Hello, everyone, and welcome to the QNB Q1 Earnings Call. My name is Nadia, and I will be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Janany Vamadeva, from Arqaam Capital to begin. Janany, please go ahead.
Thank you, Nadia. Good morning and good afternoon, everyone. Thank you for joining us today. This is Janany Vamadeva, and on behalf of Arqaam Capital, I am pleased to welcome you to Qatar National Bank Q1 2023 earnings conference call. I have with me here today from QNB management, Mr. Ramzi Mari, the Group Chief Financial Officer, Mr. Noor Mohd Al Naimi, Group Treasury and Financial Institutions, and Mr. Mark Abrahams, Group Treasury trading. Without further ado, I will now turn the call over to Mr. Mark Abrahams. Mark, over to you.
Thank you very much, Janany and Arqaam Capital, for hosting our 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 in Qatar. I will cover QNB's financial results for the three months ended 31st of March 2023. Finally, I will open the floor to questions and answers. The global environment continues to be affected by the negative consequences of excessive post-pandemic policy stimulus and geopolitical tensions. Higher inflation and monetary tightening resulted in a marked slowdown of global growth and financial instability in some advanced economies. Geopolitical woes in Eastern Europe have added further uncertainty and volatility to this outlook.
Supply chain constraints and geopolitical concerns have supported elevated energy prices and robust fiscal and external revenues in Qatar, which added further momentum to the strong domestic macroeconomic backdrop. As a result, the economic recovery is in full force locally, while the banking sector remains resilient and healthy, presenting significant growth, ample liquidity, adequate levels of capitalization, higher asset quality, and robust profitability. The successful preparation and organization of the 2022 FIFA World Cup Qatar , the largest sports event on Earth and the largest event ever hosted in the region, also led to stellar economic growth. The momentum associated with the event contributed to an 8% year-on-year GDP growth for Qatar in Q4 2022, the strongest performance in more than a decade. Importantly, Qatar's non-energy sector was particularly buoyed, with close to 10% growth during the same period.
The event has further resulted in the highest GDP growth rate for 2022 in the region, principally driven by non-oil and gas sectors. The 2022 FIFA World Cup Qatar further consolidated the country's position as a regional and international hub for business, investments, commerce, tourism, and culture. This accelerated the execution of the Qatar National Vision 2030 and assisted in the transition towards a knowledge-based economy. In the medium to long term, tailwinds from investments in increasing hydrocarbon production will 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 refining, downstream, and pet chem 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. Qatar is therefore laying the foundation for continued GDP growth over the medium and long term through investment, diversification, and stronger private sector engagement. I will now move on to QNB's financial results for the three months ended the 31st of March 2023. Key financial results are as follows. Net profit was QAR 3.9 billion, or $1.1 billion, a robust growth of 7% compared to last year.
Solid revenue growth resulted in an increase in operating income to QAR 9.3 billion, or $2.6 billion, up 20%, demonstrating QNB Group's success in maintaining growth across the range of revenue sources despite market volatility. QNB's cost-to-income ratio remains strong at 21.7%, which is considered to be one of the best ratios among large financial institutions in the Middle East and Africa region. Total assets are at QAR 1.178 trillion, or $324 billion, up by 6% from the same period last year. Loans and advances reached QAR 810 billion, or $222 billion.
QNB Group remains successful in attracting deposits, which resulted in an increase in customer funding by 5% from March 2022 to reach QAR 828 billion, or $227 billion. The group's loan-to-deposit ratio reached 97.9%. QNB Group's ratio of non-performing loans to gross loans stood at 2.9%, a level considered to be one of the lowest among financial institutions in the Middle East and Africa region, 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 was further increased to 104%. Total equity increased to QAR 103 billion, up by 5% from March 2022. The bank's capital adequacy ratio, at 19.3%, is comfortably higher than both QCB and Basel III requirements.
Before we begin the Q&A, though we welcome all questions, in the interest of time, we would appreciate if the questions are please limited to three per participant. For any further and detailed discussion on our results, you may directly reach out to our investor relations team. We will now turn to Q&A. Thank you very much.
Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. We ask you please limit yourself to no more than three questions per person. Our first question today goes to Ashwath P. T. of Goldman Sachs. Ashwath, please go ahead. Your line is open.
Hi. Thank you for the presentation. I have three questions. The first is, how has 1Q 2023 print change your guidance for the remainder of the year? The second being, how do you see loan growth pipeline in Qatar? The third on margins for your domestic business, especially because of the high competition for resident deposits. Thanks.
2023 guidelines. On the balance sheet, it is the same as we mentioned before, 4%-6%. On the profit or loss, it's marginally higher than what we gave in December. It is now 7%-9%. Loan growth. First quarter private sector loan growth domestically, was 2%. Government, as we mentioned before, they will continue to pay part of their loans. They paid around QAR 10 billion, that's why public sector loans dropped by 2%, that's why we ended up with a flat number. In December, we still believe that the overall growth in the group will be in loans between 4%-6%. Margin. On margin, if we talk about local standalone, we always need to take into consideration overseas branches, because these are one unit. You cannot separate them.
If you look at them separately, what impacts the numbers there is the fund transfer pricing, which is something internal that we utilize to encourage overseas branches to generate funding at a lower rate. This needs to be ignored because it's something internal. If we take a quarter-on- quarter movement in interest income for head office operation and overseas branches, we will realize that we grew by QAR 548 million, which is a big number. Our margin were close, if not higher marginally by 1 basis point. If we take overall margin for the group, we can see from November that there were a drop of around 3 basis points. The bulk of that drop came from Finansbank. The reason for the drop in Finansbank interest was different folds. The earthquake was a reason.
The decrease in income from CPI securities was the most important factor. Less inflation impacts overall interest income. The last one, which is indexation of IAS 29. It's a matter of how you apply the standard. This will be adjusted once we reach end of the year, of course, all dependent on what the inflation number will be. This is roughly where we see interest income in terms of analysis for the first quarter. We still believe that net interest income by end of the year will grow between 5%- 7% on last year. In terms of margin, we should go back to around the 255 basis points. We said last year that we have enjoyed 13 basis increase on margin. Different factor. One reason why the increase was the inflation in Turkey.
However, this year, the impact will be the other way around, still we will be able to manage overall impact, we don't see a drop of more than 5 basis points of where we have been in December. The most important thing is the absolute number of interest. We're still going to see growth in net interest income, as I mentioned, 5%- 7%. Okay.
Great. Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad if you would like to ask a question today. Our next question goes to Rahul Bajaj of Citigroup. Rahul, please go ahead. Your line is open.
Hi. Thanks for taking my question. Rahul Bajaj from Citi here. I have two quick questions, actually. One is a clarification from the previous comment that was made. 7%-9% P&L growth. Just wanted to clarify, is this before the hyperinflation charge for 2023 or after the hyperinflation charge? Because-
After.
why I'm asking this question-
After.
Okay. Linked question to this is the much higher level of hyperinflation charge, which was booked in the first quarter. Is it fair to assume a similar QAR 700 million-QAR 750 million of hyperinflation charge would be applied for the remaining quarters for this year? That seemed to be almost 70%, 75% higher than quarterly run rate of 2022. Thank you.
Impossible to guess how much hyperinflation impact on profitability will be, because it's highly dependent on what inflation is going to be and how we are going to manage the net monetary position of the entity. There are different factors that impact the number. We will try our best to minimize it, but at the end, the most important factor is inflation, which is something no one can guarantee.
Understood. Thank you.
Thank you. The next question goes to Naresh Bilandani of JPMorgan. Naresh, please go ahead. Your line is open.
Hi, it's Naresh Bilandani from JPMorgan. Thank you, Mr. Ramzi. I appreciate it. Pardon me, I joined a few minutes late, just while you were mentioning the impact on the interest income, and I just wanted to have one clarification there, please. Could you please explain once again with regards to how the impact of transfer pricing is affecting overall in the NII line? Clearly, I think this has probably something to do with the fact that although the pressure is coming from Turkey, it is being reflected more in the Qatari segment. Would it be fair to assume that some of the impact of the NII, and pardon me if I missed this comment, had to come from the shift in the loans moving from Stage 2 to Stage 3 in the previous quarter, so there's a loss of NII coming from that portfolio?
That's one. Second is, if you could please throw some thoughts on when or to what extent should we expect a turn in the credit volumes inside Qatar, because the more recent readings in the more recent quarters shows that I think the trend has kind of remained moribund at this stage. Any views there would be extremely helpful. Thank you.
If you try to analyze the breakdown of interest income through our note on segmental, the analysis will materially be impacted by the transfer pricing that we adopt in head office, in how we manage and how we price that funding that comes from overseas branches. It is something internal. It's a tool that we use in treasury and financial control in order to encourage our overseas operations to generate funding, number one. Number twi, to diversify. Number three, to reduce cost of funds. If they are able to do that, we compensate them by a better fund transfer pricing, which impacts their profitability. It is something internal. The net impact on the group is zero. Okay. How we manage this, please note that we have one pool of funding that sits in treasury.
Every single riyal generated by overseas operation is routed to head office, every loan given by overseas operation is borrowed from treasury. This funding to treasury and borrowing of treasury, there is a price mechanism that is built, that price mechanism is built and changed every quarter and every year based on the parameter of the market and based on what we want from overseas operations from a funding perspective. That's why I understand where you're coming from when you say what impacted Doha profitability standalone from a segmental note. The most important factor here is fund transfer pricing. In financial control, when we analyze interest, we analyze head office and overseas branches as one unit, because to us, all branches are included as one unit with head office.
If you look at this, the interest income for that unit, it grew by QAR 550 million in the first quarter. The overall negative impact that happened is coming from Turkey, as I just mentioned. This is where you. About Stage 3 to Stage 2, zero impact because the bulk of loans that were moving to Stage 3 last year, they have interest suspended on them, so there were no material impact on net interest income for Doha standalone. Credit volume, again, I mentioned that in the first quarter we were flat because public sector continued to decrease their OD account, whereas private sector moved at around 2%. We still believe that by year-end, overall growth in loans will be between the 4% and 6%.
Understood. Thank you. Just one follow-up here. If I take a look at the interest expense line, naturally, this has increased quite significantly given the rates environment. Would it be fair to assume that the trend that we are seeing in the blended funding costs has an impact from the fact that some of the deposits, probably there was a timing impact, and they left towards the tail end of the quarter, so the funding cost overall is looking quite high? That's one follow-up. The second follow-up is, you mentioned in your previous comment where with regards to Stage 3, I understand as they were moved into Stage 3 towards the end of the last year, interest gets suspended.
What I'm trying to see is naturally because the interest on them was recognized last year, it is not being recognized this year, which also has an impact on how the gross interest income is moving. Is that a fair way to interpret it?
No, Naresh. We have some loans at Stage 2, which is with interest suspended. The loans that moved to Stage 3 from the beginning of the year, their interest was suspended last year. There were no impacts on 2022 in terms of interest suspend or the move. We have many loans in Stage 2 with interest suspense. Again, this is on a conservative approach of QNB and how we manage our book. It's not only Stage 3 accounts have interest suspended. Some Stage 2 accounts have interest suspended. On the overall implication on interest expense standalone, to be honest, it will be impossible for me to be able to give you a question on the phone on the overall impact or the breakdown impact on interest expense during the first quarter.
If you drop a question to the team, I'm sure they will be able to give you a full analysis on the details on this.
Got it. Thank you very much.
Thank you. Our next question goes to Chiro Ghosh of SICO. Chiro, please your line is open.
Hi, this is Chiro Ghosh from SICO Bahrain. Two very quick questions. The first one is, I saw that the trading and other income were a little higher. If you can tell us how much of this is sustainable or rather one-off, so that will give us some guidance. Second of all is, how are you looking at the Egyptian business as a whole after the current development? Yeah, these are my two questions.
Trading income grew. We seen this happening fourth quarter last year and in the first quarter of this year. The bulk of this income is coming from international operations, mostly Turkey. The nature of this business is opportunistic. It highly depends on the market rate. If you see a good opportunity, you will liquidate part of the book that you have. Can this continue? It will, but not at the level that you have seen in the fourth quarter and the first quarter of this year. Again, the most important factor is the market condition. On other income, it is a one-off income. It's mainly caused by the valuation of our insurance arm in Turkey, which is Cigna. We used to own ± 50%, now we own 100% of the entity. Because of that acquisition, based on financial a ccounting standard, we need to do valuation.
Based on that valuation, we generated the profitability. This is a one-off income. Now, Egypt, again, regardless of the devaluation, our investment in Egypt is long-term, and we don't look at it as one year or two years. Egypt is still an important market. It's the third largest home market for the group. We still enjoy close to 20% return on equity from the entity. We think very strong number. If we look at the guidelines for Egypt this year, we're talking about a growth of close to between 14%-16% on assets, loans, and deposits, and close to 25%-27% growth and profitability. The entity continued to grow. It continued to be very profitable with a good return on equity.
Just one quick one on the previous question he asked that, a re you actually seeing project rollouts coming in and lending book within Qatar? Sorry, I did not get the answer in the previous question.
You talk about project financing?
No, I'm just saying overall, the project rollout has again started in Qatar. Do we expect to see loan growth picking up in second half of the year? The private sector or anything?
You talk about production or you talk about the project investment in the project in terms of the work? You talk about the North Field project?
Yes. Exactly. Yeah.
This started two years ago. In terms of actual projection, as far as I know, it's I think 2024, 2025, the actual production will start.
Okay, great. That's all from me. Thank you very much.
In terms of financing for this project, it's already started. As we always mention, QNB participation in these loans is usually limited because the pricing of these loans is extremely low. To us, if we want to maintain 250 basis points margin, the participation in this project for QNB will not be that big.
Okay. No, sir, I want to get a sense of overall how will the lending book come in, the private sector lending book. It was more related to that.
In terms of private sector, as we mentioned, the 2% growth in one quarter is a very good number. We think this momentum will continue. A big chunk of the growth that we are going to see in the overall Qatar operation will come from the private sector this year.
Okay, that's all from me. Thank you very much.
Thank you.
Thank you. As a final reminder, that's star followed by one on your telephone keypad. We'll pause for just a moment. Thank you. It appears we have no further questions. I will now hand back to the team for any closing comments.
Thank you very much for your time and attendance today. We appreciate your focus on QNB. Wish you a good day, we'll speak to you in three months time. Thank you very much. Bye now.
Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.