Welcome to QNB Group's Q3 2020 financial results conference call. Today's call is intended for analysts and investors only and is not intended for the media. As a reminder, today's call is being recorded. At this time, I will pass on the call to Waleed Mohsin from Goldman Sachs.
Thank you, Holly. Good day, everyone. Thank you for joining QNB Group's earnings conference call. On today's call, we are pleased to host QNB senior management team represented by Ramzi Mari, Group CFO, Noor Mohammed Al-Naimi, General Manager at Treasury, and Mark Abrahams, AGM, Treasury. Without any further delays, I will pass on the call to QNB management.
Thank you very much indeed, Waleed, and good day, everybody. I will begin by giving an update on the actions taken by Qatar in light of COVID-19, followed by a brief overview of the macroeconomic environment in Qatar. I will cover QNB's quarterly financial results for the nine-month period ending the September 30th, 2020, and finally open the floor up to questions and answers. Qatar has taken all necessary precautionary measures to protect the society, its population, and economy from COVID-19. While the impact of the COVID-19 pandemic provides uncertainty, Qatar's economy has weathered the storm, and activity is rebounding as business resumes. We have progressed through a four-phase plan for relaxing precautionary measures and are now seeing a decline in the number of new cases.
Looking forward, the Ministry of Public Health has committed to provide a COVID-19 vaccine free of charge to all Qatar residents after signing an agreement with Pfizer. The government's QAR 75 billion stimulus package includes targeted measures to defer taxes and fees, defer loan payments, boost concessional financing for small and medium-sized enterprises, investments in the local equity market, and provide additional liquidity to the banking system. Qatar has also clearly demonstrated its ability to combine prudent fiscal policy with the effective delivery of a large public program of capital expenditure to execute upon the Qatar National Vision 2030 and the 2022 FIFA World Cup. This is laying the foundation for continued GDP growth over the medium and long term through both diversification and stronger private sector growth.
Doha's non-energy private sector economy continued to expand strongly throughout Q3 2020 as coronavirus-related restrictions were lifted, according to the Qatar Financial Centre's Purchasing Managers' Index, compiled by IHS Markit. The top line PMI averaged 55.6 in Q3 2020, signaling sustained improvement in business conditions in the non-energy private sector segment of the economy and was the third-highest figure in over two years. Moving forward, private sector growth will be boosted by continued structural reforms, including ownership liberalization, the promotion of foreign direct investments, labor reforms, the permanent residency program, and several initiatives to support SMEs as well as self-sufficiency in strategic sectors. Moreover, several other facilities to improve business environment procedures were launched at the various legislative, organizational, and administrative levels. The investment promotion agency and a single window for establishing companies will facilitate faster registration and licensing of businesses in Qatar.
Tailwinds from investment in increasing hydrocarbon production will drive economic growth going forwards. Six new LNG liquefaction trains are planned to increase Qatar's LNG production by 64% to 126 million tons per annum. There are two phases in relation to the North Field expansion, the East and the South expansion. Qatar is going to go from 77 million tons per year to 110 by 2025, then up to 126 by 2027. Supporting the North Field expansion, Qatar has reserved capacity for over 100 new LNG carriers worth over $19 billion. Positive spillovers from increased hydrocarbon production will combine with diversification efforts and structural reforms to boost activity and spending in the manufacturing and services sector. I will now move on to QNB's quarterly financial results for the nine-month period ending September 30th, 2020. Key financial results for this period are as follows.
Net profit was QAR 9.5 billion or $2.61 billion. Considering the global economic conditions, QNB Group, following its conservative approach towards building adequate reserves against potential loan losses, has opted to increase loan loss provisions by QAR 1.9 billion or $520 million for the period, which will assist in protecting the group from any adverse experiences in the portfolio. This has impacted the reported profitability. In addition, QNB Group has continued on its operational rationalization exercise, which has resulted in cost savings, reducing the cost to income ratio from 25.7% last year to 24.2% now. Operating income increased to QAR 19.2 billion or $ 5.3 billion, up by 1% compared to the same period last year, demonstrating QNB Group's success in maintaining growth across the range of revenue sources. Total assets reached QAR 986.3 billion or $ 270.9 billion, up by 8% from September 2019.
This was driven by growth of 10% in loans and advances to reach QAR 716.6 billion or $ 196.8 billion. QNB Group remained successful in attracting funding, which resulted in increased customer funding by 8% from the same period last year to reach QAR 715.1 billion or $ 196.4 billion. This maintained the group's loan-to-deposit ratio at 100%. The group was also able to attract high-quality wholesale funding, demonstrated by QNB's highly successful inaugural and the region's largest green bond by a financial services issuer. This reinforces global investors' confidence in QNB Group's solid financial fundamentals and strong financial performance. The issuance was part of QNB Group's ongoing strategy to ensure diversification of funding in terms of type, tenure, and geography. This is an example of our commitment to ESG principles.
Despite headwinds, QNB Group was able to maintain the ratio of non-performing loans to gross loans at 2%, 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 these conditions. We will now turn to questions and answers. Please do note that we would like to emphasize that this call is only for financial analysts and all media personnel should disconnect now. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We will now take our first question from Aybek Islamov from HSBC. Please go ahead. Your line is open.
Yes, thank you for the conference call . I have one sort of central question about the asset quality. It looks like the impact of COVID appears to be not as bad as in other GCC economies, in my opinion. How do you think about the staging of loans in 2021, assuming that you can provide additional facilities, new lending facilities, to your borrowers, and we know that your loan book is quite complicated. That provision of additional lending facilities, is this something which can prevent deterioration in loan stages in your loan portfolio? That'll be my sort of central question of the call.
One issue that we need to highlight, and I think anyone who knows QNB numbers will understand, that the structure of QNB book, especially when we talk about Qatar, is materially different from other banks in Qatar. Government agencies contribute plus or minus 50% in the book. The rest of the book is purely corporate, and it is selective corporate. Most of these corporate are the high-end corporate. That's why NPL ratio historically for QNB was extremely low. QNB NPL ratio at group level, it's 2%, but if you take it at Qatar level, it's less than 1%, it is less than 1%. Do we expect major shift in NPL in Qatar for QNB? No, because we continue to be focusing on public sector business and on high-end corporates.
At the same time, whenever we provide a new facility to new corporate, the overall cash flow of the corporate is considered not only the specific cash flow that will come from the specific projects we are financing. For example, some of these corporates might have weakness, for example, in one of their factories. When you look at their overall cash flow from other aspects of their business, it will compensate. This is how we run our corporate business, and that's why we always have very low NPL ratio in Qatar.
Okay. Yeah. That's very clear. Thank you. I think there'll be follow-up questions on your international loan quality and your thoughts around there, but I'll leave it to others.
We will now move to our next question from Chiro Ghosh from SICO. Please go ahead. Your line is open.
Hi. Thanks for hosting the call and giving me the opportunity to ask this question. My first question is related to your net interest margin. According to my calculation, the NIM has slightly gone up over second quarter 2020. I just want to get a sense that, is this sustainable? Have you passed on the total rate cut to your clients?
Okay.
That's my first question, and the second is-
No, go ahead with the second question.
Yeah, sure. The second question is more related to your operating expense. We are seeing a very favorable development in your operating expense, very good cost management. If you can also throw some light on how sustainable it is. Those are my two questions.
Okay. Now, in terms of net interest margin, I think one of the good stories that we have seen in the third quarter is the increase that we saw in net interest margin. I think we need to give credit to Treasury, who've done a lot of excellent work to manage our cost of funding in the third quarter. If you recall the phone call that we had in June number, I said that third quarter and fourth quarter in terms of net interest margin will be tough because many of our loans will be repriced on these two quarters, and the bulk will be on the third quarter. With the hard work that Treasury has done in terms of managing our cost of funds, the numbers that we ended up were materially better than what I anticipated.
Third quarter net interest income grew by around QAR 200 million from second quarter. I expect this number to continue at that level in the fourth quarter. All in all, my projection is that by end of this year, net interest income will grow by around 4% on last year, which is extremely good number considering the low Fed rate that we are seeing. In terms of operating expenses, we have taken several initiatives that we have discussed in June, in order to ensure we improve our expense ratio. Most of these initiatives are long-term. For example, merging branches, shifting customers to digital platforms, reducing manpower, especially in several countries internationally. All these are sustainable, and we are going to see the impact even next year. Because some of these initiatives, the impact on this year was only for six months, whereas next year it will be 12 months.
Overall, impact on our cost income ratio was major improvement. For example, September number, expense ratio materially improved to 24.2% from 25.7% as you know. Even in December, this is sustainable, and I still see that we expect we are going to enter with very close to this number in December. Budget wise, next year, we are only budgeting 3% increase in cost, which is materially lower than what we have seen in previous years. Definitely, the initiatives that we are taking is sustainable. One point I need to highlight on cost, that I would like all of you to fully understand. In Egypt, by regulator, 10% of profitability is treated as bonus for staff. The higher the profitability, the higher the bonus.
Under Egyptian GAAP, that number is considered below line. Under IFRS, it is part of our expenses. If Egypt is doing brilliantly, you will see a negative impact on costs. That does not mean that we are paying more costs. In reality, it is merely the 10% portion of the bonus for Egypt. This is extremely important for all of us to understand.
Hello?
Okay. Yes.
Thank you very much. It was very clear. Just one very quick one for all of us analysts is, if you can share any of your budget numbers for next year. If you can share, that'll be very helpful.
To be honest, I prefer. We are at the final stages of finalizing the budget. As you know, considering what we are going through, I think this number will change a couple of times before it's been finalized and presented to the board early December of this year. I prefer that we discuss the budget in detail in next quarter on year-end phone call.
Fair. Thank you very much.
What I can tell you, in general, it will be a conservative budget. It will be a variable budget, we need to look at it in quarter- by- quarter. To the board, it will be a conservative budget. The numbers, the details will be given in next quarter phone call.
In the previous calls, you have said that overall on a longer term, we are expecting margins of NIM to go down. It looks like you might be able to manage it considering, as you're saying, the treasury department has done well there. I would like to hear.
Yeah, true. At the end, considering the size, considering if we are going to continue to focus our increase in loans on large corporate government agencies, and more focus on corporate business and international business, gradually margin must drop. What we need to do is to manage that drop in order to keep it between the four to six basis points. What is sustainable, as I mentioned before, is when we reach the 235 basis points- 240 basis points. This is where we need to try to keep it sustainable at that level.
Okay. That's all from my side. Thank you very much.
We will now move to our next question from Rahul Bajaj from Citi. Please go ahead. Your line is open.
Hi. Thanks. This is Rahul from Citi. Thanks for the call. I have two quick questions. The first one, if you could please provide some color on your Turkey business. What are you seeing in terms of growth and cost of risk? That would be very helpful. Secondly, just a quick reminder for us on moratorium. Could you please remind us, was there a loan moratorium in Qatar, and has that ended and what has been the customer behavior post the moratorium ended? These two for me. Thank you.
Finansbank. We are managing Turkey operations very conservatively in different elements. Number one, in terms of growth in the balance sheet, it is very strong. We continue to capture more business from tier one corporates. At the same time, we continue to improve our loan-to-deposit ratio. This year, balance sheet-wise, there will be strong growth, we expect to be between the 24%-26% with a 12 loan-to-deposit. Assets will grow by around 28%-30%. Balance sheet-wise, in Turkish lira, there will be very strong growth. Of course, in Qatar riyal, no, it will be negative. Profit and loss, we expect it to be 6%-8% lower than last year because we are materially improving the coverage ratio and taking more and more coverage. In December 2019, coverage ratio in Turkey was 90%.
In third quarter of this year, now it is 96%, and we are pushing this to reach the 100% as soon as possible. We are building more and more buffer. If you analyze Turkish banks in terms of coverage ratio, definitely, Finansbank stands out within the peer group in terms of how low is their NPL ratio and how much high is their coverage ratio. We will continue to grow in Turkey. However, prudently, we will continue to be conservative in terms of profitability in Turkey. Margin will continue to be solid around the 400 basis points. At the same time, we will continue to materially reduce the cost-to-income ratio. Last year, the ratio was 42.3. This year is 38.9. It is the lowest in the Turkish market, and this ratio will continue to drop.
We will continue to merge branches, and give more focus to Enpara platform. If you know the Enpara platform, which is the digital bank they have, it is the largest in Turkey. It has more than a couple of million customers. We are going to have more focus on that platform. I think in Turkey, that was one of the main benefits of COVID-19, is that we have seen many of the customers in Turkey, especially the young ones, shifting from normal banking to digital banking.
Considering that we own Enpara, which is the largest and the strongest platform, we were the main beneficiary from that shift from the customer side. This is all in all, looking at Turkey. In terms of the second question, Qatar Central Bank gave an extension until December. The total loan that was impacted by the regulator in QNB is only 2% of overall book. Overall impact on QNB is not that big. However, as I mentioned, until December, this will continue.
Thank you.
We will now move to our next question from Mustafa Aamer from Commercial Bank. Please go ahead. Your line is open.
Thank you for hosting the call today. My question was to do with the non-interest income, particularly the fee and commission income. That has materially witnessed a drawdown from last year. Do you expect normalization to return going into Q4 and then into Q1 of next year? Thank you.
Fee, as I mentioned in June, I said that we expect a drop on fee this year of about QAR 500 million. The main reason for that is three aspects. The most important one is the concession that was given in Egypt, especially on credit cards, whereby banks stopped charging customers fee on different services they provide. This was given for six months from March until September. The Central Bank decided that they will extend it until December. The impact will continue. That is number one. Number two, again, in Turkey, the same happened, but in a broader level, and that is why this again materially impacted fees coming from Turkey. The third one is the impact on locally. We have seen around 60% drop on fees on credit cards. Fee on credit card is number three or number four most important source of fee in QNB.
Considering that expenditure for people materially dropped and of course, naturally, fees from credit cards will drop. Definitely will be different. We hope that central banks and international operations will top the concession. At the same time, locally, banks will go back to normal expenditure levels, definitely fees will go back to normal.
All right. Okay. Thank you so much.
We will now move to our next question from Vikram Vis from NBK Capital. Please go ahead. Your line is open.
Hello. Thank you, Ramzi. This is Vikram from NBK Capital. I had a follow-up question. You mentioned that you managed the funding cost quite well in Q3 because of all the efforts put in by the treasury. Can you tell us perhaps what are the things that the treasury did differently this quarter? Was it the choice of instruments or how did they manage to keep this? Just interested in the mechanism. Thank you.
Okay. Hi, it's Mark here. I can give you a little bit of color on that. Just a couple things, really. I wouldn't say we did things differently. I think we just did things in a more focused fashion. We've been working very hard indeed for a number of years as the bank has grown so significantly in diversification of the funding base. That's always been a very big driver for the bank over the last few years, and I think we've been a big beneficiary in this very difficult time of the work we've put in over the last few years. As you know, we had a very well-established MTN program. It's been around since 2011. I think we are the best-known name certainly from the region in that regard. We've always had very strong engagement from Europe, from Asia, from offshore U.S.
I think that we were tasked with obviously reducing overall cost of funding, and at the same time, from a structural perspective, turning out the funding as well. As well as any rollovers on deposits, we were looking to extend tenor. We are obviously very well represented in Europe through the U.K., Paris, Switzerland, major hub in Asia out of Singapore. We certainly were seen as, I would say, very much as a safe haven for money. I think we diversified our investor base on the deposit side. Under the MTN program, we had a very busy time of it indeed. As you know, earlier in the year, we were the first to fight to reopen the bond market after the COVID hit in the end of Q1. Obviously, with regard to highlights in Q3, let's give you some examples.
We're talking about a couple of billion dollars of issuance with respect to public bonds and private placements. Highlights there are clearly for most of the transactions that we've done which are now past $5 billion. This is long-dated, very economic money. It's 40-year callable paper. We did two transactions over $900 million. That's with primarily the Taiwanese and Far Asian investor base. We have also seen a couple of very good private placements on the CNH side, so again, Chinese investors. I think probably the most high profile of all of our deals recently, we've been working for some time, obviously, on our ESG framework, and the culmination of that was clearly the green bond that we did just a couple of weeks ago in that space. Our inaugural green bond was $600 million in five years. That was a good deal for the investors.
They were very happy indeed. It was heavily oversubscribed at the peak. It was around about three times over, and we ended up with a historically low peak on that trade and a very new investor base. It's a combination of things, really. We've worked very hard on the deposit side. We have clearly done more under the MTN umbrella. We do look at more structured solutions as well, which I won't go into details now. I think it's really a combination of a lot of hard work that has resulted in lower cost of funds and turning out the funding profile.
All right. Thank you. I just had one more question on Turkey. I think you mentioned that you will see growth in balance sheet of about 25% in Turkish lira terms. Are you expanding market share in Turkey, or are you growing in line with the market?
No, we are in line with market.
In line with the market. Okay. That's all from me. Thank you.
We will now move to our next question from Naresh Bilandani from JP Morgan. Please go ahead. Your line is open.
Thank you. Thanks, Mr. Ramzi, for the presentation. It is Naresh from JP Morgan. Two very quick questions, please. Just wanted to firstly gauge your thoughts on do you reckon we are at the peak of the cost of risk in your view for the year? I know you started the year probably in Q1 and Q2, you were offering conservative guidance for the overall cost of risk. Do you reckon Q3 is the peak, or do you believe that the conservatism at the franchise will see that the cost of risk stays somewhat elevated as we go into the fourth quarter also?
That is the first question. Second is, perhaps maybe a tad bit too early to ask, but just wanted to hear your thoughts on what would be the executive management's recommendations to the board on dividends for the year-end, given the fact that the visibility around payments of the dividends across the global banking space still remains extremely low. We will be very interested to hear what you think at this stage. Thank you.
Cost of risk. I think by year-end, overall cost of risk for the whole year will be between 30 and 30.2 basis points. If we take the average of the four quarters, naturally, the fourth quarter will be around 74 basis points. We started in March with 55, June, 17. In September, it became 71. I think in December it will be around 71 again. Fourth quarter will continue to be conservative in terms of cost of risk. Dividends, no one can expect what is going to happen. The first thing is that the regulator, until today, did not send any instructions in terms of any changes to the structure of dividends for banks in Qatar. My expectation is that, the movement in profitability naturally will impact dividend. At the end, we need to wait and see what the board will decide on.
What is extremely important for me to highlight here is that, whatever the board will decide in December will definitely take into consideration our capital adequacy ratio. We always said that we want to maintain at least 200 basis points on our ratio, and this is where we are going to run the payout ratio based on that parameter. Today, we are 18.1. Last year, December 2019, we were 18.9. My expectation that we are going to end up this year with very close numbers to where we were in December 2019. So at least a buffer of close to 300 basis points.
Got it. Thank you very much. That's clear.
We will now move to our next question from Mohammed Adel from Al Faisal Investments. Please go ahead. Your line is open.
Hi, thank you for the presentation. Thank you for taking my question. I have only one question about the government program, the deferment, the loan deferment of interest and installments in Qatar. Is there any updates on this? If it's not extended, what is the client behavior? Did the clients ask for deferments? Can you give us a color about this? Thank you.
The plan was extended until December this year, it was extended for another three months. As I mentioned at the beginning, considering the structure of QNB book, our share or the number of accounts that participated on the plan was extremely low in QNB. The overall impact was less than 2% of total loans for QNB. Number one, confirmation was extended end of December. Overall impact on QNB is very, very small.
Okay, thank you.
Just as a reminder, it is star one to ask a question. We'll now move to our next question from Anastasios Dalgiannakis from Al Faisal Investments. Please go ahead. Your line is open.
Hello. Thank you. If I may talk from a top-down point of view on your green policies, congratulations on the green bond you issued. Did you disclose how much of the loan book is in line with your sustainability framework? What is your objective in terms of calibrating the loan book in a sustainable way against the current mix of customers and especially government customers that clearly will be investing more into fossil fuels and outside the framework? How do you plan to make lending more sustainable going forward? Thank you.
We do disclose the total book, which is classified as green. For QNB, it's close to $2 billion. As you know, this is a journey that we have started a few years ago. Building the book is a continuous process. Today, we have a dedicated committee which has members from the business, the control, and the sustainability team. Number one, to educate the people in risk and more of the business on the requirement for us to continue to build momentum in that perspective. We want to increase the book that can be considered green.
Again, for the region, this will take time. For us to educate the business community of the importance of structuring their business in a way that will be allowed to be considered part of the green book. It will take us time, but definitely, there is major interest from government in that perspective. It will take us time to reflect that interest into the business community.
Thank you.
Again, just as a reminder, that's star one for telephone questions. We'll now take our next question from Janany Vamadeva from Arqaam. Please go ahead. Your line is open.
Thank you, Ramzi, for the call today. I just have a couple of questions. First, on payment deferrals, deferral outside Qatar, like 25% of your loan book is outside Qatar. If you could talk a bit about the payment deferrals in Turkey and Egypt, whether it has ended, what the percentage was under the deferral program, and how has the payment behavior been like since then? That would be helpful. The second question is about stage two ratios loans. It has remained stable in Q3 when we compare with Q2, around 5.5%. I remember you guided towards 7% for year-end. Just wondering whether you still hold onto the year-end 7%, or is there any change on that given that Q3 has been stable?
Janany, on your first question, I don't have an answer. I will make sure that we come back to you with exactly the answer for that question. On the stage two, you are right. I said that by December we are going to be 7%. I still believe that this is where we are going to end up with. I doubt it will be 7%, but I will not be surprised if it's between 6%-6.5%.
Do you think it's driven more by because most of the deferral program is going to sort of end by December, so that's going to drive whatever increase from 5.5%-6.5% or 7%?
It will depend on the total number that we have, how much the customer will delay more the installment. To give you an exact number or how much will be the impact in stage two, it's too early for me. We need to see that because it's a moving target, Janany. When I gave the 7% in June, definitely I was conservative, and as you can see from September number, that number is better. I still prefer to be conservative and watch what is the progress on the ground in terms of stage two loans. If you estimate between 6%-6.5% in your model, I think this will be a more appropriate percentage at this stage.
Thank you, Ramzi. If you don't mind, just one more quick question. You did give the guidance of profit sort of decline of 12.5%- 17.5% after the Q3 numbers. Do you still think that sort of the number you're looking at it, because you mentioned that by September you'll have a better idea of how it's going to fare.
This guideline still stands, profit or loss 12.5%-17.5%, loans and deposits between 6% and 8%, and assets between 5%-6%.
Thank you, Ramzi. Thank you very much.
Again, that is star one to ask a question. We'll now take our next question from Valentina Stoykova from Barclays. Please go ahead, your line is open.
Hi. Thank you very much for the presentation. My question is on Turkey. Can you share with us some sensitivity you have run on your Turkish unit? At what level of the Turkish lira versus the U.S. dollar do you see Finansbank losing its primary subsidiary status?
That's a very interesting question. Regardless of the rate, it will not lose the subsidiary status. The rate between Turkish lira and U.S. dollar does not impact the subsidiary status for Turkey, if I understood your question.
Just as a reminder, that is star one for telephone questions. We'll pause for just a moment to allow everyone an opportunity to signal star one. It appears there are currently no more questions, so I'd like to hand the call back to our speakers for any additional or closing remarks.
Mark any closing remarks from your side?
No, I think we're good. Thank you very much. We remain at your disposal. You have our contact details. Thank you, everybody, for calling in today. We appreciate it.
Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect.