Hello, welcome to the Dukhan Bank conference call. I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Roy Thomas to begin the conference. Roy, over to you.
Thank you. Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Dukhan Bank's first quarter 2024 financial results conference call. On this call from Dukhan Bank, we have Ahmed Hashem, the Group Chief Executive Officer, Osama Abu Baker, the Group Chief Financial Officer, and Riaz Khan, the Head of Reporting, Budgeting, and IR. We will conduct this conference call with management first, reviewing the company's results, followed by a Q&A. I will turn the call now over to Ahmed Hashem. Go ahead, Ahmed.
Salam alaikum, everyone. Thank you very much, Roy, good afternoon. I appreciate all of you joining us today. As usual, I'll begin by briefly discussing the broader economic context before delving into our key updates for the first quarter of 2024. Later on, the team will provide you with the updates on the financial performance of the group, followed by the usual Q&A session. Let's start by addressing the global macroeconomics landscape, where geopolitical tensions continue to impact the economic landscapes, with implications for trade and investment flows. Inflation rates remain varied across regions, with some countries experiencing slightly inflation than expectations. Financial markets exhibited volatility responding to economic data, geopolitical events, and central bank actions. Shifting our focus to the domestic market, we continue to note a resurgence in the momentum since the latter part of 2023. All sectors of the economy experienced growth.
Tailwinds from planned CapEx investments under the flagship NFE project, coupled with related downstream projects, is also providing a boost to the overall economic growth. The ongoing diversifications efforts and structural reforms by the state are expected to further stimulate the economic activity and spending across various services and manufacturing sectors while ensuring alignment with Qatar's 2030 vision, with particular emphasis on the healthcare, education, travel, and tourism. Talking about Dukhan Bank's strategic approach, it revolves around the core values that define our business, placing a significant focus on digitalization and sustainability. While upholding these values, we have successfully retained our market share and remain dedicated to continuous digital innovation. Despite substantial changes in policy rates, we have sustained robust profitability and continue to reduce our cost of risk and achieved high recovery rates.
Let's turn our attention to the group's financial performance for the first quarter of 2024. I'm pleased to report that we have achieved notable success. Our total income has grown by QAR 243 million versus the same period of last year, reaching QAR 1.7 billion. Consequently, our bottom line profitability for the three-month period ended March 2024 increased by 2% from last year and reached a net profit of QAR 423 million. Our liquidity remained robust, and capital adequacy ratio was comfortably higher than the minimum requirement and currently standing at 18.2%. Now by ending here, I'll let Riaz to share the details of our annual performance for the first three months of 2024, followed by the usual Q&A. Thank you so much.
Thank you, Ahmed, and welcome everyone. I will start my analysis with the group's balance sheet. Our total assets stands at QAR 113 billion, predominantly composed of financing assets, which stands at almost QAR 81 billion, and they constitute 72% of our total assets. The investment portfolio follows closely and reaching almost QAR 17.2 billion and contributing 15% of the total assets. Our balance sheet is predominantly funded by customer deposits, representing about 80% of our total liabilities and totaling QAR 78.5 billion. This is followed by market funding, which contributed 18% and amounted to QAR 17.5 billion. We are maintaining a regulatory ratio for loans to deposits which is close to 100% and currently stands at 101.7%.
This distinguishes us amongst all the Qatari banks. Notably, our reliance on non-resident deposits has decreased to less than 2% as we continue to cultivate strategic and generational domestic relationships. In our commitment to safeguarding profit margins and managing our cost of funds, the net profit margins have been maintained at around 2.1%. We anticipate the conclusion of the rising cost of fund cycle, which is linked to Fed rate hikes and QCB benchmark rate increases as inflation showing signs of cooling off. This would reduce pressure on our cost of funds and lead to positive margin evolution. Examining the breakdown of group's total income, two primary contributors stand out. Financing and investment income, which rose by QAR 316 million, or 25% compared to the previous year, reaching a total of QAR 1.6 billion.
The second highest contribution comes from net fees and commission income, which amounts to QAR 49 million. Turning our attention to impairments, the net impairment charge after taking the impact of recoveries for the current period totaled QAR 37 million, marking a slight increase from QAR 30 million reported in the first quarter of 2023. The staging of financing activities aligns well with the industry standards, with stage one at 81%, stage two at 14%, and stage three NPLs at 5.1%, with a decent coverage of 4.1% against stage two accounts and 71.5% against stage three accounts. An important point to note that if we consider the eligible collateral benefit, the stage three coverage ratio reaches approximately 90% against the NPLs.
Our financing book also remained very diversified, encompassing all sectors, including government at 22%, real estate 28%, commercial lending at 9%, consumer lending at 8%, contracting business at 5%, industrial and manufacturing at 2%, and services in other sectors about 26%. Group's capital adequacy ratio at the end of the first quarter for 2024 stands at 18.2%, exceeding well above the minimum regulatory requirement of 14.33%. This positions us well to grow confidently in the future. Looking forward to the full-year of 2024, we project a sustained growth trajectory, anticipating a mid-single-digit expansion in our balance sheet that aligns with the overall GDP growth targets for the country. The drivers of this growth will predominantly be wholesale banking and private banking segments, with our growth strategy emphasizing on quality over quantity.
Regarding the bottom line profitability, we see a comparable mid-single-digit growth mirroring the expansion anticipated in the overall balance sheet. While we anticipate no significant deterioration in the asset quality, our approach to provisioning remains conservative. We will continue to build adequate buffers to safeguard against unforeseen adversities. In summary, our focus will be on delivering another successful year while prioritizing NIM protections, robust liquidity, and maintain our current market share while fostering the growth of our balance sheet. We will open the floor for the Q&A session. Thank you.
Thank you. If you'd like to ask a question, simply press star followed by the number one on your telephone keypad. That is star one to ask a question. Our first question comes from Ejayan Al-ahbabi from Al Rayan Investment. Please go ahead with your question.
Thank you, gentlemen, for the presentation. I've got a couple of questions. Firstly, could you tell us which sectors you saw growth in for your financing book? How sustainable do you think this growth is for the remaining nine months of this year? The second question is regarding your investment book. Considering the investment book, the current environment, the yields are very high and you can have good returns on this asset class. Why do you keep on reducing your investment book? It's come down to QAR 17 billion, and it's only 15% of your, I think, book. Your total assets. Whereas if you compare it to other banks, it's probably one of the lowest locally and probably regionally. Why do you think that is your strategy for your investment book? What would be your average rating on your investment? Thank you.
Thank you. I'll start with the first question in terms of sectors and the financing. We are seeing growth predominantly coming in from services sector, I would say, in the first quarter. On holistically speaking, in the year ahead, in the rest of the three quarters, as we mentioned, we are expecting a growth of somewhere mid-single digit. That is the target, and that growth will be predominantly coming from the wholesale banking as well as private banking. These two will be the key pillars which will contribute towards the growth. The overall targets, it's a bit modest in mid-single digit growth. They goes in tandem with the overall GDP growth expectations. I hope I answer your first question. In terms of investments, currently you are rightly saying currently standing at almost QAR 17.5 billion.
In the last year, the year-end, it was at somewhere QAR 19 billion, QAR 19.5 billion. We saw a reduction that is predominantly because certain maturities we saw in the Sukuk portfolio. I think it's a matter of whether to grow the investment books or the loan book. From our perspective, as you would have seen, the yields for investments tends to be slightly lesser as compared to the loan book. That's the first priority for us to improve our loan book. Investments predominantly plays a major part when we talk about the HQLAs and managing the regulatory ratios. That is predominantly the idea where we are heading towards to manage the investment books. In terms of the ratings is I think almost 60% to almost 70% of our book is double A-rated, and that is predominantly sovereign in nature. Hopefully I've answered all your questions.
Thank you. You mentioned, what was your average yield on your investment book?
If you remember in the last year financials and when we were talking about the profit rate sensitivities, we mentioned it was 4.12% per annum, or close to 4%. With recent maturities, given they were very old Sukuks, our portfolio has slightly moved upwards and with the current repricings happening in the market. It will be somewhere 430 basis points.
It will be around 4%- 4.5%, basically.
Yes. In between this range.
Okay, sounds good. One last question. The expectation for this year was that probably we will see some improvement in the net financing income margin. However, first quarter also we saw some contraction. Is it because your CASA levels have gone down or the general cost of funding has continues to go high? Thank you.
I am not really sure on the margins how you are calculating it, but the way we are calculating and we are seeing the numbers, it has improved. It has improved almost by five basis points on an annualized basis. Yeah, because I think your average balances, you take the spot average balances, two data points. Maybe because of that you will be seeing a bit of distortion. From our perspective, we are seeing an improvement in the NIMs. On month-on-month basis actually we are seeing an improvement. Cost of funds sequentially is going down slightly, getting stabilized and towards tilting downwards. Not like I would say heavily going downwards, but like tilting downwards. Yields on assets remaining stable quarter-over-quarter.
Sounds good. Thank you.
Thank you. Our next question comes from the line of Mark Krombas from TFI. Please go ahead.
Hi. I just have a question about the recoveries. Could you talk a little bit more about how much recoveries you had over this quarter? Because obviously your cost of risk was very low. Could you just talk a little bit about the trends within stage two, your stage two loans, whether there's reason to believe that they might become performing again or whether some are trending towards tier 3? Just some more elaboration on the tier 2 loans. stage two loans, rather.
Thank you, Mark. If you go on page number 15 of the financial statements, you will notice there is a recovery we are mentioning, so it's QAR 25 million. If you compare to page number 16, the last year recoveries, which were very, very high, so it was QAR 110 million. Presumably this answers your recovery question. In terms of the overall cost of risk, we continue to anticipate in a range of 35- 45 basis points on annualized basis, given these recoveries will be coming in the pipeline and will be flowing through. As far as your stage two question is concerned, we have not seen any significant changes in terms of our stage two portfolio when we compare to the December numbers. As of now, we are pretty much quite stable on the stage two.
Going forward, obviously there will be some reclassifications moving upwards, that is stage one, and some reclassifications which are going to be moving downwards, that is in stage three. It's too early to say how these will evolve but as of now we are talking as of March, they are pretty much stable and has not even moved at all.
Okay. Thank you.
Thank you. Our next question comes from Andrew Brudenell from Ashmore. Please go ahead.
Yeah. Hi there. Can you hear me okay?
Yes, we can hear you.
Hi. Yeah, great. Okay, thanks. Yeah, no, thank you for this. I just had a couple of things. Maybe I missed what you were saying about the NIM. Could you just talk a little bit about NIM sensitivity? Obviously, you haven't seen quite the dynamics that some other banks have seen in terms of NIM, but you've seen it on cost of funding. If and when rates actually begin to come down, what would you expect to see over the next, say, couple of years? Just to give me a sense of how the sensitivity works on the books, please.
Yeah. In terms of, you're spot on the point that there is a lot of gray area on when the Feds will decide and how the rates, the market or the benchmark rates will move. We are very conservative, and as we have told in the Q4 call, that we expect almost 25 bps reduction in the latter part of the year. That is like in Q3, Q4, somewhere in Q3, Q4, and on a year-on-year basis, being very conservatively calculating and sensibly looking into the numbers. We expect a bump in our NIMs by almost 10 bps. In the first quarter on annualized basis, we saw four to five bps going upwards. That is the correct direction we are moving towards.
Again, there is a lot of things, there is a lot of moving parts at the macro front, which can take things to a different direction. Starting in the year, in December call, we mentioned 10 bps, with 25 bps reduction in the benchmark rates.
Yeah. Okay. Great. Thank you. Then the second one, I've asked this question before, the cost of risk is incredibly low despite the fact that coverage is quite low. Then you mentioned that you sort of want to keep provisioning to, I think I inferred from what you're saying, to increase coverage. Yet cost of risk guidance is sort of 35- 40 bps. Is there a target coverage that you actually want to get to by a certain point, or is it a little bit more kind of random than that?
Because even with collateral, I think you said coverage is only 90%, which I know you're going to tell me that it's different for you guys from every other bank in the world, that real estate is a big portion, I don't understand, it is a low coverage figure. If you just could tell me the plan, please.
I think on the coverage front, again, we consider collaterals. When we look into the collaterals, our coverage remains close to 90% in the medium term, not like tomorrow, not like day after tomorrow. In the medium term, the idea is to improve this to reaching towards 100% mark. By the way, the coverage has slightly improved quarter-over-quarter. Last quarter in December, it was 69.9%. We improved to 71.5%. You might see slight improvements on that front. In medium term, the idea is to reach to 100% with the impact of the collaterals.
Okay. All right. Thank you. Then just so I maybe just finish on that. NPL formation, because obviously the NPL ratio went down, but the book sort of grew. In terms of NPL formation, what's the kind of assumed natural NPL formation going forwards?
I think the idea is to close this year by close to 5% mark and all that will be good too if we can less than 5% mark, not significantly less. Again, it should be close to 5% in terms of the NPL ratio by the year end.
Okay. Based on mid-single-digit growth. Okay.
Yeah.
Not much change. Yeah. Okay. Sorry. Then just one final one. I'm sorry, I've lost the page. OPEX growth. Cost income ratio is one metric, but just in terms of growth that you expect in expenses in OPEX over the next couple of years, what's the group sort of assuming or targeting on that front, please?
I think the theme or the idea for the management is to be as less as possible, don't be extravagant, and be modest in terms of our spendings. That strategy will continue. You might see single digit movements towards positively, like going upwards. Key areas of spendings could be spendings on the IT infrastructure, could be certain spendings, sometimes you have certain marketing campaigns which comes up. Those are at times you might see some upward movement or outliers. The idea is to remain very much close to the inflation benchmarks, close to the historical numbers, and don't be extravagant on the overall spendings.
Yeah. Okay. Great. Thanks very much.
Thank you. Our next question comes from Lee Beswick from QNB. Please go ahead.
Hi. On the NIM, in relation to your earlier comments, if the Fed raises by 25 bps at the end of the year, would that then slightly negatively affect the NIM, maybe going into 2025, if you got a December rate rise?
No. What I mentioned earlier is we are budgeting a benchmark rate reduction of 25 bps. That is the Fed rate reduction, which is to happen in the latter part of the year. With that, we will get a NIM increase by 10 bps.
Exactly. My question is: if the Fed raises rates, not cuts them, raises rates in the latter part of the year, will that have a symmetrical impact, slightly negative impact on the net interest margin?
If the Fed increases the rate, obviously my cost of funds might go in tandem with that, I did not modeled how my yield on assets will work. This is something which I don't have any answer on at this point of time. Historically, in last two years, we have seen the NIMs getting compressed or getting pressured predominantly because of very high cost of funds.
Okay. Thank you.
Thank you. Our next question comes on the line [Muskan Jain] from Lesha Bank. Please go ahead.
Yeah, hello. Can you hear me?
Yes. Hi. We can hear you.
Almost all my questions are answered actually. I missed on a point that how do the bank perceive the loan growth for the year? Secondly, I want to ask, what ROE the bank is targeting for the year?
I think we mentioned during our speaker notes also, we are looking for a mid-single-digit growth on a year-on-year basis for the overall financing books. Key pillars of the growth or key segments of the growth should be wholesale banking and private banking. That is pretty much aligned with the overall GDP growth expectations at the country level. In terms of your second question, sorry, I missed your second question.
What ROE the bank is targeting for the year?
I think the current ROE is somewhere at 14%, slightly notching upward 14%. The best bit in ROE should be close to 13%, being conservative. That's something, it's a function of so many moving parts, so I won't be able to give you exact guidance on that. As far as the best guesstimate or estimate should be somewhere close to 13%. That will be a good achievement for us.
That's it from my end.
Thank you. Our next question comes on the line of Lee Beswick from QNB. Please go ahead.
Apologies. Just a follow-up question on capital. Have you made an assessment of Basel 3.5, Basel IV, whatever you want to call it, and what impact that would make?
As of now, since last year, we were working on the new regulations which Qatar Central Bank trying to implement and announce those regulations. 3.5 Basel and Basel IV, I am not really sure we have anything to say at this point of time.
That is going to be implemented in this quarter, is it? By June?
The QCB regulations, if they are incorporating these new regulations which you are referring to, yes, that has already been implemented, and that has been implemented starting from 1st of January. We did an exercise in line with the QCB's regulations, the new regulations, to calculate the capital adequacy ratio, and that has been implemented with some exceptions and with some delays are there which QCB has asked us, and as of now, we are following what the QCB regulations are requesting us to do.
Okay, you have implemented it within your accounts, your first quarter accounts?
Yes.
Okay. Thanks. Thank you.
Thank you. Our next question comes to line of Salome Skhirtladze from Bloomberg. Please go ahead. Salome Skhirtladze, your line is open. It doesn't appear as we're getting a response. I'll move on to the next question. Our next question comes to line of Ejayan Al-ahbabi from Al Rayan Investment. Please go ahead.
Gentlemen, thank you for the presentation. This is Shabbir Kagalwala from Al Rayan Investment. I have a question on the expected tax implementation in Qatar. What sort of tax rate do you anticipate to affect you and how do you see to mitigate the risk of taxation in terms of improving profitability or maintaining profitability because of that? If you can just give some comments, please.
Shabbir, I think we are still awaiting exact regulations. To say something on this front will be difficult from my part. Like how much the exact tax will get applied. If I see the Pillar Two regulations, it says anybody or any MNC who has a revenue of more than EUR 750 million, they will be applicable for a 15% tax. That is not actually been implemented as of now. I won't be able to comment on this one. When this will be implemented, again, this is something a moving part or I'm not really sure when exact regulations will become applicable. All right. Thank you.
Thank you. Our next question comes from Salome Skhirtladze from Bloomberg. Please go ahead.
Hello, can you hear me now?
Hi, we can hear you.
Hello. Hi. Thanks for the call. I have a quick question on the cost of risk. The 2023 level was annualized, I mean, was low significantly versus the historical average. Could you give us a bit more information or guidance? What could be the 2024 level like? Shall we see the level rebounding to the historical average, and could you comment on the real estate market developments that you have seen so far in one Q? Thanks.
The cost of risk question, I think we had this discussion before also. In the last quarter, this cost of risk should remain with a range of 35-45 bps on a gross basis. It will be difficult to determine on net basis how the cost of risk will evolve in this year. In the first quarter, on the basis of gross cost of risk, we reported 24 bps on annualized basis. Going forward, we expect the year to close somewhere in a range of 35-45 bps of the cost of risk. As far as real estate market in the first 90 days of the year, we haven't seen any unusual movements or any significant changes. That is its status quo as compared to the December discussions we had on the real estate exposures.
Thank you very much. One question more about the operating expenses. I see the decline in staff costs, in the first quarter. Are you going through any structural changes or could you explain that? Thanks.
No, I think it's pretty much at times you have certain accruals to make. Those accruals, on a given point of time, you make certain accruals and you don't make certain accruals. I think this is pretty much, it's a seasonal effect. Maybe in Q2, Q3, you might see those accruals flowing through. This decline, it's a one-off, I would say.
Okay. Thank you.
There are no further questions at this time. I'll now hand the call back over to Mr. Roy Thomas.
If there are no further questions, we'd like to thank Dukhan Bank's management for the results update and answering all the queries, and look forward to speaking to you all for the second quarter 2024 results conference call. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.