Hello. Good morning, good afternoon, good evening, everyone. This is Rahul Bajaj from Citibank's financials research team, here in Dubai. We are very delighted this afternoon here to host the QNB management team to discuss their Fourth Quarter 2022 Results Performance. On the line with us, we have the QNB management team being led by Ramzi Mari, the Group Chief Financial Officer, Noor Mohd Al-Naimi, Senior Executive Vice President, Group Treasury and Financial Institutions, and Mark Abrahams, Executive Vice President, Group Treasury and Trading. Without further ado, I'm passing the call to Mark to take the call forward. Mark, over to you.
Thank you very much indeed, Rahul and the Citi team for hosting our call today. Before we begin, it's customary to remind everybody, please, this earnings call is for investors and analysts only. Any media personnel should disconnect now. I will begin by giving an overview on the macroeconomic environment, I will cover QNB's financial results for the 12 months ended 31st of December 2022, and finally open the floors up to Q&A. Following the recovery from the pandemic, economic activity has gained traction globally on the back of robust reopening demand. Excessive post-pandemic policy stimulus has given way to higher inflation, the resultant monetary tightening has resulted in a slowdown in global growth. Supply chain constraints and geopolitical concerns have supported elevated energy prices and robust fiscal and external revenues in Qatar, which has 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, the largest event ever hosted in the region, also led to strong growth in Qatar's private sector in the second half. With more than 1.4 million international visitors, the event has provided strong impetus to the local economy and businesses which were impacted by the pandemic. The flawless execution of the event consolidates Qatar's position as an international hub for business, investments, commerce, tourism, and culture. It has accelerated the execution of the Qatar National Vision 2030, will assist in the transition towards a knowledge-based economy.
In the medium to long term, tailwinds from investment 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 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. 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 12 months ended 31st of December 2022. Net profit before the impact of hyperinflation was QAR 16.1 billion or $4.4 billion, a robust growth of 22% compared to last year. The accounting for a non-cash hyperinflation adjustment impacted the profits nonetheless, and despite the challenging conditions, QNB Group reported net profit after the impact of hyperinflation at QAR 14.3 billion or $3.9 billion, up 9% compared to last year. Robust revenue growth resulted in an increase in operating income to QAR 34.6 billion or $9.5 billion, up 24%, demonstrating QNB Group's success in maintaining growth across the full range of revenue sources despite significant market volatility. As a result of higher revenue growth, QNB Group has continued to reduce the cost-to-income ratio downwards from 22.2% last year to 19.7% as at December 2022.
Total assets are at QAR 1.189 trillion or $327 billion, up by 9% from the same period last year. Loans and advances reached QAR 808 billion or $222 billion. QNB Group remains successful in attracting deposits, which resulted in an increase in customer funding by 7% from December 2021 to reach QAR 842 billion or $231 billion. This improved the group's loan-to-deposit ratio to 95.9%. QNB Group was able to maintain the ratio of non-performing loans to gross loans 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, coverage ratio on Stage 3 loans is at 99%. Total equity increased to QAR 106 billion , up by 6% from December 2021.
The bank's capital adequacy ratio, at 19.6%, is comfortably higher than both QCB and Basel III requirements. The board of directors have proposed a cash dividend of 60% of the nominal share value, QAR 0.60 per share, for the year ended 31st of December 2022. The amount is subject to approval by the general assembly. Before we begin the Q&A, and in the interest of time, we would appreciate if the questions are 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.
We are now beginning the Q&A session. If you have a question, please press the raise hand button, which can be found at the bottom of the Zoom interface. If you are dialed in via telephone, press star nine to raise your hand. When you are selected to ask question, I will call your name and ask you to unmute yourself. Thank you. We already have our first question. It comes from Chiro Ghosh. Please unmute yourself and ask your question.
Hi. This is Chiro Ghosh. First, thanks for hosting the call and giving us enough time to ask our questions. My first question is regarding your loan growth. Loan growth in fourth quarter was a surprise, and it was quite strong, I must say. What can you give us as an outlook for the loan growth in next year? A continuation of this is that you have been talking about the hydrocarbon side, but in the previous call, they have been saying that the hydrocarbon loan book demand might be met by international banks also. How much opportunity you see in the hydrocarbon project versus the other infrastructure projects? If you can give some guidance on what kind of infrastructure projects are happening in Qatar right now. That's my first one. Second one is related to the asset quality.
I believe that there has been some asset quality deterioration, especially in the Qatar side, in the fourth quarter. I know you have taken enough provision against it, but you believe that the concerns are over, or we might still see more deterioration, pickup in delinquencies in first half of 2023? That's my two questions.
Okay. Loan growth. I agree with you. The fourth quarter saw strong growth in loans that we have not anticipated. Considering QNB is purely a corporate financial institution, in many cases we would be negotiating large loans, and we cannot guarantee when the deal will finalize. We were successful in closing some large loans in the fourth quarter, before December, and that's why they were booked, before year-end. This has impacted the growth in the fourth quarter. In terms of our expectation for the year, we still have the same guidelines that we gave last quarter. Balance sheet growth for the group is expected to be 5%-7%, whether it was for loans or for assets. The same guidelines. Now, growth will continue to be partially from hydrocarbon projects, whether it was the North Field or the petrochemicals factories that were announced. I agree with you.
We usually don't take large chunks of share in this project. At the end, we have our share usually that we get, which add to the overall value. There are several projects that are being discussed, in terms of whether they haven't been finished and they are ongoing, whether they are total economic zone , Lusail mixed-use development, another couple of large real estate projects in addition to the North Field project. All these will allow us to achieve the target that we talked about, which is a 5%-7% growth in the bank. Now, NPL. I agree with you again on the growth that we have seen in the fourth quarter in terms of NPL ratio. I've always said that QNB is seeing a lot of pressure in having a coverage ratio above the 100%, whether it was from the QCB, Central Bank or from the auditors.
To be able to manage that coverage ratio and to keep it around 100% from where we used to be around 116, we had to move some accounts from Stage 2 to Stage 3. This will give us more room to build more provision on this and to continue our policy of conservative approach in managing our NPL ratio or coverage ratio. Will this continue in 2023? What I can say today, yes.
We will do our best to maintain our coverage ratio around 100%. NPL ratio will grow. To what extent it will grow, it's really dependent on the cost of risk we want by end of this year. How much cost of risk we are going to see? It's highly dependent on the revenue stream that we are going to see. I know I'm making this very complex, and it's all dependent on other factors, but this is the way it was always the case in QNB. I always mentioned that we target a cost of risk which is the normal for a bank like QNB, which is between 60- 80 basis points. If revenue stream is strong, as we have seen last year, cost of risk will pick up in order to manage the overall result of the interest.
Do we expect cost of risk this year to be 111%? I doubt it. I expect it to be around 100%. If revenue is strong, it will move upwards. If we look at the cost of risk for 2022. For Stage 3, it was 77 basis points, which is very close to December 2021. The bulk of the growth in cost of risk was on Stage 1 and Stage 2, which moved from 16 basis points to 34 basis points. There's a clear reflection of how we manage cost of risk. It is not on Stage 3 loans. It's mostly on Stage 1, which is secured loans, or Stage 2, which is still performing loans.
That's very helpful. Just one hypothetical question. If, God forbid, you have a bad year next year, for whatever reason, is it possible that the cost of risk might actually come down? Or this 100 basis point is roughly where you see it?
It will go back to normal, what we need to maintain.
Okay.
Today, the coverage ratio for Stage 2 is around 8% for QNB. It's much higher than what you see in most other institutions at our size.
Yes.
Again, you need to manage the overall cost of risk based on the result that you have.
Very clear. Thank you. Thank you very much.
Our next question comes from Waruna Kumarage. Please unmute yourself and ask your question.
Hi. Good morning. Good afternoon. This is Waruna Kumarage from SICO. I have a couple of questions. One is a follow-up on the previous question. If, Mr. Ramzi, if you can elaborate a bit further on the loan growth, because during the year on the government side, there were repayments across the banking sector. Whereas I think when you see year-end numbers, actually, you see growth even on the side of overdrafts. I want you to, if you can, shed some light on this. In addition to that, even on the deposit side, there was a very strong inflow from the government. What was the background to this, if you can elaborate a bit? That's my first question. The second question, regarding the provisions. My question is on the write-offs, which happened in, I think there were substantial amount of write-offs which happened in fourth quarter.
If you can explain what were these write-offs exactly? Those are my two questions. Thank you.
We'll start with the last one because it's the easiest one. The write-offs. We have been modeling the total amount of write-offs that QNB did comparing with peer group in the GCC. If you take the numbers for the last six or seven years, QNB numbers does not exceed 15% of what was written off in the peer group. This is materially punishing our numbers because we have a lot of loans that's fully provisioned. We continue to follow up on it, but we are not being able to write it off or book it below line in order to allow us to manage our NPL ratio, whereas all the peer group does this regularly. That's why we have been in constant discussion with the Central Bank to give us more room to write off some of the loans that is 100% written off.
This year they were supportive, that allow us to take a couple of loans that is 100% provisioned. Some of these has good collateral. Again, considering they are 100% provisioned, we were allowed to bring some below line, similar to what's been done in all banks around the world. In terms of deposits, public sector deposits grew during the year. Looking at the numbers, it grew by 34% in QNB, whereas private sector numbers dropped by 2%. That's simple. During the year, we had to change the structure of our funding profile. We materially reduced non-resident. You can see this from the numbers. We reduced non-resident funding by around 26%, which is equal to around QAR 46 billion. In return, resident deposits grew by 33%, which is around QAR 93 billion.
The QAR 93 billion is split between public sector, QAR 51 billion, and private, around QAR 40 billion. The increase in public sector deposit is natural reflection to oil prices. With oil prices it's natural that we see public sector deposits going up. This is expected even for the year 2023. This is a natural thing to would happen when oil prices go up. Now, in terms of loan growth, I agree with you. The government was very active in reducing their OD accounts during the year. In the fourth quarter, this didn't happen to a large extent. It did happen, but in the last month of December, it didn't materially happen. Do we expect them to go back to reducing overdraft in 2023? Of course. As long oil prices at current level, we expect them to continue to reduce OD balancing during the year.
What we have seen in the fourth quarter, we had good momentum of growth in loans, that was not purely private sector. Around 45% of the growth was in public sector, which is government agency, not pure government. These are government agencies, the rest was in the private sector.
Okay. Thank you very much.
Our next question comes from Shane Matthews. Please unmute yourself to ask the question.
Hello. Thank you for taking my question, and congratulations on the results. I just want to understand one aspect regarding the loan book. I want to know how much of that current existing loan book is directly as well as indirectly related to the recent World Cup which happened. Want to understand your take on how exactly this portion is going to, let's say, grow in the future, because you're going to see some shrinkage in the coming year. Want to understand where the other areas of loan growth are going to come from and whether that's going to make up for this shrinkage in that part of the world. Thanks.
Very simple. Loan book, World Cup, zero.
All right. For both directly and indirectly related projects, it is zero?
Yes.
Understood.
If there's anything, it will be extremely small considering the size of QNB's balance sheet, QAR 1.1 trillion. It's extremely immaterial.
Okay. Understood. Thank you.
The next question comes from Waleed Mohsin. Please unmute yourself to ask the question.
Yes. Thank you much. Good afternoon. Thank you for the call. Three quick questions. Number one, Ramzi, just wanted to confirm that on asset quality, how much of the move in NPL was organic? You mentioned that most of it was done to meet the provisioning that you hold, but how much of the 60 bps NPL increase was organic, actual NPLs that you saw in the quarter? That's one question. Secondly, if you could provide your thoughts on the net interest margin trajectory for next year, given that Turkish net interest margin should come off. It seems there is still some cost of funding pressure, and would be curious to hear if you're going to make further changes to your non-resident deposit funding. The third and final question, how do you think about profitability growth for next year?
Hyperinflation adjustment should come off, but at the same time, the revenue profitability from Turkey should be coming off as well. Thank you.
Asset quality, how much was organic or non-organic? Very difficult for me to give a number now. I will tell you, a big chunk of this was to manage overall profitability. However, part of it was also to bring up coverage ratio for loans, which has to move to Stage 3. I cannot say that 100% of that growth was purely to manage overall profitability. No. Some of it was also to increase coverage ratio on loans that has to move to Stage 3. We always said, for the last two years, that we are going to start to see the impact of COVID era on some of the loans, not today, but after 12 months. We started to see some of these loans getting weaker, Waleed.
The policy of QNB of being conservative materially helped in us being able to absorb some of the hits that came or will come during the next year or the year after. Net interest income projection. We still believe that interest will continue to be strong in 2023. Today, we expecting 7%-9% growth in net interest income. This is very conservative expectation. If Fed rate move as everyone expects, we are going to have another two to three increases in the next six months, then will continue to be stable beyond this until the end of the year, or we are going to see marginal drop in the fourth quarter of the year.
If this happen, net interest margin for QNB will continue to be around 260 basis points, which is very strong considering where we stand overall in the balance sheet. Good momentum expected for net interest income during 2023 if movement in Fed rate is as is expected by everyone today, we don't see major quick surprises that no one expects now. P&L guidelines did not change, 6%-8% growth for the group in 2023.
Just one follow, Ramzi. On the 6%-8%, your impact from hyperinflation should fall. You said cost of risk is likely to be lower than the 111 basis points last year, and you're also factoring in 7%-9% net interest income growth. The 6%-8% seems that there's either your increasing cost growth substantially or your non-interest revenue is falling.
I cannot build a budget, Waleed and assume how inflation is going to be because I'm lying to myself. For me to make my life easy, I assume the impact of hyperinflation will be stable.
When I say 6%-8%, I mean inflation impact on 2023 number is equal to that in 2022. If it changes positively or negatively, then we need to manage that through cost of risk or other means that QNB have. For budget-wise, I need to assume that impact of hyperinflation is the same, and this is where the 6%-8% will come.
Got it. Thank you very much, Ramzi, as always. Thank you.
The next question is from Edmond Christou. Please unmute yourself to ask your question.
Hello, good afternoon. Thanks for the presentation. Just to follow up on Turkey, there is some talk from the bank in Turkey that possibly after direction, we see increase in interest rate. Just want to understand how this is filtered into the dynamic of the book if we see an increase in interest rate in the second half of the year. Will that be positive to the margin or pressure on the cost of risk? This is in term of Turkey. The second question is on the coverage ratio for Stage 1. It looks to me now that you will be increasing or building a buffer on Stage 3, but not also on Stage 3, it's also on Stage 2 and Stage 1, if you can. Do you have any guidance on where do you see this coverage by the end of the year, especially on Stage 2?
Just an indication if there is further downgrading to Stage 2. If there is further downgrade into Stage 2, which sector you would suspect this would come from, especially when we talk about COVID impact in the long term. The third one is on the funding side. I understand that long-term funding has been some changes in the NFSR ratios, et cetera. Probably are not able to give some number on that. It seems to me that strengthening the long-term funding profile for the bank, it's in focus for the next 12-24 months. Just want to understand what kind of instrument or thinking strategy you have in place and what is the impact could be on the cost of funding. Would that change the cost of funding going forward? Thank you.
I will give room to Mark to handle your last question, then we'll go back to the remaining questions.
Hi there, Edmond. As always, QNB remains opportunistic. As you know, we have a large net, the MTM program. With the volatility last year, we were much more active on the PP side, private placements. I think that, as a bank, we've never had a formal fixed quarterly funding program in terms of what we will or won't do in terms of bond issuance. That will be the main instrument, if you like, or vehicle of long-term funding for the bank. We're under no pressure with regards to ratios or our liquidity. Therefore, it will be opportunistic. We monitor the market very closely indeed. We have a solid credit curve already out there, and we look to add to that as and when it makes sense for QNB. Predominantly in dollars, but also, we look at other niche markets.
We were fairly active when things were a little bit quieter before last year and the volatility. You may see QNB in some of these niche markets again coming up. We do have the advantage, I think, with many of our peers, whereby we can be opportunistic as opposed to prescriptive in terms of our funding.
Thank you.
In terms of Turkey and the expectation for the increase in interest rate. For Turkey, for you to be successful, you need to build your book in a way that you hedge, to a large extent, any sudden movement by the regulator to decrease or increase interest. If you don't do that, your numbers in Turkey will be materially fluctuating to an extent that you cannot manage the number. This is how we usually try to do it, as much as possible, is to hedge and to manage the overall balance sheet, whereby the movement in interest rates upward or downward will have an impact, positive or negative, but it is manageable on overall picture of the profit and loss on the balance sheet. In terms of staging.
For me today to tell you that the coverage ratio in 2023 for Stage 2, it will move from 8%- 10%, and for Stage 1, it will move from 0.3%- 0.5%, it is extremely difficult because it is highly dependent on different factors. On number one, how we are going to manage overall account that we see weakness. Will we be able to manage some of these accounts or no? Number two, the strength in the revenue stream and to what extent we are going to be conservative. Stage 2 should be highly dependent on the ECL model. ECL model, if we build it in QNB today, as we have it today, the coverage ratio should not be 8%. It will be maybe 5%- 5.5%.
The remaining is additional provision you take in order to build your coverage ratio, which is something that we will want always to do. This is highly dependent on the other side of the profit or loss, which is the revenue stream. Based on this, it is extremely difficult for me to tell you, coverage ratio for Stage 2 will move to 10%- 12%. In terms of Stage 3, we always said we wanted to be close to 100%, and this is what we are going to continue to strive to.
Okay, just to follow up. It is fair to assume that you are going to build the buffer above the 100% during the year on Stage 3, and possibly reallocating it by the end of the year. On Stage 1, if I am right, the coverage of 0.3% or 30 basis points, this is based on the probability of default plus the market expectation on the macro economy. Going into this year with the challenges we talk about, we could expect the 0.3% to be on higher demand. Correct?
Not really, because the model is highly built on different factors. Some of them oil prices, the GDP growth, the growth in loans, different factors, not only one or two. Many of these factors are more going towards the positive side than the negative side. Technically, the need for more provisions, based on the ECL model for Stage 1 and Stage 2, will be lower.
Okay, fair enough. Yeah, this is what I need. Thank you. Cheers.
Thank you.
Our next question comes from Fatema Alshakar. Please unmute yourself to ask your question.
Hi, can you hear me?
Yes.
Yes. I just want to know your outlook of the Egyptian and Turkey operations going forward in 2023. That's my only question.
Egypt, definitely it will be a challenging year considering the devaluation that's happening. It will impact the overall number, but at the group level. If you look at it from Egypt perspective, we still see good momentum for growth in loans, mostly on the corporate side, in Egyptian pound. If you add the guidelines that we are giving for Egypt, for assets, we talk about 12%-15% growth, and for the profit or loss, between 18%-20% growth. Still, we expect good momentum coming from Egypt, from a growth perspective. We continue to manage the NPL ratio and coverage ratio, in Egypt, where we still have close to 100% coverage ratio, which is something that we want to have.
Loan-to-deposit ratio continue to be very strong at 55%, which means we still have good room to grow the overall balance sheet, as long we are seeing good momentum, in terms of growth in loans. We always said that we don't want to focus on sovereign bonds in Egypt. That's why for the last three years, we have been increasing the market share for QNB in the Egyptian market, especially on the large corporates. Which is something we are going to continue. We've been also much more active in retail business in the last two years, which is something that we have seen, given us a good momentum in terms of growth and net interest margin and reducing cost-to-income ratio. In last year alone, cost-to-income ratio for Egypt dropped from 28% to 25%.
This is a very good momentum, which is something that we want to continue. Finansbank, it's a much more complex story. However, we still believe that inflation will continue during the country. It will not be at the level that we have seen in 2022, but it will continue to be much higher, which will materially impact the overall numbers for Turkey. In terms of guidelines for Turkey, we expect continuation in the growth in the balance sheet, higher than Egypt's. We expect 30%-35% growth in the overall balance sheet. P&L also, we expect it to grow between 30%-40%, some of it coming because of the inflation, and some of it because of the natural growth in the balance sheet.
Margin, we expect it to continue to be strong, not at the level we have seen in 2022, which is close to 800 basis points, but it will continue to be solid. cost-to-income ratio, something that, again, we have to keep a very close eye on, considering that the inflation will push that ratio up. To what extent it will reach, we need to wait and see how much for the overall number. I can summarize by saying that in 2022, we took advantage of the strong momentum in the profitability for Turkey, and we built very good buffer in the coverage ratio. We started at 122%, we ended the year at 140%. This should help us in protecting the entity for any deterioration in the book beyond the inflation number that we see today.
Because of the inflation, we have seen NPL ratio coming down materially from 3% to 1.8%. Once inflations go back to normal, we expect the NPL ratio in Turkey to start to pick up again, in a gradual basis. That is why we have built up good buffer in the coverage ratio. This is summary on where we see Egypt and Turkey in 2023.
Thank you.
There are no further questions at this point. Thank you.
Okay. Thank you very much for your time today, everybody. Rahul and everybody online today, thank you very much for giving us the time. From the QNB management team, thank you for your interest and we look forward to speaking to you in three months time. Have a good day. Thank you very much.