Good afternoon, everybody. I'm Zubair Chaiwalla, Head of Investor Relations and Capital Management in Commercial Bank. I welcome you all to the Q1 2023 Commercial Bank Results Call. With me, on the call to my right is Joseph Abraham, the Group Chief Executive Officer. To my far right is Rehan Khan, the CFO. For the duration of the speakers' talk, you will be on mute. I'll get back to you before the Q&A starts. I now hand you over to Joseph Abraham. Joseph, over to you please.
Good morning, everyone. Or good afternoon, sorry, everyone, and thank you for joining us today. We've now finished the first quarter of 2023, and obviously, I think after the hectic activities of the last quarter with the World Cup is going to be a slightly quieter phase in Q1. I would say that we anticipate the spending and the other initiatives to accelerate in Q2, Q3, Q4. This is a, I would say, a temporary lull. Despite that, we have shown a good result in terms of a 7% increase in our profit. One of the facts which obviously will stand out is the sort of reduction in the loan assets as from the balance sheet.
I would actually say that, just to give you a bit more clarity on the individual components, we've actually increased our domestic lending in Qatar, you know, both across wholesale and retail banking. You know, retail banking has gone up about 10% on a year-on-year basis, about QAR 900 billion, and wholesale is also up about QAR 2 billion. We've actually shown growth in our domestic business. This has been offset, of course, by a reduction in the MoF, Ministry of Finance overdraft. Also one of the factors which shows there's a loan reduction, but which actually isn't is something called acceptances. Under the Central Bank regulation, when we put our acceptance on a letter of credit, we have to show it under the lending side.
Yes.
We used to use this as a means of raising structured deposits. People would place cash with us against an LC, which we'd confirm. They would then get that discounted offshore, basically taking a bit of arbitrage on the difference between the deposit rate and the lending rate. In the revised context of some haircuts on non-interest deposits and also the higher cost of funding, we found this was no longer beneficial. We dropped these structured deposits, and they're down about QAR 4 billion year-on-year. That's showing as a reduction in loans, but I want to just clarify it's not really a reduction in loans. Similarly, there's a reduction in deposits because these are also the on the other side of their deposits.
Net-net, the figures are giving a slightly, I'd say, exaggerated picture of a decline which is not really there. That's why I think our net interest margin has remained the same. Our net interest income has risen quarter-on-quarter, sorry, year-on-year. Quarter-on-quarter it's a slight decline, but that's, I think, coming more from an increase in the cost of funds. Overall, I'd say that despite the relative quietness in the first quarter, we have continued to see growth in our loan book. Of course, in Turkey we saw a reduction, and that's also shown in the consolidated figures. In Turkey, you know, there's been quite a few changes in the various rules and regulations regarding deposits and loans.
Currently there's almost a negative spread on loans. It makes sense to reduce deposits. I would say that that's the context in which what we've done is actually reduce structured deposits and loans which are at a negative carry or very low margins, and that will be long-term positive for the business. Apart from that, I'd say the other factor is the improved performance of our associates, NBO and UAB, and we expect that uptick to continue in the next few quarters for the year. I will let Rehan go into a little more detail, but I just wanted to give that high level, sort of that the momentum has positive legs behind it.
You know, as I've said for a long time, the challenge for every bank is maintaining and growing its net interest income, given where we are in terms of the cost of funding. That said, I think, you know, there are multiple views on where the Fed will go and I think the good thing is that we're reaching the peak level for interest rates probably or close to it. That, I think, is the key for the future, you know, and therefore we should see a positive trend in net interest income in the future when rates go down. Because the primary factor between both of the banks in Qatar has been the cost of funds rising, you know, following the Fed rates. Rehan, over to you.
Yeah. Thank you, Joseph. Good afternoon, everyone. I'll focus on the same slide 8, which shows the quarter-by-quarter performance. As always, you know, on the right-hand side is the reported numbers and on the left-hand side are the normalized numbers which strip out the impact of IFRS 2 regarding the staff performance scheme which is a fully hedged scheme. Just to remind you that that has no impact overall at operating profit level. You can see Q1 is QAR 1,026 both in normalized and operating. Similarly, Q1 last year, QAR 9.2 and QAR 9.2. The income and costs now show much more the underlying trends by taking out the impact of IFRS 2. Having said that, look, we're up 7% in profit year-on-year.
Up 22, 23% up quarter-on-quarter. I'll focus more on year-on-year because, as you know, Q4 has a number of anomalies always. Starting with the operating income, it's up 11%. Within that, net interest income is up 7.5%. We have managed to maintain our NIMs for the quarter, 2.8%, which was the full year for 2022 as well. It's up from 2.7% a year ago. Back in 2018, our NIM was 2.1%, it's a much improved position that we're in now at 2.8%. NIM is being maintained.
Joseph explained the decrease in lending, within that, Alternatif was QAR 2 billion down year-on-year as well, which is a function of, them also looking very carefully at what is NIM enhancing and what is not, and exiting from some of the loans, that were not NIM enhancing. That's gonna be our focus at making sure that everything we're doing on the asset side is with a NIM focus for us. On the non-interest income side, we're up, 22%, year-on-year. This is, fees, CapEx, investment income, et cetera. That is, of a recurring nature. We're, we're pleased with how our non-interest income is, performing as well. Some decrease in fees, which would be typically loan related.
Once our other loans start improving, then I think we'll start seeing an increase in our fee income as well. On the cost side, you can see it's at QAR 326 million. It's up 19% year-over-year. Within this, within domestic, there's very small increase in cost, mainly AMC related. Staff costs are pretty similar year-over-year. Obviously, as we know, Turkey is in a hyperinflation situation, staff costs are up year-over-year. Also, because of the earthquake disaster, donations were made, and that's also within our Q1 numbers. Those are the main contributors to our cost increase.
Having said that, our operating profit at QAR 1,026 million is up 8.8% year-on-year, and so that's a very positive improvement for us and is showing that there's momentum in the business. In terms of provisions, QAR 273 million versus QAR 276 million, so quite similar, although credit provisions are lower and other financial assets provisions are higher. As Joseph again mentioned, very good momentum in our share of associates. That's at QAR 70 million for the first quarter. Both UAB and NBO continue to improve year-on-year, quarter-on-quarter. So we're pleased that that turnaround is continuing with both of those associates and it's a, you know, a promising trend for the future as well.
As we mentioned, non-monetary assets is the adjustment for Alternatif regarding IAS 29 due to hyperinflation. That is the adjustment of QAR 42 million that you can see there. The tax is primarily Alternatif as well on the profits that are being made there. Overall, decent results of QAR 751 million for the quarter. Strong momentum, I think, going into the next few quarters. cost-to-income ratio is the one area where, because of that increase in costs, we need to manage that down again for the next few quarters. We have given guidance that will trend downwards in Q2 to Q4, and we expect that to happen. I think that's an overall summary of the results.
I'll hand you back to Zubair, and then we can go to the Q&A.
Thank you, Rehan. We will now start with the Q&As. If you wish to ask a question, please use the raise hand features, or you can send a text message. If your name is announced, please unmute your device, mention your name and corporation, and then ask your question. Once your question is answered, please unmute yourself and let others ask questions. I said please mute yourself and let others a chance to ask their questions. I'll wait now for people to raise hands. We now have the first question from Varuna. Varuna, please go ahead, unmute and ask your question.
Hi. Thank you, Zubaid. Thank you, gentlemen, for this opportunity. I have mainly two questions. The first one is related to the change in the loans that Joseph alluded to in the beginning. As a result of, you know, dropping the structured deposits and, you know, related loans, I mean, if you could shed some more color on it. I mean, where, I mean, what was the rationale for, I mean, first of all, for originating this business and in terms of letting go of this business, I thought you said it's because of the net-net, there is no benefit.
If you could elaborate a bit on that would be useful. Secondly, on the expenses, I think Rehan mentioned there was a like one-off element in terms of earthquake donations. There were some, I think, one-off increase there. How much of the total cost was related to that? If you could explain that as well. Thank you.
Yeah. I can take the first part and then let Rehan handle the second part. I think regarding the. This was a form of generating some deposits for us. As I said, you know, internationally, some clients have access to deposits, so they would place it with us. An LC would be issued, which we would accept, and they would get that discount abroad. They were basically taking some arbitrage against the, you know, the funding what they're earning on their deposit. This take, you know, sort of international commodity companies. With the deeper non-resident deposits, and therefore with, you know, the QCB has been, you know, asking the country banks to reduce their non-resident deposits. We saw that as no longer being useful, you know, in this context.
Also, you know, with the rise in interest rates, et cetera, the benefit of margin is more liquidity point of view. That's why we have taken the conscious decision that they no longer serve the purpose given the changed context. That's why we dropped them. That's why you're seeing those acceptances because we put our acceptance of the letter of credit. That was coming as per the Central Bank classification under loans, but the deposits were also on the other side.
That's right.
That's why you've seen a reduction in our loans, I mean, at a high level, and a reduction in deposits. In fact, it's not really a huge reduction in our loans because it was just a form of structured liquidity raising.
Yeah. I mean, just to add to that, obviously, when the interest rates go up, that does not become viable really for us to, you know, continue with that. Obviously our focus is to optimize our net interest margin. Just to reiterate, you know, the numbers Joseph said, the retail is up about QAR 800 million year-on-year, which represents about 8%-9%. Corporate was up QAR 3.2 billion year-on-year as well. You know, with this reduction in acceptances and the reduction in the MoF overdraft, and then thirdly, the alternative reduction, these are all, I think, gonna help us in the long term for our net interest margins. That has to be the main concern rather than the absolute amount year-on-year.
I would say, just to get a bit further detail, probably on a quarter-on-quarter basis.
Yeah.
we've been reasonably flat. Retail has grown about QAR 300 million, I think.
Yes.
Wholesale has been reasonably flat.
Yes.
You know, despite a negative trend in most of the banks, we would say that we have maintained our loan book during the first quarter. As I said, we expect some momentum to increase in the following quarters.
Yeah. Yeah. Then the second question was around expenses. Around QAR 9 million of this would be one-off in Turkey. The remainder is genuinely inflation-related increase, primarily from Turkey. There is some here as well, which is more to do with the investment that we've made in technology. So we are seeing a little higher depreciation, we are seeing a little higher AMC costs. Primarily, the increase is coming from us, specifically in Turkey, which is inflation related.
Thanks a lot. If I, if I may ask one more question, if you don't mind. I mean, related to this non-resident deposits, do you see any further, you know, requirements coming in, to, you know, bring down this exposure further or, or is the current level kind of acceptable to the Central Bank?
Yeah. Yeah. Look, I think as a bank, we were never one of the outliers. You know, our ratio at the peak was 22%, but I think at that time the system was 28% or in that range. We've never been an outlier in terms of the composition of non-resident deposits. Today, we are about 13% or 14%. I think this is very much in line with where. The system is also down.
18%.
18%.
Yeah.
I think it's the long term that they want to reduce the dependence on non-resident deposits. I would say now, the next highest country in the GCC is the UAE, which is at about 14%, I believe. I would say that that's probably a benchmark that you could set as a threshold where an overall system might want to, you know, stabilize that.
Thanks a lot for the clarification. Wish you all the best.
Thank you.
Thank you. Our next question is from Janani. Her question is, can you please give some color on recovery in lending in the coming quarters? Given drop in deposits, how do you expect this to affect cost of fund trend and NIMs?
Yeah. I would say lending growth, as I said, this has been a quiet quarter. We expect it to pick up a bit in the second and probably third and fourth will be CIMB Group. We have given a guidance of 3%-5% for the year. I would say it's probably at that 3%, I would expect, you know. Because, as I said, most of our reduction came from, you know, these acceptances which have dropped and also Turkey. We don't see too much more of that effect going to... Maybe Turkey, I don't know, depending on, because we're in a volatile time there. I don't want to be absolutely specific on that. I would say that we expect to continue our growth in retail.
I would say retail will grow at the same level as it is. We expect a 10 to 9, 10%, which will probably come at about QAR 700 million-QAR 900 million. Wholesale, I'd expect QAR 2 billion-QAR 3 billion more. I think 3% is probably where we would like to come out in terms of momentum. In terms of retail deposits dropping off, as I said, these are at the marginal level where we're trying to manage our cost of funding. Per se, they don't affect the NIM that much. It's, I would say, much more challenging if we see a big drop in our low cost funds and, you know, areas like that. That's a constant challenge for us.
I think the challenge is more about low cost funds migrating to slightly higher interest rates, because at these rates, you know, everyone wants... starts looking at their idle amounts. That's more of a challenge, I'd say, for us. We've given guidance that the NIM could drop 10 basis points. I would keep that guidance in place because... It's not from the absolute level of deposits. I'd say it's more from migration of, zero interest, cost advances to, you know, call accounts and other... As, and overall clients becoming more, I'd say, attuned to the interest, earning opportunity. This is, I think, a global phenomenon. It's not restricted to Qatar.
Thank you. I think we don't have any more questions. Joseph, over to you for any closing remarks.
Well, I think, as I said, Qatar remains, you know, as in a very strong position, particularly the government, which I think is the most important thing for the economy in the long term. You know, whilst it has short-term implications of paying out a government overdraft, I think that's a shorter term thing. I think this gives the government the wherewithal to continue to invest and build the economy. There are definitely moves afoot, I think, to, you know, now that the World Cup is behind us, to really initiate initiatives which will boost the economic growth and diversification of the economy. A continued investment in oil field expansion. We remain positive on the overall outlook for 2023.
Joseph, just as we said that.
No. Okay.
Please. The next question from Omar Afifi. Please go ahead and ask your question.
Hi. Thanks for taking my question. I have a question about cost of risk. You were guiding for 1.2% cost of risk for the full year, and the cost of risk came this quarter way lower than the guidance. I mean, for the full year, you still have the guidance of 1.2% cost of risk?
Yes. Yes, we do. Yes, we do. Obviously, not a lot has happened in the first quarter, so almost all of our provisioning actually is under the ECL rather than any specific provision. We expect, as the year develops to, you know, look carefully at the performance of our customers and where the provisioning will be required. Yes, we don't change the full year guidance.
Okay. I have one more. For the fees, is there any one-offs in the fee income for this quarter?
No. No, there is not one-offs in the fee income.
Okay. If I may, one last question. Towards the non-residents deposits. I mean, we know that the Central Bank, as you mentioned, also the Central Bank were advising the banks to lower their exposure to non-resident deposits. Do you now re-reach the level that is comfortable or you will go further in dropping non-residents deposits?
No. I think we are reasonably comfortable at the level we are at. You know, we see no pressure to either grow or drop. I think also Fitch has come out with, you know, they were the original, let's say, cause because they were to report, say, a country like this is too dependent. The Central Bank took that seriously, which I think is proactive on their part, and they brought it down. You know, as I said, I think at this 18% level, even Fitch has come out with a recent report saying there's been a big improvement, and this shows the resilience of the country banking sector etcetera. I think that cause of, let's say, pressure has come out. Now, is 18% satisfactory or...
Like I said, I think around 14, which is where UAE is probably where everyone will feel comfortable. I don't see any big pressure. We are at 13% or 14%.
Yes.
We're at that level. It's not a big issue for us.
Okay. Thank you so much. Congratulations on the results.
Thank you.
Thank you.
Thank you very much.
Our next question is from Vikram Viswanathan. Vikram, please go ahead and ask your question.
Thank you. Thank you for the for the earnings call as always. A question on the margins. If the Fed rates were to decline by 100 basis points. What will be the impact on CBQ's margins? I think you mentioned that if rates were to go down, it's generally positive for the Qatari banking sector, given the increase in funding costs that you've seen. I'm just curious to understand if rates were to take a U-turn and start going down, how sensitive is the margins to a rates decline?
Yeah. Look, Vikram, I think for us, we certainly highlighted before as well that with such sharp increases in interest rates, number one, the QCB has not fully passed that on in the QMR loan rate. Secondly, you know, there is a point where you come to with customers where it is not appropriate to pass on the full increase. I think a decrease in interest rates from now would be then enhancing because deposit rates would fall and not necessarily would be fully reflected in the lending rates. I think it would be positive for the banks in Qatar when interest rates start coming down.
Sure. I'm just trying to assess the magnitude. If rates go down by 100 basis points, what will be the impact?
Just on-
on CBQ's, NIMs? Mm-hmm.
The point here is if you just do a model basis, it will give you about QAR 40 odd billion. The fact, and this is what Rehan and Joseph have also mentioned in the past, it does not move unilaterally in a straight line like how the model moves, and that we've seen it in the real life situations.
I think, you know, I think because if we're in that sort of space where the rates are very high, customers are suffering, you know, I would say that when the rates come down, obviously it would pass through into the cost of funding, but also, you know, into the customers also. You know, I would expect this to be net because the repricing on the deposits might happen, you know, with a slight lag. I think we, we will try. You know, again, it's managing how we reprice assets also. Because it's as Rajesh said, it's not a straight line. Net, net, but I would say the first drop with 100 basis points, I'm not sure what the effect will be. I would say basically probably neutral.
I would say that it's the next set where you'll likely see the bigger benefit for the banks, because we've got out of the danger zone of interest rates, you know. That would be on the loan side, you'd see a better result for the banks. That's my view.
Thanks. Thanks, Joseph, for taking those additional questions. We can call it a close here.
Okay. Great.
Thank you.
Thank you very much, everyone.