that is causing that.
Just in terms of operating income, we did see our net interest margin. Our net interest income is up 2.4% year-on-year. Net interest margin is maintained at 2.7%. However, it is down from 2.8 % to 2.7% in the quarter. Again, that is a guidance that we had given, that we did expect in this environment for some reduction in our net interest margin. This is driven from our Alternatif subsidiary. As in Qatar domestically, we have maintained our margins. Also, you can see that our, within our operating income, our non-interest income is up almost 24% year-on-year. We've seen a recovery in our investment income, and we've also seen strong FX income.
There's a little bit of trade-off again in Turkey, there, lower NII, but higher FX. That can reverse in subsequent quarters if loan rates go up and our net interest margin starts going up again. In terms of operating profit, we're up 6.9% year-on-year. Our cost income ratio is down from 24.1% to 22.5% quarter-on-quarter, but it's still higher year-on-year, from 22.6% to 23.3%. It's trending in the right direction, but it is higher than this time last year. In terms of OpEx, as I said, this is largely driven by the inflationary situation in Alternatif.
They are up about 34% year-on-year in terms of OpEx. That includes the one-off contribution regarding the earthquake that took place in the first quarter of this year. There is the underlying staff costs that have gone up, but also the one-off. Within Qatar, we are investing in this in technology. You do see some increase in AMC costs, in depreciation costs. Also, we are investing in the private banking wealth management. We are investing in additional headcount in that area. Those are the overall explanations for our OpEx increase year-on-year.
In terms of provisioning, largely, stage 3 additional provisioning that we have done in this quarter. You can see that has resulted in a higher coverage ratio, which is just under 112%, including ECL. In terms of associates, both UAB and NBO have continued to do well. We are working very closely with both of them. They are exercising on their strategy, and we are seeing very positive results of that. Net monetary loss is obviously the IAS 29 adjustment that we've seen in place from last year. Taxes slightly lower quarter-on-quarter.
There was some deferred tax in Alternatif Bank that we have now taken off as an adjustment, and that has helped in the overall tax charge for the quarter. I think in terms of remaining ratios, CET1 is up from 11.7% to 11.9%, and our total CAR now stands at 16.1%. So we're happy to be above our minimum ratios. So overall strong capital adequacy ratio. I think we can end there in terms of overall presentation. We're happy to take the questions, so I can hand over to Zubair for the Q&A.
Thank you very much, Rehan. We'll start the Q&A. If you wish to ask a question, please use the raise hand feature, or if you wish to type a question, you can use the Q&A button on the top right-hand corner of your screen. We'll pause for a moment. We already have our first question. Chiro Ghosh. Chiro, please go ahead. Introduce yourself, unmute your button, and ask your question.
Hi. Can you hear me?
Yes, we can.
Yeah. Perfect. Okay, hi, I'm Chiro Ghosh. I'm calling from SICO Bahrain. A couple of questions. The first one is related to the asset quality. I see the asset quality very deteriorated a bit, but I can understand, as you're saying, it is primarily because of the denominator impact. But the through the call, you also said that one-third of the loan book, that was, that you let go was primarily due to asset quality concerns. My rough calculation shows around QAR 1 billion odd would be those loans. If I take that off, it still looks like some asset quality deterioration did happen in this quarter. If you can throw some color on that one. That's my first part. The second question is: How sustainable are the FX income and the investment income going forward?
Okay, yeah. In terms of asset quality, as I said, there was a small migration from Stage 2 to Stage 3. Stage 2, actually, overall, has reduced by about QAR 450 million, overall, in terms of the book. There was a small migration, as I said, from Stage 2 to Stage 3. What Joseph was referring to, was basically letting go some customers where we felt further down the line, there would be asset concerns, and that's why we allowed.
If I recall right, they were either Stage 2.
Stage 2.
Okay.
We, at the time, made a very attractive offer. We were... Normally, our view is we don't chase business at low interest rates, but in this case, they were made a very attractive offer, and we were willing to let it go consciously rather than defend our business, defend it. Normally, if someone attacks our portfolio, we defend it even at, but we don't chase new business at low risk. In this case, we consciously let it go because we felt further down the line with the continuation of these interest rates, with the sector it was in, we felt that there's overcapacity there, and therefore, this was probably a conscious decision. That's where I'm saying that we prioritize credit quality over immediate income growth or income loss, because we believe that fundamentally the right approach.
Your second question around FX and investment income. FX, as I said, is largely coming from our subsidiary. There is a bit of trade-off between that and NII. We may see a little bit of reversal of that in the second half of the year, and that's my expectation, talking to our colleagues there, that there will be some additional NII and slight reduction in FX in the second half of this year. Investment income is, I think, more normalized now, so we expect that to continue in the second half of the year.
Just a quick reminder, the loan growth guidance in the past was 3%-5%. If you can remind, what is your loan growth guidance now?
We said, going forward for the rest of the year, we think 0%-1%.
Yes.
Oh, just for the loan growth. That's for the loan.
Yeah.
Okay, clear. That's all from my side. Thank you very much.
Thank you. Our next question is from Rahul Bajaj. Rahul, please go ahead, unmute and ask your questions.
Hi, thanks. Thanks, Joseph, Rehan, Zubair. Rahul Bajaj from Citi. I have three quick questions, actually. The first one is on OpEx. If I remember correctly, you had a QAR 10 million or QAR 9 million or so of one-off in the first Q on Turkey earthquake-related payments. Is it fair to think that this kind of second quarter run rate, which is QAR 315 million, QAR 316 million, give and take, is kind of a normalized run rate, and we should build on that going forward? Or you think this is a part of elevated levels, and we should see some normalization there? That's my first question. My second question is, I think just now Rehan mentioned that the investment income line is at more normalized levels now.
Just wanted to clarify, are you talking about the 2Q run rate, which is just over QAR 100 million? Is that the run rate you're talking about, or the first half run rate of around QAR 50 million a quarter, or QAR 50 million? Is that what you're talking about in terms of normalized? My final question on lending growth. I mean, I understand the new guidance, 0%-1%. If I look at year -till -date, loans are down almost 9%, year -till -date. If we have to get back to that 0%-1% guidance, you're probably talking about between 9%-10% growth in the second half of the year on the end of June base.
Almost like 4%, 4.5% - 5% growth per quarter over the next couple of quarters. Do you think that is reasonable? Or what will ride this, in your view, this kind of 4.5% growth per quarter over the next couple of quarters? Thank you.
Thank you for those questions, sir. I think starting with your last question first, that probably I didn't communicate properly, my apologies. What I meant was that from current level, at the half year, we will be 0%-1% growth. I wasn't talking about the annualized effect. Therefore, from the current level, where we are. That means for the net, for the full year, it obviously be down. The incremental growth from the, say, third and fourth quarter is 0%-1%. Again, we see slowness in the economy, we see slowness, and these high interest rates, we see some maybe leverage challenges in some of the groups. That's why we're being so cautious in our approach. I think that's correct.
That's correct. On the other two questions, Rahul, on the OpEx, you're quite right. There was a one-off in the 1st quarter, QAR 9 million. QAR 316 million represents a more normal quarter for us, and that is the guidance going forward. In terms of investment income, the half-year investment income is a more normalized number now for us going forward.
I think the only cost income ratio, you know, I would say the key factor which will, in terms of our incremental cost, is probably Turkey again. Again, the continuation of high inflation there will obviously lead to inflation-adjusted adjustments, which could therefore come through. Those, I would say, in terms of the core domestic, Qatar business, I think it's reasonably well controlled.
Yes.
We expect it to be minimal increases, but if any. It's the Turkey business which is, again, we've seen pricing contain, so you could see some further adjustments there. We are actually adjusting it from the bottom end of the Turkey market, but it's just that the inflation outlook is so high there.
Sure. Just one clarification, Joseph. On the lending growth side, this LNG expansion has been a key theme for the last two to three years, talked about in the last two to three years. Are you seeing project being moved forward? Are you seeing downstream industries getting set up? When do you see, or where do you see, the loan pipeline fortify for the banks? I don't think we have seen anything major materialize as such. Any thoughts there would be very useful. Thank you.
I would say that for the LNG expansion, that's continuing apace. A lot of it is done internationally through project finance. Where apart from maybe QNB, which obviously has the capability, the local banks normally participate as sub-contracts to the overall contractor. That's why we have seen some growth, but finally in, you know, guarantees or non-recourse work and such. That's the nature of the. I think the business has been coming down the road on the North Field expansion, a subsection of the overall project finance, which is arranged, you know, for the subcontractor rather than the main contractor.
Understood. Okay. Thank you. Thanks so much.
Thanks, Rahul. Our next question is from Lee Beswick. Lee, please unmute yourself, go ahead and ask your question.
Thanks, Zubair. Can you hear me?
Yes, we can.
Yep. Can you just talk about your e-exposure, if any, to the small apartment market, within the real estate portfolio? What size that would be?
Small apartment.
Just apartments in general, as opposed to lending to builders. Is that something that you'd look at separately?
residential apartments.
Resi-residential-
Residential, yes. Sorry, yeah, residential, yeah.
We can get some specific figures on that, but it's not a huge growth area for us.
Yeah.
Where, where it's strategic, because we've always focused on reducing our real estate exposure, which is, a lot of it is, these residential apartments. That has been coming down over time.
Mortgages?
I think we have idea, we want to grow individual mortgages.
Mm-hmm.
You know, there's the, we find rather than doing big ticket, sort of, property lending, whether residential or commercial, which was us. We've curtailed that. One of our strategic agendas is reduce real estate as a proportion of our loan book. Where we see an opportunities in our retail business, where individual mortgages, we're talking about $1.5 million maximum, is a growth area because it offers both permanent residency opportunities for people in Qatar. We see this as a growth opportunity, both for residents and non-residents, and that's where our focus will be. In terms of growing our, let's say, commercial office space or commercial residential, you know, to big builders or that, it's not a growth area for us. It's mainly actually coming down over time. Yes.
Okay. Secondly, I don't know, again, I don't know whether you'd have the detail of this, but, the new QCB, loan-to-value ratios, that they announced about a week or so ago, would that have an impact on your current book or the lending growth going forward? Is that something where you would be lending above those loan-to-value ratios previously and would have to cut back or?
No.
Below them already?
I don't think those will be having an impact on our existing book. Where we see the opportunity, in fact, is that it's really to enable greater lending to the individual mortgage, individual mortgages. That was not a well-developed sector. I think that's the objective why they're given slightly higher loan-to-value thresholds than before. I mean, they even have a segment for non-residents-
Yes.
Which was earlier not available at all. Now, they do it to 16%, 60%, which again was a discussion document. It shows the trust of the initiative to try and develop Qatar's individual mortgage market linked to permanent residency, both of existing residents and non-residents. We see that as a viable growth or a viable retail mortgage growth segment to provide diversification away from the significant concentration in the banking sector, in commercial and residential real estate, but down to large units.
Okay. And sorry, just last question. What for residential mortgages, in particular, obviously, I mean, apartments, but you may not have the information. What's the basis of the valuations? Are they done on an income basis? Are they done on a land plus building basis? How do you typically look at valuations for these apartments?
Usually, we look at a combination. Yeah, we usually look at a combination of both income and the, sort of, value in the market. Ultimately, then we look at comparators, also, you know, what other partners are selling for, and then we try and take a conservative approach. This would be, it's a combination of both.
You would already assume some kind of downside for price, within the valuation that you look at?
In the book that we have, that was on our books, but also I think for new ones, we take the current values. Suppose, again, it depends. Suppose someone is marketing a new build property, then, you know, we will look at it and, if they say, 80% or 85%, we look at the valuation. With some of the reputed developers, we may allow them at that value, you know, because that's market price, which they're selling it. We are also looking very closely at the individual's servicing capacity. We believe that's why, you know, we believe the diversification across a larger pool of individuals will be much better than the large single-ticket, you know, owners or developers.
If I look at our mortgage book, our existing mortgage book below, $2.5 million dollars, say QAR 10 million country, that has actually performed significantly better than our large ticket, mortgage book. That's why it gives us confidence that the individual mortgage segment is one where there is both demand and capacity, and also capacity to absorb, you know, something. Most people want to maintain their business.
Okay, thank you.
Thank you, Lee. The next question is from Varuna. Varuna, please unmute. Go ahead and ask your question.
Hi. I hope you can hear me.
Yes, we can.
Yeah. I have three questions. First of all, related to the acceptance. I understand, like, this is not a profitable business, that's why you didn't hesitate to let it go. I just want to understand the background of this. What led to this? That's my first question. Second question on the ROE target that you have for 2023. It looks like... I mean, you could actually, given, I mean, so what you have achieved so far, you could, you know, exceed that. I just want to hear your thoughts on that.
Thirdly, on Turkish Alternatif Bank, I want to hear your views on, you know, going forward, given the fact that the benchmark rates have increased and, I mean, there were certain measures that the government took to promote lending to certain sectors by regulating rates in the first earlier in the year. How this is going to affect, how this is going to change in the future? That's my third question. Just one more clarification, if I may make. You mentioned about individual mortgage portfolio. Did I hear you correctly saying that it's QAR 10 billion in your books? Those are my questions. Thank you.
Let me clarify. The individual mortgage, I was talking about the threshold for smaller ticket mortgages. We classify smaller ticket mortgages as QAR 10 million and below. That's the one that we have found that the credit history and the repayment history is actually quite good compared to larger ticket mortgages, which were, you know, large ticket above that value. That's why we feel comfortable in, that was Lee's question about how we develop individual mortgages. We feel comfortable that that's a good segment to expand in, given our past track record and the benefits of permanent residency that are being provided to people who invest in individual mortgages. It's a combination of these, why we believe that's a positive area to grow in.
Let me take the other questions, Varuna. Firstly, on the acceptances, I think definitely leading up to the World Cup, the last few years, we did see an increased demand for this product. Post the World Cup, that has been reducing. As I said, it wasn't NIM enhancing. We took a very conscious decision to reduce this amount. In terms of ROE, yes, you're quite right, that there is, you know, a possibility to exceed the guidance. We've not changed the guidance as of now. We will keep this, you know. There's still a lot to do in the second half of the year, that's why we've kept the guidance as is.
You're quite right, in terms of your third question in Turkey, there is a possibility that lending will actually increase, and therefore, NII will increase in the second half of the year from our subsidiary Alternatif Bank. That's something that, you know, the team is working on. We will obviously still go through each individual case and then and review its viability before we go ahead with any new lending there.
Also, I think it depends on the normalization of economic policy.
Yes.
We've seen some initial moves there, but it's been slower than expected in the first move, and therefore, you might have a slower trajectory to normalization than was initially expected.
Okay, got it. Thank you very much. Just one quick follow-up on the, you mentioned something on the, your policy on the expatriate, lending to expatriates in the mortgage space. What's the loan-to-value there? Did you say 60%? Is that what you're using?
No, I think for non-residents. Earlier, that was a category which did not really exist, but the Central Bank has specifically announced, you know, mortgage guidelines which cover non-residents who want to buy in Qatar to get the benefits of permanent residency in Qatar. They were allowed a LTV of 60%, for non-residents.
Okay, I see. Right. Thank you very much, gentlemen. Very, very useful.
Our next question is typewritten, and that comes from Shrikant Wadling. Apart from net interest and net impairment losses on loans, bank also reported other provisions in 2 Q 2023, amounting to QAR 117 million. Any clarity on the same will be really useful.
Yeah, we did do that. That's really related to real estate provisioning that we have on our books. It's just a conservative measure that we've taken at this stage. You know, we will look at that more closely in the second half of this year. Hope that answers your question, Shrikant.
Thank you. We have no further questions. Joseph, over to you for closing remarks, please.
Thank you again for joining us today. As always, you know, Zubair and Rehan, and the rest of the team are available for any further clarifications or questions. As we said, we look forward to the second half of the year and continuing on our current trajectory. Thank you very much. Thank you, everyone.