Hello everyone, welcome to QNB Group's Second Quarter 2023 Results Conference Call. My name is Nadia, I'll be coordinating the call today. If you would like to ask a question, please press star, press one on your telephone keypad. If you have joined online, please use the Q&A chat box provided. I will now hand over to our host, Elena Sanchez from EFG Hermes to begin. Elena, please go ahead.
Thank you, Nadia. Good afternoon and good morning, everyone. This is Elena Sanchez from EFG Hermes, I would like to welcome you all to QNB Group's Q2 2023 results call. It's a pleasure to have with us in the call the following speakers from QNB Group. Ms. Noor Mohd Al-Naimi, SEVP, Group Treasury and Financial Institutions, Mr. Mark Abrahams, EVP Group Treasury Trading, and Mr. Durraiz Khan, SVP Financial Consolidation. The call will begin with a presentation from management of the key highlights for Q2 2023 results, then we can move on to the Q&A. I would like to hand over the call now to Mr. Mark Abrahams. Please go ahead.
Thank you very much indeed, Elena and EFG Hermes for hosting our Q2 call today. Before we begin, it is customary to remind everyone that this earnings call is for investors and analysts only, any media personnel should disconnect now, please. I will begin by giving an overview on the macroeconomic environment, I will cover QNB's financial results for the six months ended 30th of June 2023, finally open the floor for Q&A. The global environment continues to be affected by the consequences of excessive post-pandemic policy stimulus and geopolitical tensions. Higher inflationary and monetary tightening has resulted in a slowdown of global growth and uncertainty in some advanced economies. The conflict in Eastern Europe has added further uncertainty and volatility to the global growth outlook.
Furthermore, despite a correction in oil and gas prices, fiscal and external revenues remain robust in Qatar and the wider GCC region. This is adding momentum to the strong domestic macroeconomic backdrop. As a result, the economic expansion continues while the banking sector is resilient and healthy, with only significant growth, ample liquidity, adequate levels of capitalization, higher asset quality, and robust profitability. Qatar continues to lay the foundations for GDP growth over the medium and long term through investment, diversification, and stronger private sector engagement. On the non-hydrocarbon front, following the successful preparation and organization of the 2022 FIFA World Cup Qatar, the country has further consolidated its position as a regional and international hub for business, investments, commerce, tourism, and culture. This has accelerated the execution of Qatar National Vision 2030 and assisted in the ongoing transition towards a knowledge-based economy.
On the hydrocarbon front, failed initial investments in increasing gas production have drive economic growth, with six new LNG trains planned under the flagship North Field Expansion project, one of the largest capital expenditure projects in the region and industrial engineering projects in the world. This investment is expected to increase Qatar's LNG production by 64% to 126 million tons per annum, contributing to almost a third of global LNG demand. The project will include an equivalent expansion of Qatar's refinery, refining, downstream, and petrochemical capacity. Positive spillovers from these projects will combine with diversification efforts and structural reforms to boost economic activity and spending in the broader manufacturing and services sectors. We expect domestic activity to remain strong with a GDP growth of 2.4% in 2023 and 2.5% in 2024, according to consensus estimates.
Importantly, Qatar is set to continue to benefit from major twin surpluses on its current and fiscal balances, while inflation will moderate further to around 3% this year and 2.5% next year. I will now move on to QNB's financial results for the six months ended 30th of June 2023. Net profit was QAR 7.6 billion or $2.1 billion, a robust growth of 8% compared to last year. Solid revenue growth resulted in an increase in operating income to QAR 18.5 billion or $5.1 billion, up 14%, demonstrating QNB Group's success in maintaining growth across the range of revenue sources. QNB's cost-to-income ratio remains strong at 20.4%, which remains considered to be one of the best ratios among large financial institutions in the EMEA region. Total assets were at QAR 1.202 trillion or $330 billion, up by 7% from the same period last year.
Loans and advances reached QAR 819 billion or $225 billion. QNB Group remains successful in attracting deposits, which resulted in an increase in customer funding by 5% from June 2022 to reach QAR 836 billion or $230 billion. The Group's loans-to-deposit ratio remains stable at 97.9%. QNB Group's ratio of non-performing loans to gross loans stood at 3%, reflecting the high quality of the Group's loan book and the effective management of credit risk. In addition, the coverage ratio on Stage 3 loans is at 99%. Total equity increased to QAR 104 billion, up by 1% from June 2022. The bank's capital adequacy ratio, at 19%, is comfortably higher than both the QCB and Basel III requirements. We will now turn to questions and answers. Thank you.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you have joined online, please use the Q&A chat box provided. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today goes to Waleed Mohsin of Goldman Sachs. Please proceed, your headline is open.
Yes. Good afternoon. Thank you much for the presentation. Three areas I wanted to discuss. Firstly, if you could provide an update on the loan demand domestically, if you are seeing any changes there, any green shoots on that front, and how that is factoring into your guidance for this year. Are you revising your guidance? Any color on that would be very helpful. Secondly, specifically on net interest margin. It seems that Turkey was the big or large detractor this quarter. You had a significant reduction. Given the data we are seeing in Turkey, it seems the third quarter and fourth quarter will be also weak given the increase in funding costs. If you could put this into context for the group net interest margin, that will be helpful. Third and final question on asset quality.
If you could share some details in terms of how the conversations with the regulator are progressing and if complete credit loss is in sight and if you would see a certain level where your credit losses increase and then we start seeing an improvement. Those were the three questions. Finally, if you could update us on your guidance, that would be very helpful. Thank you.
Thanks so much, Waleed. This is Durraiz Khan filling in for Ramzi . In terms of loan demand domestically, what you have noticed is that despite significant devaluations in our Turkey and both Egypt, our loan growth has still held up, and that is driven by private sector loan growth in Qatar. We had approximately, compared to December, loans were up 3% in private sector while the government continued to repay the loans. The domestic credit demand has continued to stay robust, which has helped us in making sure that we have continued to grow quarter-on-quarter sequentially as well as versus last year loan growth. We will go to the guidance first so that your question is answered. From a balance sheet perspective, we expect total balance sheet growth will be around 4%-5%. Profit and loss will be the same at 7%-9%.
The cost of risk for the full year we expect it at around 90-95 basis points, and the margin for the full year will be around 250-252 basis points. Your second question in terms of net interest margin and Turkey. Of course, what has happened in Turkey in Q2 was significant contraction in margin by approximately 300 basis points, principally coming from the cost of funds. The Central Bank has taken a lot more actions towards the end of Q2 in reducing some of the reasons why which the cost of fund was going up significantly higher. At the same time, the benchmark rates have been raised as well. We expect that the trend of raising benchmark rates would continue. We slightly differ in this view that Q3 and Q4 are going to be further weak. No.
Hopefully we'll see significant improvement from the condition that we saw in Q2 towards late Q3 and Q4. In terms of your third question in terms of asset quality, as you're aware, as long as our operating income growth is robust, which has held up in the first half of the year, we will be very proactively provisioning and providing for the cost of risk. Particularly in first half of the year, we have front-loaded a lot of ECL, resulting in our cost of risk at around 130 basis points for first half on an annualized basis. We expect that for the full year, the cost of risk would come around 90 to 95 bps which would be lower than what was last year. There is expectation that it will be the peak cost of risk was actually for the year 2022. That's our view right now.
Thank you very much, Durraiz. That's very helpful. Just on the net interest margin point. It's more a question about there's something different in your balance sheet versus the local Turkish banks because when we look at the data for the Central Bank data and I mean , weekly data, it continues to show that margins on Turkish lira loans continue to be negative, especially on the commercial side. Obviously, it's expensive to go off. Is there something that you're doing on the Turkish balance sheet which is helping you offset these cost of funding pressures? Are you doing more in terms of SMEs which are not capped in terms of rates?
In terms of overall balance sheet size, from a lending side, it's corporate-driven . It is our view that since the benchmark rates have risen and the loan cap on interest rates have been removed, this will help us in improving the margin towards, but it will not be sudden. We expect in late Q2 it will help us in actually making sure that the margin erosion which happened, significant margin erosion which happened in Q2, part of it goes away in late Q3 and Q4. It's still early days in terms of the new policy transmission. I think looking at the data immediately after the policy action which has been taken might not give the right sense of direction. Let's wait for certain more data to come in.
At least a month should fully pass before we can make different judgments as to how the margin would work out. Our view is that it would be an improvement versus Q2, definitely.
Just to wrap it up. So then in that context, your Group NIM, as you said, 250-252 , which kind of implies from top level that they will be margining down to generally stable, right? The rest of the group expect Egypt to continue to remain high in NIMs and then Qatar to be, domestic business remains stable in terms of NIMs?
Yes. This is our expectation that for the rest of the year, we have put in one rate hike, which almost is priced in. As long as that's the case, we expect the group, Qatar NIMs and other business NIMs to be stable compared to what was in first half.
Perfect. Thank you so much, Durraiz. Thank you.
Thank you. Our next question goes to Edmond Christou of Bloomberg. Edmond, go ahead. Your line is open.
Hello. Hi, it's Edmond Christou from Bloomberg Intelligence. Thanks for the call today. Some of the questions have been already answered. Just probably to put some light on the asset quality, if possible. It seems to me that asset quality is more stable into 2Q compared to 1 Q. How should we think about it going into the second half of this year and going into next year, especially with the oversupply property market, which I think is yet to be seen as a downgrade into the books. If you can shed some light on this. The second one on Turkey. Do you expect concerns of credit quality pressure going into next year? If you have seen any pressure on the migration in the second quarter.
The last one is, if I understand correctly, it's reasonable to assume that the margin for the Qatari riyal lending is stabilizing to the second half of the year where you are bit priced better on the asset side compared to the cost of deposits. If you can give some color on the cost of deposits in the local currency. I know there's been a competition on the system maturities to meet the Central Bank requirement on SSR , et cetera . Plus is there any update on this? Thank you.
In terms of asset quality guidance for Qatar, we have actually taken front-loaded some provisions in first quarter just to ensure that we are adequately covered for whatever scenario might happen for the rest of the year. In terms of your question as to whether the overhang of property sector and that is not yet reflected in the book in the sector, we wouldn't comment because QNB is a very differently structured bank compared to the rest of the market, and our loan profile is very different from everyone else. We very proactively provision any loan which we think is going to cause us issue down the line. That is why we don't believe that, especially wealth affiliated overhang is going to be a major issue for us. We remain cautious, and we try to, as soon as we identify something, we'll proactively cover it.
In terms of Turkish asset quality, interest rates are still deeply negative in real terms, resulting in the lowest ever NPLs in Turkish banking franchise that we have seen in the longest of time at around 1.3%. Interest rates will rise and will come closer to inflation rates, there is a natural expectation that there will be problems in asset quality, we have been building provision in Turkey just for this purpose. Our Stage 1 provision in Turkey is around 6%, Stage 2 is around 18%, and Stage 3 is 168%, just to ensure that, this is the best-in-class provision that you would find in potentially any other financial institution. We are covering for our asset quality risk in Turkey, which may come down the line, but it would be more of a 2024 issue, not a 2023 issue.
In terms of your third question on Qatari riyal, let me think from a QNB perspective. Even when we talk about margin stabilization in Qatar, it's more of a dollar-based balance sheet that we have. Qatari riyal is there, but dollar has a more significance, and we think that whatever loan deposit repricing that was there has been done. Even if there is one more rate hike, which almost is priced in, our margin would remain stable for the rest of the year.
Very helpful. Thank you very much for that.
Thank you. As a reminder, if you'd like to ask a question, please press star, followed by one on the telephone keypad. If you have joined online, please use the Q&A chat box provided. Our next question goes to Aybek Islamov of HSBC. Aybek, please go ahead. Your line is open.
Yes. Thank you. Thanks for the conference call. Couple questions from me . First is operating costs. You've done pretty well in the second quarter. Obviously, your revenue line will be under pressure. Yes, your operating cost is looking quite good. What are your thoughts on the operating costs for the rest of the year? How do you see them evolving? That's my first question. I think secondly, what I wanted to ask you is the change in the regulations about funding by the Central Bank. Does it somehow impact your net margin sensitivity to changes in interest rates going forward? If it does, in what way? Would you expect more margin compression from a rate fall, for example?
In terms of operating cost, absolute decline principally is happening from a devaluation in our two key markets. If you go back to our discussions which we were having in Q3 and Q4, when absolute operating costs significantly increased, the reason was that our two large subsidiaries had certain adjustments primarily in their staff cost and other line because of very high inflation in both markets. Since exchange rates were stable, it was resulting in a like- for- like increase also in dollar amounts. Since both of these entities were at devaluation, almost a fifth in both of these markets, absolute levels are coming down. We expect similar trends going forward in second half of the year as well. In terms of Central Bank regulations, no, it doesn't change any sensitivity as such.
The only thing the Central Bank is trying to do is asking the banks to go slightly longer term to ensure that stability of the deposits or stability of the funding in the system is more robust compared to what market thinks. This has been illustrated by the data. We don't think that our sensitivity changes because of these actions.
Thank you. Just one follow-up question. On your capital ratios, can you remind us what's your minimum capital requirements in Turkey, how much capital buffer you have there at the moment, and also in Qatar, right? Obviously there's a lot of consumption on Q1 on the back of the FX realization losses, which accelerated in 2021. Yes, can you remind us the capital ratio?
In Turkey, its minimum requirement is 12%, whereas locally reported capital over there is 13.8%. If we measure as per it, this is disclosed in our Finansbank slide in our investor relations pack. In Qatar as well, we are much higher than the local requirements. The minimum requirement is, if you give me a minute to get to the page, it's slide 23. 11% on CET1, we are at 13.9%. On a total capital, we are approximately 300 bps higher. 16% is the minimum requirement versus 19% on an overall basis. We are very comfortable. At a group level, we are much higher than the buffers that we have internally set for ourselves.
Just to verify, on your Group core Tier 1 quarterly numbers, you do not add your net income? Do you retain any-
Not yet.
In quarterly results. Not yet.
Not yet. We are expecting may change in 2024.
All right. Thank you.
Thank you. The final reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. If you have joined online, please use the Q&A chat box provided. We'll pause for just a moment. It looks like we have no further questions. I'll now go back to Elena for any further questions.
Thank you, Nadia. Yes, I can see s ome questions here that have been sent in a written form that have not been asked before. Based on the question about the nature of the big write-offs this quarter, and can you provide color on the high income from FX operations?
Yes, Elena. In terms of the write-off, as we have said that we have been following up for a very long time to get certain approvals for write-offs for loans which had been provided many years ago, and some of the approvals came in, which has resulted in the write-off that we are seeing this quarter. In terms of high income from FX operations, it's principally coming from our Turkish operations, and the reason is that volatility between the dollar and lira was significant in late Q2. That resulted in much higher FX income.
Okay, thank you, Durraiz. There is another one on non-resident deposits. What is the share of non-resident deposits now for QNB? Let's say that deposits also mainly come from Qatar and how that deposit funding in the coming period.
In terms of our deposit breakdown, we provide detailed breakdown in our investor presentation as to what are the geographies from where deposits are coming in. The question which usually gets asked is around whether the non-resident deposits would continue to slow down. No. They have broadly stabilized. Between the December and the June levels, they are broadly very similar. I wouldn't expect them to continue to come downwards this year as well. Now we are trying to change the composition of deposits to try to ensure that we meet the regulatory requirements of Central Bank and try to increase our diversification efforts. So far, besides obviously when we are trying to go slightly longer, it will have some cost impact. On an overall basis, the impact on NIM has been manageable.
Okay. Second set of questions that I can see here. One is asking about the outlook for operating expenses growth this year, also asking if the staff cost inflation has eased in Turkey, go down in Turkey and Egypt.
In terms of expenses in Turkey and Egypt, both countries continue to be under much higher inflation. That has been for a long time, and we expect that that is going to drive the cost higher. Having said it, in a usual circumstances, whenever these countries generally have devaluations, when the numbers are eventually translated to dollar or riyal, the absolute number is much lower than what has been given in the local markets. That is our view that would continue to be the case.
Thanks. Another question on tax expense last quarter in Q1 2023, there was a tax write-back of QAR 21 million. Asking about the change in the increased tax in the first half of 2022 - 2023 comparable to one.
Elena, you would easily note in the financials that last quarter, we had a one-off from Turkey because of change in tax law regarding certain properties that drove the one-off tax write-back. That is no longer there. That's why now the Q2 tax number is more normalized.
Okay. Thanks for that. Lastly, a question on credit quality in Egypt, if you can comment on credit cost dynamics there and expectations.
Our view is that in our Egyptian franchise, the credit quality continues to be high on the agenda. We are trying to make sure that NPLs are creeping up slowly, gradually. We expect because of high inflation in that market, exchange rate volatility, this trend will continue. It's our job to ensure that we take much more than adequate cost of risk provisions against those. At least for the second half of the year, our view is that the credit costs would continue to trend higher. The NPLs would also continue to trend higher.
Another question for me on Qatar's business outlook and loan growth. Can you please speak more about the loan performance outlook in Qatar? Do you expect most of the loan performance to be stressed in that system? And the second part of the question, can you perhaps answer the first part of the question, the loan outlook within Qatar for the rest of the year?
We covered it in our first question, that we expect that the franchise loan growth has continued to remain robust. For QNB, it is approximately 3% up versus December, June versus December numbers. We expect a pick-up actually in second half of the year so that we are able to achieve the targets that we have announced for the full growth. Second question is looking at current PMI data, business is high. What early indicators would you love to, at the turn of a cycle, see, PMI is, we have to go slightly back. PMI was low recently because the World Cup just ended, and there had been a lot of inventory build-up. Now that that has been cleared, the PMI indicator, of course, has improved. What does major CapEx kick-off for NFP 2024, we expect from this year onwards?
It would not be something which will happen all of a sudden. It would be momentum which will gradually build up. We expect initial things to start coming in from second half of this year.
Yes, hi. I see no further questions in the queue. I think we have covered most of the questions that have been sent in written form. I think perhaps we can close the call. I would like to thank the QNB management for your time today and everyone for participating in the call. And I hand it to you Durraiz and Mark to make any closing remarks that you may have. Thank you.
Thank you all very much for your time today. We'll speak again in three months. Have a good day. Thank you.
Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your lines.