Good day and welcome to the Qatar Islamic Bank Q2 2022 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Group CFO, Gourang Hemani. Please go ahead, sir.
Thank you very much. Good day, everybody. Welcome to the QIB Q2 2022 Results Call. We'll start with a quick update on where Qatar stands as of now, Qatar economy, and then we'll take on to QIB and followed by Q&A. In terms of Qatar economy, we see that the post-COVID growth continues to remain strong. Overall economy is doing quite well. Strong hydrocarbon prices are really helping and boosting the overall liquidity into the system. The banking system in general remains strong, both in terms of liquidity, capital, asset quality, various perspectives. Strong liquidity, strong revenue generation by the state has allowed them to inject the liquidity into the system, both through repayments of the short-term financing they have from the banks as well as through deposits.
Overall, the medium-term outlook continues to remain very strong given where the hydrocarbon prices are and the LNG expansion plan which the country has. Going to QIB results. I think we are again very happy to announce the Q2 results, whereby our total assets for the bank stand at QAR 193 billion, which is up 4.8% compared to June last year, but flat versus the Q1 of this year. Similarly, the total financing is at about QAR 127 billion, flat versus last year, as well as which remains the same as the Q1 numbers as well. However, on the deposit side, our deposits have reached almost QAR 129 billion, up 3.2% versus last year, growing by 5.1% in the quarter.
Overall, the loan to deposit ratio of the bank currently stands at 98%, one of the best in the country. In terms of the QCB regulations of the credit ratio, the ratio stands at almost 94%. In terms of the asset quality, our NPL ratios remain at about 1.5% with no significant new NPL generation in the quarter. The coverage ratio remains very strong. The stage three NPL coverage ratios remain very strong at 95%. On the capital adequacy side, our total equity stands at about QAR 26 billion with a capital adequacy ratio of 18.5%, well above the QCB guidelines and Basel III guidelines. Going on to the profitability metrics.
For the H1 of the year, the bank has reported a net operating income after payment of returns to Sukuk holders and the deposit holders of QAR 3.2 billion, representing a growth of 5.1% compared to H1 of 2021. The bank was able to contain the expenses at QAR 540 million, up 0.8% compared to last year, enabling the bank to improve its efficiency ratios, bringing its cost to income ratio down to 16.8% compared to 17.5% last year. The bank continued to take precautionary provisions, predominantly allocated to stage one and stage two portfolios. The total financing provisions for the first half of the year was QAR 885 million, down 3.3% compared to last year.
The total provisions came to QAR 837 million, thanks to certain re-recovery and reversals that we had generated in the Q1 of this year. This, in effect, represented the bank was able to generate the net profit of QAR 1,815 million, up 13.8% compared to last year. Overall, I think we have continued to demonstrate a consistency in delivering strong set of results over the previous quarters and the years. I'm done with presenting the Q2 results. Happy to take any questions from any investors.
Perfect. Ladies and gentlemen, I'm sorry, please go ahead.
No, nothing. I was just gonna say we can go to Q&A now, please.
Okay, perfect. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one to ask a question. We will take our first question from Chiro Ghosh from SICO. Please go ahead.
Hi, this is Chiro Ghosh from SICO Bahrain. First, congratulations for a good set of results. In fact, when I looked at it, almost all line items look quite good and quite strong. The only concern which we still have is the loan book. Like, if you see for last five quarters, almost the loan book has remained around QAR 126 billion-QAR 127 billion. If you can throw some light on where we should expect the loan book to grow over the next two or three quarters? What is the ground reality? What is the borrowing demand? That's the general question.
Thanks, Chiro. Going on the financing book growth, I think at the beginning of the year, and at the end of Q1 , we had given an indication that we expect the loan book to grow by 6%-8% on the private sector side, while the public sector will get driven by what the government decision is in terms of how the liquidity will be injected into the system. If we look at the H1 of the year, I think compared to December, our private sector book has grown almost 2%, while we have seen a drop of almost 9% on the government-related businesses.
This is very consistent with what we were expecting in terms of what really is going to happen if there is going to be significant revenue generation by the state. I think with what we have seen in the H1 of the year, I believe that trend would continue, whereby we believe that government will still continue to reduce their credit from the banking sector and will continue to inject deposits at the same point of time as well. On the private sector side, I think from where we look as of now, I think the numbers that we had given for 6%-8% looks a little bit stretched.
I think we would believe that the full year growth would come around 4%-5% on the private sector growth, given the fact that now we are entering into the summer season, and followed by that, Qatar will be hosting a mega event for the FIFA World Cup, and there will be a lot more, let's say, activities and attentions towards that. I don't believe there's going to be significant offtake on the credit side. However, the ground remains very strong for going forward. As we go into 2023 onwards, we believe that the LNG expansion plans of the government will start seeing more, let's say, on-the-ground activities, whereby the contracts would get awarded to contractors and subcontractors which should drive up the demand.
More or less with the overall improvement in the business conditions and the outlook, I think we will see more private sector participation and initiation of new initiatives. I believe that 2022, the growth will remain muted at least, and we I think overall, if we are able to achieve a 3% growth after taking both public sector and private sector put together, that would be a significant achievement. That's a lot, that still would require a lot of work to do if government continues to reduce the reliance on the credit from banking sector. I think this is not something that is very specific to QIB. This is more generic trend that we are seeing across the Qatari banking sector and which is kind of bit normal.
In terms of, does it really reflect on the bank's performance or the profitability? I would say not necessarily. Given the way the interest rates are rising and having an impact on cost of funds, I think letting go of. Yes, these are high-quality credits, but these are low-margin credits and which the margins would get squeezed further when in the rising interest rates environments, when you need to fund your balance sheet at a higher rate. I think from the, let's say, balance sheet perspective, it is not a very positive signal, but it does really contribute or help towards the NIM formation for the bank.
Once again, to ask a question, press star one. We will now take our next question from Vikram Viswanathan from NBK Capital. Please go ahead.
Hi. Hi, Gaurang. Thank you for the presentation. You mentioned that you're still putting in precautionary provisions in your income statement. My question is, how long will you keep putting these precautionary provisions? Over how many quarters? When should we expect the bank to get back to pre-crisis cost of risk levels?
Again, Vikram, I think we have been very clear in our, let's say, guidance is that if we are going to have good operating performances, we will continue to build provisions. However, we do face. These are more precautionary to take care of reduce the future volatility in the bank's earnings, given if there were some unexpected, let's say, quality deterioration or some idiosyncratic credit risk that comes up. As long as we can continue to have good operating performance, we'll continue to build provisions. What we will need to do is maybe we might need to change the strategy a bit, whereby we are allocating quite a bit to stage one at this point of time.
We might look towards allocating more towards stage two, or maybe we may even consider precautionary downgrades of customers from stage one to stage two or stage two to stage three to be able to justify and manage these provision levels. We continue to remain with our risk pragmatic risk management policy that we will continue to build provisions as long as we are generating good operating performances.
Clear. Clear, Gaurang. Just one more question. There was a change in the Central Bank governor, I think beginning of the year or late last year. What is the outlook of the new Central Bank governor on the asset quality or provisions? Are they more conservative? Are they more liberal now compared to the earlier Central Bank management?
I think you have to understand that it's we are talking about an institution. We are talking about a regulator where while individuals can influence the process, but overall quality or the strategy remains more or less aligned. I don't think we are going to. We don't have any indication that there is any change or shift in the conservative outlook which the QCB central bank, QCB takes at all points of time. We believe that we will continue to see a similar conservative outlook from Central Bank. There are no indications otherwise.
Great. Thank you so much.
Once again, to ask a question, press star one. We will now take the next question from Waruna Kumarage from SICO. Please go ahead.
Hi. Thank you. Thank you for the opportunity. Thank you, Gaurang, for the presentation. I have a couple of questions. The first question is on the net financing margin.
Go ahead.
The participant has just dropped. Once again, to ask a question, press star one. Okay, we just got a question from Ankit Mittal from HSBC. Please go ahead.
Hi, Gourang. Yeah, thanks for the opportunity. Just wanted to ask on the net interest margin. What's the outlook now for the second half of the year, given that now we have like firm expectations of like more rate hikes from U.S. Fed, and keeping in mind that QCB has not raised the lending rates in line with the deposit rates. Any outlook for the H2 and next year would be very helpful. Thank you.
As Ankit has said, right, you know, what we had mentioned at the end of Q1 is to say that we are definitely expecting the Fed to increase the rate hikes. There may be a couple of extra quarter basis points hikes that now currently look more, let's say, ingrained in the way the inflation situation is there in the U.S. We were very clear that, you know, we will need to wait and watch as to how QCB increases the lending rates. As you have rightly mentioned, they have not increased the lending rates to that extent. That effectively really takes away the advantage of partly the advantage of the higher interest rate environment that the banks would normally benefit from.
However, on the other side, as I mentioned, that the government is injecting the liquidity into the system, both in terms of reducing their credit offtake as well as through deposits. I think there have been a few. If you look at the overall system, government deposits, you will see significant improvement in those levels. I think what has that helped is that while the overall QCB deposit rates have gone up, I think the competition that was there in the market, the premium that was required to be paid for expensive deposits has really come down, so effectively absorbed a bit of the impact of the increased interest rates on the funding costs for the banks, especially on the deposit side.
The wholesale banking follows the market. I don't think there's much to talk about that. We being the bank that rely quite a bit on deposit base for funding. As I had mentioned in my presentation, our loan to deposit ratio is 98%, which is well below the market average of almost about 120% plus. I think from that perspective, we did not see the cost of funds go up that much, at least in Q2, and that's why if you've seen that our NIMs have slightly improved this year compared to last year.
I think if the liquidity situation remains quite strong and we see no reason why it should change at this point of time, and if the trade-off take is not going to be that very strong, we believe that the NIMS might see a small improvement maybe by about three-four basis points more in the H2 of the year. I think the bigger benefits will start accruing next year, hoping that the liquidity situation continues to remain where it is. I would not be able to give you a definitive guidelines in terms of where it goes, because there are a number of moving parts, as we mentioned, to say how does QCB respond to the lending rates, how the liquidity scenario remains with one factor kind of offsetting the other.
Overall, we believe that NIMS will remain strong where we are, though we may not see a very large improvement. Maybe in Q4 we might see a better, let's say, impact, as given the fact that there is always a lag effect of three-six months, almost six months. Three months is a wrong parameter. I would say six months at least before the rate hikes really start translating into asset yields. Hope that helps.
Thank you. Very helpful. Yes, just one more follow-up on fee income. So I think Q2 the core fee income was quite strong. So is that sustainable? I think H2 we will be having a benefit of, I think, World Cup as well. So I think any outlook on the fee income for the H2 and next year? That would be helpful.
I think the fee income for the H1 of the year was strong and it was driven by the core activities, as you have rightly mentioned. We believe that those activities should continue to work in our favor as we go into the H2 . There is always an element in the H1 of the year. We did have some investment banking revenues coming in from our investment banking subsidiary, QInvest. Now that the markets have really turned a little bit on the capital market side, we'll have to wait and watch how those really turn up. Overall we still expect to carry on the overall momentum.
Sure. Thank you. Thank you.
Once again, to ask a question, press star one. Have any questions at the moment? Again, to ask a question, press star one. We do have a follow-up question from Chiro Ghosh from SICO. Please go ahead.
Hi. Just a very quick, short question is, can you please remind us what percentage of your liability is from outside Qatar?
In terms of our deposits, we are at about 20%. We are well below the market average, which is about north of 40%. If you look at the QCB statistics, I think the external funding is almost 40-45%, somewhere in between. I think it's coming down since the beginning of the year where it was almost 44-45, but I think it's still around 40%. We are around 20-21%. We've always been quite active in the local market and even if we look at the first half of the year, we have actually tried to reduce overseas deposits.
What we continue to do, we'll continue to look on the wholesale funding side of it little bit, but again, still, we are still much smaller than overall the overall Qatari banking sector, if you want to look from the external funding perspective.
Oh, thank you. That's all from me. Thank you.
As a reminder, to ask a question, press star one. We will now take the next question from Edmond Christou from Bloomberg Intelligence. Please go ahead.
Hello. Just a similar question, but in terms of the dollar lending, what is the percentage on the loan books in terms of the dollar? The second question, you have done fantastically well on the cost base. It's falling sequentially. Clearly also you are investing into risk management and other initiatives within your strategy, and also we have an inflation. How do you see this is going into the H2 of the year? Do you have any campaign or marketing plan with the World Cup? Do you expect some pickup toward the Q4? Thank you.
You asked too many questions. We'll go one by one. I think our foreign currency funding is roughly around 30%. The dollar funding is, or dollar lending is about 30%, so I think that should more or less answer your question in terms of where does our lending book look like. In terms of our investments into technology, both from the perspective of digital as well as InfoSec, I think we have been doing it and we've been consistently doing it. I think it's a question of how we are investing into those, and we continue to remain quite, let's say, cost conscious in terms of managing these costs into reasonable levels and trying to generate other efficiencies later on.
We do expect that the cost might go up, but marginally, but not nothing very significant, at least in terms of absolute levels. In terms of the FIFA marketing, I think we have already been doing it for quite some time. I think it's we have tied up with Visa to offer various kind of packages and benefits to our customers, especially on the retail side, depending upon the kind of spend they do and the kind of products they are taking. So we have been doing it. Yes, it definitely will go up during the H2 of the year, but nothing very significant that should really cause us a bigger.
Maybe it might, you might have a small increase, but we are well into that spending cycle already since Q2.
Okay, perfect. Can I follow up on the cost of risk? For modeling purpose, is it prudent to assume second quarter cost of risk is sustainable into the second half, or you see gradual decline?
I think I've already answered the question that it is these are all precautionary provisions that we continue to take, and as long as we have strong operating performances, we'll continue to build. How we will justify, I already explained that as well, that if required, we might downgrade some customers from stage one to stage two or stage two to stage three, improve the coverages on stage two. If we are going to generate operating performance, strong operating performance, we believe it is prudent to build provisions. I think that provides a stability in your performance, and I think if you look at our results over the last six, seven, eight years, I think that's where the bank has been focusing on to provide stable, sustainable, yet very healthy returns to our shareholders.
Excellent. Thank you. Really appreciate it.
Once again, to ask a question, press star one. We will now take the next question from Zohaib Pervez from Al Rayan Investment. Please go ahead.
Thank you, Gaurang, for the presentation. This is Zohaib Pervez from Al Rayan Investment. Your cost to income ratio keeps reducing. I think right now it's at 16%. It's probably lowest in the world, probably. Do you think this is?
16.8.
Do you think? Yes.
It's 16.8.
Do you think this is?
Not 16 point.
Okay. 16.8%. Do you think this is sustainable, or do you think I mean, you've probably gone a bit too far in reducing the cost, and probably you need more, you need to improve on, you know, for more cost that's needed to, for better operations or something? Or you think you're still fine with this? Thank you.
Now, it's how you want to look at it. As a CFO, if you ask me, I always challenge my business and my operations team to see how we can generate more efficiencies, and I think that's the general message that goes from our board as well as the CEO as well. What we have overdone, I could not understand, because I think we have continued to invest. I think our absolute level of costs have not come down. What we have done is not to bring in the complacency that the fact that just because we are having a good revenue doesn't mean that you need to spend more. We spend more in, and directed towards those activities that generate more revenues to us and help us in further improving our efficiencies.
Now, in terms of our absolute level of cost, yes, we have been fairly successful. It's still almost 1% above last year. With the inflation coming, maybe we might see a small uptick on that as well. However, as long as the revenues keep increasing as well, I think we should be able to generate healthy cost to income ratio. Am I saying that it will remain at 16.8%? No, I'm not saying that.
I think what we have been always telling to all our investors and stakeholders is that as long as we are healthy and well below the market. I think if you look at some of our peers as well, I think everybody has been actively working to bring down their cost to income ratio as well, so we are not the only one. I think what we continue to benefit from is the discipline that we have put in the organization over the last very many years, and we continue to work on that. We might see that the cost to income ratio might go up back to 17-17.5%, but that's still well below what the industry average is.
While there are no clear, let's say, items that stand in front of us to say that the cost to income ratio should go up significantly, there are always room for us to be able to spend more if required, given the high level of efficiency that we have already achieved. I think we look at more as an opportunity to be able to spend more efficiently rather than anything else.
Sounds good. Thank you, Gourang. Thank you.
Thank you.
We will now take our last question from Rahul Tony from Avalon Global Research. Please go ahead.
Hello. Yeah, thanks for taking my question, and congratulations for the good set of numbers. Couple of questions from my side. Can you give some indication on the industry-wide exposure of the loan book and which industry you expect to drive the growth in FY 2023?
I think overall I already mentioned that we see that the private sector will continue to grow compared to public sector, where strong revenue from the government is really expected to boost liquidity in form of deposits as well as in forms of lower credit offtake from the banking sector. Within the private sector, we believe that areas which are more aligned to hydrocarbon we will see those supporting industries, whether it be upstream or downstream in the sense, it's activities that are really going to help in building those infrastructures, which are basically the contractors, subcontractors we will see offtake out there.
We see offtake in ancillary areas of services, especially in terms of LNG shipping, transportation, and infrastructure, so we see investments there. We also believe that, given the fact that, the country is committed to its Qatar National Vision 2030 and given the strong revenue generation that it is going to make, we will see higher spend in the areas, which are there. A lot of work has already been done on the infrastructure, thanks to the 2022 FIFA World Cup. I think there are more areas, especially in terms of education, electricity, and other infrastructure services, where we will continue to see spends, predominantly service-oriented, where we'll continue to see more investments. These are the predominant areas we believe will benefit as we go into 2023 and beyond.
Okay. My second question, since I'm tracking this QIB for the first time, so I would request you to throw some light on one of the line item from P&L, that is, return to unrestricted investment account holders.
What I could do is for the benefit of everybody, you can reach out to the Investor Relations team, and we can guide you through the financials of our bank. Given that we are an Islamic bank, there are few nuances that it would be good for you to know. In summary.
Sure.
To answer, this is basically the profit that we pay to our deposit holders because deposit holders are known as unrestricted investment account holders for an Islamic bank. Yeah, any of these kind of technical questions, please reach out one-on-one, and I think that could be best answered there.
Sure. Thank you.
Perfect. There are no further questions, so I would like to turn the conference back to our host for any additional or closing remarks.
Thank you very much for everybody to join our Q2 results call. Hope to see all of you in the Q3 results call as well. Thank you very much. Bye-bye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.