With me today on the call are Joseph Abraham, the Group Chief Executive of The Commercial Bank, and Rehan Khan, the CFO. You will be put on mute during the duration of the speakers' presentation, I will get back to you before the Q&A. I now hand you over to Joseph Abraham. Joseph, over to you, please.
Thank you, Zubair. Good afternoon, everyone, or good morning if you're in another location. I think, as you've all seen the results, we've had a strong 2022, with a 22% increase in our net profit. What I would talk about first is the outlook for Qatar in 2023. As you know, there was a very successful World Cup, and I hope some of you had the chance to visit us in Qatar. It was very well-organized, and I think it showed that Qatar has the ability to handle events, you know, world events in a world-class way. Going beyond that, what does 2023 hold? I know there's some views that, you know, the economy will slow down or there'll be a bit of a downturn.
Personally, I think the macros, as I said before, last year, this is probably the best that I've seen the macros in the last five or six years, given that we went through, first of all, the blockade on Qatar, then, you know, oil and gas prices were really low, then the real estate market adjustment, and then the pandemic. When you look at today's macros, the outlook for oil and gas, and gas in particular, both on the demand side and the price side, looks very strong. This ties in well with Qatar's NFE, North Field Expansion. There's a lot of downstream industry investment going on. As we know, QatarEnergy has announced a $6 billion Ras Laffan petrochemical complex, so that will have further economic activity benefits.
In addition, beyond that, I believe the awareness that has been created about Qatar is very, very important in other ways. Perhaps not directly in terms of industrial investment, but in terms of both as a place to visit and secondly, as maybe as a residency location or as. This is why? Because as, you know, people talk about hotels being empty, et cetera, you know, post the World Cup, and how will they be filled up? I really think that, you know, we forget that Qatar has 40 million people actually arriving in Doha, but not staying here, and that's because they go through Doha Airport.
If we can just convert 10% of that to stay two nights, you've got, you know, assuming, that's 4, 8, 8 million room nights, assume double occupancy, that's 4 million room nights. That will straightaway solve any hotel problems. I think there is a great awareness in Qatar and the government and the tourism authority about the need to do that. We're seeing already some pickup in that from making Qatar a more attractive destination. The World Cup has created the awareness. I really think this is important because Qatar has had a lot of positive attributes, but very few people are aware of Qatar. I think the Middle East, especially when you go to Asia and, you know, parts of America and maybe Western Europe, the Middle East is basically Dubai. You know, that's awareness-wise.
That's why I think Qatar holding the World Cup has created awareness. The second is, apart from the tourism aspect, I think Qatar has a very strong and attractive permanent residency program. Again, it's a zero tax location, great infrastructure, and the criteria are quite low. With a $250,000 investment, you get five-year renewable residency, and with a $1 million investment, you get lifetime residency, including healthcare at government facilities and even education. Everyone talks about the Golden Visa program, which is very well-known, but very few people are aware of this. I think we, in fact, will be doing some roadshows around it, but we think this is an opportunity to, again, further build out the population in a sort of for Qatar.
That's very positive, which will benefit the retail banks, will benefit many aspects of social spending. The third is the fiscal position of the government is very strong. They've got a 13% budget surplus this year, projected, and that's at a $65 per barrel of oil assumption, and it's likely to be much above that. Your fiscal surplus is gonna be probably much greater, which will again enable the government to have the fiscal firepower to invest in the economy. Finally, the credit rating continues to improve. Qatar is one of the few in the Gulf with an AA rating.
I think, as I said, we've been through the previous five years to 2016, 2017- 2021 have been quite difficult. 2022 was marked by a very choppy global environment. I think 2023 will have some volatility, but comparatively, Qatar is well-placed to manage it. The outlook remains to my mind, positive. Therefore, we enter 2023 in Qatar is one of the probably the better places to be, and the bank is also well-positioned in that space. If you go to the next one. I would say, in terms of our guidance and indications, you can see this out here.
I would just say that loan growth, you know, we are saying 3%-5%, which I think is where it'll be, and we are comfortable with that. Our capital, you know, we gave our guidance and is in this range, 12.2%-12.7% and 18%-18.5%, which is pretty strong. In terms of capital, in terms of risk, we will put our cost of risk again. As we said, the one point is we're coming out of the COVID scheme, so we want to be conservative. We kept our cost of risk at the same levels as 2022, and our NPL ratio will be in that range. Our loan book reshape.
You might see that our government and public sector is 15%-18%, the same level as 21%. This is because, as I said, the strong fiscal position of the government has enabled them to pay down their government overdrafts, that will likely continue. As they do investments and certain public sector investments will happen, we will try and capture some of that business. The cost-income ratio continues to improve. We expect to be going down further below 21% at a consolidated ratio and below 19% there. That's because we've...
As I said, our costs have been relatively flat for the last few years. That's where we intend to keep it as we continue to invest in technology. Our income will continue to rise. That'll finally drive the return on equity, which is again, we hope to be in that 12.5%-13% range. That gives you an outlook at a macro level and also our guidance. You can see that we are showing a positive guidance for 2023. Of course, it's going to be a strong focus on our strategic plan execution. That's been the guiding sort of light for us over the last few years. That's why we're able to deliver these results that we've delivered so far. We expect that trend to continue.
Rehan now, who can give you some more color on the details of the financials. Then, of course, happy to take any questions. Rehan?
Thank you, Joseph, good afternoon, everyone. As usual, I'll focus on slide eight, which shows the quarterly trend as well as the year-on-year performance. As you know, on the right-hand side, we have the reported numbers, on the left-hand side, we have the normalized numbers. This is really to strip out the impact of IFRS 2 on both the income side and the cost side for the staff performance scheme that we have in place. The reported numbers do change as a result of any share price movement quarter-on-quarter. It's obviously a fully hedged scheme, therefore, the impact is overall zero at both the operating profit level and at the net profit level.
You can see, for example, 2021, the operating profit is QAR 3,621 at the reported level and also at the normalized level. Similarly for 2022, reported QAR 4,156 at the normalized as well. If we start at the top, what we can see is that operating income is up 11% year-on-year. It's approximately QAR 500 million. Just over QAR 500 million is the additional operating income that we've generated this year. Both NII is up approximately 11%, and the non-interest income is also up around 11% as well. Equally distributed in percentage terms. As you can see, the record profit that we've made of QAR 2.8 billion is about QAR 500 million up year-on-year as well.
Pluses and minuses on all the other lines, but it's really the operating income that is driving the net profit, almost the same amount at the top level as at bottom level. Within this, as you can see, our net interest income has gone up 11%. Our net interest margin is 2.8%, up from 2.7%. If I wind back about five years, in 2018, our net interest margin was 2.1%. Over the last few years, we've been gradually improving our net interest margin year-over-year. 2.8% represents one of the highest now in the market in Qatar.
In terms of non-interest income, this was derived by strong FX trading income and overall very good trading volumes over the course of the year. Costs have stayed fairly similar to last year, down slightly, 0.7% positive variance year-on-year. What it means is that overall, our operating profit is up almost 15%, 14.8% year-on-year. This does mean that we're continuing to bring down the cost-income ratio. It now stands at 21.6%. It was 24.1% last year. Again, if we go back to 2018, for example, it was 33.4%. It's a considerable improvement in our cost-income ratio as well over the last five years.
If we turn to provisions where just over QAR 100 million more in 2022 versus 2021. That means our cost of risk is 121 basis points versus 111 basis points last year. We guided that we will be prudent in 2022, we expect that to maintain in 2023 as well. Think it's a sensible thing to do while we're coming out of the COVID schemes, our revenue generation is healthy at the moment. We will build up our buffers, and we do want our coverage ratio to continue going up. It now stands at 105.4% versus 97.4% last year.
I think what's been very encouraging has been the contribution from our associates. As you can see, QAR 222 million is the net contribution from them. This is both UAB and NBO who have performed significantly better than 2021. We did guide in the previous few calls that we did not expect any impairment on our associates and that has turned out to be the case. There's no impairment in our 2022 numbers, and we're very comfortable with the carrying values of both UAB and NBO. As we know with Turkey, it is in a hyperinflation situation at the moment. The results of Alternatif Bank are on a standalone basis, very good. However, there is an adjustment for the net monetary loss.
Non-cash is QAR 189 million, and we've seen that since June reporting onwards, when we've implemented that. Tax is purely coming from Alternatif as the profits are higher there. Obviously 2022 marks the first year of our new five-year strategy, so we are very pleased with the momentum that we're seeing in the business. As I said, it's a record year, and a record year last year as well, so two consecutive record years for us. Having said that, on the balance sheet side, we don't see a net loan growth, purely because of the government repayments that we've seen during the course of the year. I think when you strip that out, it's approximately 4% growth in our lending book.
In terms of deposits, it's up 1.5%, but within that, the low-cost funds are up 6.5% year-on-year. That's a very important factor when we looked at our cost of funding and will continue to be a very important factor going forward as well. That just gives you an overview of the results. I'll hand you over to Zubair to then take us into our Q&A session.
Thank you, Rehan. We now begin the Q&A session. If you wish to ask a question, please use the raise hand feature, or you can send us a text. If your name is announced, please let us know your name and organization, and then ask your question. Once your question is answered, please unmute yourself so that others get an opportunity to ask their question. We have the first question from Waleed Mohsin. Waleed, please go ahead and ask your question.
Yes. Good afternoon. Thank you very much for the presentation. Congratulations on a good set of results in a challenging Q4 environment. Three quick questions from my side. First, on credit growth, if you could provide some more details in terms of, you know, what is going to drive credit growth going forward. What I'm thinking here is, do you think it's gonna be mostly working capital facilities? Some of the large projects have indeed been completed. Is this going to be purely private sector, you know, given the public sector has been repaying some of the facilities? Do you think most of the repayments from the government are done?
Any color in terms of helping us shape our thoughts on, you know, what gives us comfort that, you know, the credit growth will be positive and not zero or negative over the short to medium term would be very helpful. Secondly, credit losses. On the provisioning side, you continue to build up coverage. You know, from that perspective, you start from a healthy position. In terms of, you know, kind of getting comfort around the medium term or that progress towards what you have always kind of talked about as a normalized credit loss ratio, where are we in that cycle? What will give us comfort that we are actually trending towards a normalized ratio? You know, your guidance for 2023 continues to be quite conservative around credit losses.
My third and final question, when I look at your ROE targets for 2023, it seems that, you know, most of the improvement will come from cost to income. Secondly, on the, you know, that you're I think expecting that the hyperinflationary loss will not repeat itself, at least in the same quantum. Any other factors? I would have thought leverage would be one part of it, but if I look at your kind of capital guidance, it's still healthy, and you're actually assuming a significant buildup in 2023. Those are my three questions. Thank you very much.
Thanks, Mohsin. I'll handle the first bit and give some color on some of the others, and then Rehan will give more detail. Regarding the lending growth, even in 2022, whilst we showed a flat lending position, it actually was 4% growth in the private sector and then negative in the government and because they repaid their government borrowings because of the strong fiscal position, which actually is the right thing to do. We should actually, as I said, it points positively to the Qatar government's fiscal prudence. We would expect that to continue in 2023 in the sense that they've actually paid down most of their government overdraft.
The only positive on that, I would say, is that actually because that's government, it's quite finely priced, and particularly at today's interest rates. The net loss of interest income is not that huge when you. Net interest income is not that huge because it's quite a finely priced loan. We actually see potential for growth in 2023 coming from, one is the North Field Expansion. You see a lot of onshore project work being done by contractors and, you know, then you have the bonding, you have some of the financing of the projects.
That is going to come through, and that's quite a significant amount, we're already seeing quite a few requests and tenders coming our way. That's one aspect. We also see our retail bank. Now, I think our retail bank is relatively. Our brand is quite strong in Qatar. Our retail bank has significant growth potential, whether it's in the card space, whether it's in the personal loan space, whether it's in the wealth space. We see lending growth coming from that area too, and mortgages. We think that's an engine of growth which we are firing up quite strongly as compared to previous years. That'll also provide a supplement to the corporate side.
These two areas will be what provides us with asset growth and lending growth in 2023, and we expect that trend to continue. That's why we say we expect in the 3.5%-4% range, because that's where we think is the right approach. Of course, we continue to be conservative in our credit underwriting. As we've seen in the last five years, our net new NPL formation is actually quite low, at 50 basis points or below even. We wanna continue that because that, to me, that's very important that we grow in the right manner.
Waleed, I think you were asking also about, I'll just go to the slide five, which shows the targets. In terms of risk management, as you can see, our five-year target remains in place, which is 2.5% NPL ratio and 60-80 basis points in terms of cost of risk. While it stays at these kind of levels for 2022 and 2023, we then start expecting to see a gradual downward trend towards these ratios that we've got as targets.
I think your next question was around, return on equity, which we're guiding will go up from 11.3% to 12.5%-13%, range for 2023, with our capital ratios also going up at the same time, net of the dividend that we announced, yesterday. Revenue generation is gonna be the main driver. You talked about cost-income ratio. Of course, revenue is the main driver now of that cost-income ratio, reduction. We expect that to be, the case for 2023 as well. We expect, the momentum that we have in the revenue will continue. We expect that the, international entities will deliver as well.
In terms of hyperinflation impact, yes, it will be, we expect it to be slightly less than in 2022, but not significantly less. We don't think that will be the driver. We expect hyperinflation to be in place throughout 2023 and potentially going into 2024 as well. Hope that answers your questions.
Thank you much. Very helpful. Just one very quick follow-up. On the 120-135 basis points cost of risk guidance, should we expect, this to be, you know, kind of front-loaded in the first half? You continue, you know, take provisions, and then second half, we should expect, you know, some sort of a recovery, you know, in terms of the regulatory, I would say push for building up, provisions? Or looking at Stage 2, is that pretty much done and it should be a first half front-loaded and second half improvement, kind of a scenario?
I expect it to be similar to 2022. We will build it up during the course of the year. With some of these names, typically the assessment is done towards the end of the year.
Got it. Thank you much. Thank you. Very helpful.
Okay.
Thank you. We have our next question from Chiradeep Ghosh. Chiro, please unmute and ask your questions.
Hello. Can you hear me?
Yes, Chira, we can.
Yeah. Hi. Hi, this is Chiradeep Ghosh from SICO Bahrain. I have two questions. The first one is related to the net interest margin. NIM has been on an upward trend, so I want to get a sense how should we see it going forward, considering that you plan to move towards public sector loans. That we believe might have a lower margin. Just now you said that overdraft also earns you much lower margin. The NIM direction would be very helpful. That's my first one. Second one is more related to the asset quality. What I understood is that the North Field Expansion project, you would be targeting more, like, more the contracting side. In the past, we have seen a lot of defaults in the contracting sector.
I know we cannot generalize, but so how comfortable should we feel about it, or these are all government-backed, so the probability of default would be really low. This is my second question. A continuation, the previous line which you said, the 50 basis point default or the new NPL default, it's on the new loan which you have disbursed over the last five years, or it is on the total loan base? Just want to get a sense on that. Yeah, these are my questions.
I will take the first question. I think the point is about the public sector. As you can see, over the last five years, we've actually grown our public sector exposure to from, you know, it used to be in single digits, and today it's, it went up as high as 18%, now it's 15%. During that same period, we've also grown our net interest income and net interest margin from 2.1%-2.8%. I would say that it's not counterintuitive that you can take on public sector and still grow your net interest margin. Because net interest margin is a combination of both your gross interest margin and your cost of funds. During the same time, we have captured a lot of the non-funded... sorry, the low-cost funds.
The proportion of our low 20s to now it's almost 40%, 50% of our 40%, sorry. 40% of our deposits. We want to continue that. It's, you know, lending is a tool by which we can then get entry into the wider ecosystem of the client. That's been our digital elevation, digital capability. That's why I would say we will still continue to grow our public sector. In terms of the net interest margin, as Rehan mentioned, it's already one of the highest in the market, so obviously, you know, there's a limit to how much you can continue to grow it. We would anticipate that it would probably be remaining flat going forward.
Maintaining that would itself be a positive achievement.
Yeah. Jiro, your second question was about asset quality and specifically around contractors. Of course, we are very careful in terms of the contractors we lend to. It is at the higher end of the chain as far as contractors go. That's what makes us relatively comfortable about the lending that we're doing. Thirdly, around NPL formation. The 50 basis points is what we're really seeing is since 2018, the last five years, all of our lending that we've done, about 0.5%, 50 basis points is only what has gone into non-performing loans.
Oh, okay. That's all from my side. Thank you very much.
Okay, thanks, Chira.
Our next question is from Shrikant Deshpande. Please go ahead and ask your question.
Hello. Hello.
Yes, Shrikant.
Yeah. First of all, congratulations on good set of numbers. When I'm seeing gross NPLs, it's 9% higher quarter-on-quarter, which coupled with the flatish loan book result in a higher NPL ratio around 4.9%. I just wanted to understand which sectors are contributing to NPLs and what is your view going ahead?
Yeah. Hi, Shrikant. I think I understood you. You're saying basically on the non-performing loans, which sectors does it cover?
Yeah. Yeah.
Yeah. There's quite a lot of background noise. If you can mute if you're not speaking, that would be helpful. Look, I think as we've said in previous conference calls, there is more in real estate, but it is covered across various sectors. The NPL ratio is 4.9%. It was 4.7% last year. It's a very similar percentage on a loan book that hasn't moved year-on-year. It is more in our real estate sector, which does represent about 20% of our overall loan book. The good news is that on the more recent lending in the last five years, the NPL formation has been really negligible.
Just to add, obviously we're working on resolutions of these customers. We do have good collateral with obviously real estate loans, and therefore we do expect over a period of time to be able to come to conclusions and to be able to exercise that collateral.
Yeah. Thanks, sir. That was very helpful. Apart, I just have one more question. Apart from net impairment losses on loans, bank also reported net impairment losses amounting QAR 149 million for 2022 versus reversal of QAR 22 million in 2021. Any clarity on same will be really helpful.
Hi. Yeah, Shrikant . It basically pertains to off-balance sheet items. These include both ECL as well as NPL. Last year there was a net reversal of ECL on specific off-balance sheet products versus this year a net provision. That's the difference between QAR 149 charge and a QAR 22 credit.
Many thanks.
Thank you. Moving on. Our next question is from Lee Beswick. Lee, if you could unmute and ask your question, please. We'll wait for. Whilst we wait for Lee to join in, our next question is from Rohit Raj. Rohit, do you want to unmute and ask your question, please? Okay. Lee does not have audio, so I'll ask his questions. Oh, sorry. Rohit Raj is asking his question. Rohit, please go ahead.
I have put my question in the chat, so maybe we'll take that.
Yeah. I'll go to Lee's question first, and then move to Rohit's from the chat. Lee's first question is: Can you explain the staff cost line for Q4, QAR 595 million at year-end, QAR 570 at Q3. Earnings seem to beat because you're almost 0 staff cost in Q4. What is the reason behind the quarterly volatility, and will it continue?
Lee, the main reason for that is the movement in share price, which has resulted in a net credit on our staff costs because the performance rights are IFRS 2 accounted. As the share price in Q4 for Commercial Bank fell, there was a net credit in the staff cost line.
The next question is: What is CBQ's exposure to residential apartments in the 20% real estate?
How will this evolve as the Supreme Committee releases World Cup inventory back to the market? Office and retail exposure. What is the residential exposure within real estate? Lee, roughly from the 20%, about 11% is mortgages, including retail and residential, and 9% is commercial. The last question from Lee is: CBQ has the highest wholesale funding as a % of total funding. Can CBQ shift to more deposit funding as higher interbank rates are less attractive today?
I would say, look, we have actually, our wholesale funding has actually turned out to be quite advantageous for us 'cause we have created a broad base of investors, you know, across Asia, across Europe, and even in the US. That's advantageous because it enables us to tap the markets at appropriate times and in appropriate currencies. As an example, we did an AT1 last year, an international AT1 for the first time. That's one of the first international AT1s by Qatari banks, and it was done at 4.5%, which looks very good in today's market, where comparable funding would be 7.5% or so.
We also don't have too many issuances maturing in last year, in 2022 or in 2023, so that has given us an advantageous interest benefit in today's market. We will go to the international markets at the opportune time when we see the interest rate cycle moving in our favor. That's how we play it, so the volume of international will go up or down. As I was mentioning earlier, we will continue to build our deposit base. I think I would differentiate between looking at a deposit base, retail or wholesale at a, as a homogeneous pool. You should really differentiate between the proportion of high cost deposits and low cost deposits, because you can easily put on a bigger retail deposit base if you just pay up.
For us, our focus is on building a sustainable low-cost deposit base, and that's gone from what was about QAR 18 billion a few years ago to about QAR 29 billion-QAR 30 billion. That's our prime focus. That's the way we operate on the retail deposit space and the corporate deposit space, because we look at the low-cost deposits as the key driver, and that's our strategic approach.
Lee, I just wanted to add also regarding your first question on the staff costs. I'll just take you back to slide eight and reiterate what I said at the beginning, which is that IFRS 2 requires us to show the movement in the share price, both in terms of income and costs. That's why we also show the normalized numbers here. As you can see, costs have not changed much between Q3 and Q4 when you look at normalized numbers, QAR 286, QAR 280. Within that staff cost has not changed actually very much at all. It's just the share price movement that is making it look in the financials that there's been a significant move in the staff cost. That's not actually the case when you strip out the impact.
As I mentioned, it is fully hedged, therefore, income and costs move in the same quantum and direction, each quarter, depending on the share price movement. That's why it's operating profit. There's no difference between normalized and reported. I hope that helps explain to you that staff credit is not the reason why our performance has improved in terms of revenue and costs. It's actually net zero impact on our overall performance.
Thank you, Rehan. Our next question is from Vikram Viswanathan. Vikram, please go ahead and ask your question.
Hi. Hello. Hello, everyone.
Hi, Vik.
Hi . Just a question on the, you mentioned about good revenue generation in 2023. The question I have here is, you said you can grow your loan book by around 3%-4%, somewhat flat margins compared to this year. It does not look like you will grow much on the net interest income line. I'm just trying to wonder where this growth in revenue will come from. Is it gonna be fees? Are there any other sources of revenue that you can generate? That's my first question. The second question is on the Central Bank of Qatar asset quality review.
There was a lot of hue and cry about the new governor and the asset quality review that he had started and the impact of the review on the provisions. So far, from what we've seen, from the banking sector reserves, none of that really came through. We were hearing that the central bank is pushing for some of the Stage 2 loans to be pushed into Stage 3 if they cannot be made viable. You know, we did not see any of this, any of these issues come through in the banking sector numbers. I'm just wondering if the central bank could change their minds or if you could elaborate on what happened there, that'll be great. Thank you.
Yeah. Vikram, look, in terms of revenue generation, as we saw in 2022, revenue was up approximately QAR 500 million year-on-year. We expect a similar amount. We did not grow the balance sheet between 2021 and 2022 either, the loan book, certainly on a net basis. We had the QAR 500 million growth in revenue. We expect that to be something we can replicate in 2023. Of course, we're always developing various revenue streams. It's not just on NII. Payments and cash management, FX, they've all been strong contributors in 2022. We expect that to be the case in 2023. We are focusing a lot on retail.
wealth management, will also be key contributors in 2023. You know, of course, we've seen a very good contribution from our international entities, our two associates. We see... We're working very closely with them. They have five-year strategies in place now as well. We see that being a contributor that increases year- on- year as well. All of those combined, give us the targets that we have in place in terms of net profit and return on equity.
I think about the second part of your question regarding the central bank. I think they are taking the prudent approach, which is actually good for the banking system. I think we are also taking a prudent approach, so it's not a surprise or a challenge to us in terms of the provisioning that we are taking. Because we have since the last four or five years been prudent in our provisioning and recognizing what needs to be done. For us, we are quite aligned with that approach. That's why we've also guided that we'll continue that prudent approach for 2023 and perhaps into 2024. That we can only speak for ourselves.
All right, great. Thank you.
Our next question is from Aybek Islamov. Aibek, please go ahead and ask your question.
Yeah. Thank you. I think I wanted to ask around the asset quality situation with Commercial Bank of Qatar. I think firstly, I think what we see is that real estate values in Qatar declined since 2016 by about 30%, right? I suspect the loan to value ratios on real estate loans must be higher than they were, let's say, you know, back then in 2017, 2016. Can you comment what are the LTVs like on your real estate? Obviously, real estate is, I guess about 25% of your loan portfolio, right? Quite a material exposure. If LTV is above the comfort level of the central bank or Commercial Bank of Qatar management, what are the ways to rectify that?
Does higher provision rectify, you know, or hedge you against the high LTV loans? Can you elaborate a little bit on this? Thirdly, when we look at the increase in Stage 2 loans, Stage 3 loans, just want to understand qualitatively which segment of the loan portfolio is driving that, and why we're not seeing high write-offs of the loans, particularly in the Q4 , for example, but throughout 2022. Is that because the loans which are being taken into Stage 2, they are long-term loans? I would just appreciate more color on this subject. Thank you.
Yeah. Aibek, thanks for those questions. Yes, of course, you know, there is a decline in real estate values. Our LTV is around 70%. In terms of Stage 2 and Stage 3 formation, it has been in the real estate sector to a large extent. In terms of write-offs, you know, obviously we get to a 100% provisioning first, and then we do the write-offs. We do expect write-offs to happen in 2023. It was on the low side in 2022. Part of the reason why we're building up those provisions is that so that we can get to that 100% provision, and then we can look at write-offs, which obviously impacts the NPL ratio as well.
Mm-hmm. Thank you. Can I ask you just as a follow-up, is there a guidance as to what kind of Stage 2 loan coverage is adequate for Commercial Bank of Qatar?
Yeah. Look, it varies. It does depend on different sectors within the book. Of course, you will see quite a wide variance between banks as well in terms of Stage 2 provisioning. I think anything between 10% and 20% coverage on Stage 2 is adequate.
Mm-hmm. Okay. Very helpful. Thank you.
Sure.
Thank you. Our next question is from Stoykov. He's asked to read it out. I was looking at the CET1 ratio versus your targets for 2023. They are 60 basis points higher than FY 2022 levels. I guess retained earnings from this year will be reflected only in Q1 2023 capital, so this should help ratios. Can you elaborate a bit more on how you plan to achieve the capital targets?
Yes, in Qatar, the Qatar Central Bank allows the capitalization of profits only after the payment of dividends. That will happen in Q1 2023, so there's only once that capital profits can be capitalized. As we have done in the past, we will continue to maintain a balanced approach towards dividend payouts and profit retention. And management generally guides that the payout will not exceed 50%, and that helps us to build our capital over a period of time. We believe that that strategy will get us to our capital targets in the medium term. The second question is on issuance plans for 2023 for senior and subordinated bonds. Lastly is the outlook on the Turkey business.
On senior bonds, I think we will watch the market very carefully in terms of timing. We're obviously looking at to see how Fed rates move over the next six months, nine months, 12 months. We're certainly not in a hurry to do an issuance, and we did the last one was in 2021 when we did the Additional Tier 1 issuance at very favorable rates. We have locked in long-term funding through that, as well as a capital impact as well. We will look at the market to see when is the appropriate time for a bond issuance.
On Turkey.
Like I said, we're always constantly exploring new investor bases and new forms. We might look at a local bond issuance if the market is suitable for it, and local currency bond issuance as a new form of issuance. That's more like trying out something new and building diversity for the future. I think your last question was around Turkey, the outlook. We have our Turkish CEO here, but I think, and going back to an early question, the hyperinflationary accounting is likely to continue for this year because as per our understanding, and Rehan Khan can confirm, you have to have if your inflation total for cumulative inflation total for over three years is 100%, then you have to apply it.
I don't think we'll get out of that cumulative 100% for the next at least two years. We would expect hyperinflationary accounting to be applied for this year and next year also, I think, assuming unless there's a dramatic change in the inflation outlook. For our business, the way we've run our business is a conservative business. We have not chased growth. We've ensured risk quality is strong, and that's why our Turkish business is one of the lowest non-performing NPL ratios. I think it's below 3% right now. That's what we expect to continue. At an operating level last year in TRY terms, it performed extremely well, as did the entire Turkish banking market. At a standalone entity, it did very well.
I think it made QAR 222 million equivalent of profit. When you apply a hyperinflationary accounting, then that obviously is negated that impact. That's why we expect Turkey will continue to have hyperinflation accounting. Our underlying business will continue to do well because it's conservatively managed, and that's. We're not pushing for huge growth there, and I think that's important given that we may expect some more volatility in Turkey. We have our CEO of our Alternatif Bank here, Kaan Gür, and he might like to give a short view of what the outlook is like for Turkey. Kaan?
Thanks a lot, Mr. Joseph. Actually, I totally agree what you're describing our 2022 performances in all terms. Regarding 2023, actually I could say that the most important thing is the central bank liberalization. You know, it's going on. It means that as there is a very important ratio, whole the banking system, you know, should, you know, follow that. The banks are trying to keep over 60% TRY deposit ratio. It is a very strong localization effort. In the same time, there is some pressure, especially on the commercial lending yields. Actually, the most important thing is the protecting the existing net interest margin by diversifying the loan book.
As you very well mentioned, Mr. Joseph, we're going to maintain our prudent approach on credit risk management, right-sizing of the balance sheet, and of course, we're going to more focus on non-interest income generation. Of course, there are some obligations, you know, if the banks doesn't meet the 60% Turkish deposit ratio, such as, you know, reserve requirement commissions and, you know, purchasing low-yield treasury security maintenance. However, Alternatif Bank is very well performing. We are over 60%, so it's going to be main issue throughout the whole year. I would like to say those words, if there's any detailed questions, I'm ready to answer that.
Yeah. I would just add that in our current 2022 figures, the contribution of our Alternatif Bank has obviously, as I said, been very minimal due to the hyperinflation accounting. For 2023, we are expecting the same sort of contribution. We're not expecting a huge contribution post hyperinflation accounting in our 2023 outlook.
We have no further questions. Joseph, over to you for closing comments, please.
Thank you, Zubair, and thank you everyone for joining us today. We hope we were able to give you a satisfactory explanation. I think there's one more question.
Yeah. Rohit, you can go ahead and ask your question.
He's on chat.
Yeah, he's on chat. Yeah, I'll read it from the chat. The parent results published on last page of financial statement shows the parent operating income is down QAR 48 million and OpEx including share costs of QAR 61 million. Does this mean entire increase in operating income is from Turkey that is offset by hyperinflationary adjustment, and all the increase in group net profit is primarily from no impairment for associates and share plan related costs year-over-year positive impact of QAR 396 million?
No. Again, it goes back to the same answer as previously. That there is a difference between the reported numbers and the normalized numbers. The share price movement has caused some differences. What you can see is, and as I mentioned to you, on a normalized basis, operating income is up 11%. It's quite similar in the parent company as well as in international as well. Costs are about normal for about the same in both the entities as well, year- on- year. It is the share price movement that is slightly giving that impression. Overall, the contribution is both at domestic level and at international level. There is.
Sorry, I'll just add, obviously, there is a positive contribution from the fact that the associates' income has been very good, their contribution, as well as the fact that there is no impairment required this year as there was last year and the year before.
We don't expect the impairment.
No.
to continue.
No.
Yeah, we expect that position to continue as operating performance of the associates is also positive. We said outlook also looks positive. We don't expect any further impairments on the associates.
That's right. That's right. If there are no other questions, then we'll wind up today. Again, thank you very much for joining us. If there are any other questions or clarifications that you need, please feel free to reach out to Zubair, and we'd be happy to answer that. Thank you again, and we wish you a good day.
Thank you, everyone. Bye now.
Bye-bye.
Thank you. Bye-bye.
Conversation end.