Ladies and gentlemen, welcome to the QNB Q1 2020 Results Call. My name is Maxine, and I'll be coordinating your call today. Please be aware this call is not for media representatives, so any media on the call, please kindly disconnect. If you would like to ask a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Aybek Islamov, from HSBC to begin. Aybek, please go ahead when you're ready.
Thank you. Good afternoon. Good morning, everyone. This is Aybek Islamov, Emerging Markets Bank Equity Analyst. I'm glad to host everyone at Qatar National Bank Q1 2020 results call. With us on the call, we have today Noor Al-Naimi, General Manager of Treasury, Mark Abrahams, AGM Trading and Treasury. We have Durraiz Khan , Head of Consolidation, James Mason, Senior Economist. With no further ado, I'd like to pass over the call to Mark Abrahams. Please go ahead.
Thank you very much indeed, Aybek. I will begin by giving an updated overview of the macroeconomic environment in Qatar, including actions taken here in light of COVID-19. I will cover QNB's quarterly financial results for the three-month period ended 31st of March 2020, and finally, we will open the floor for Q&A. With regards to the coronavirus global spread, the state of Qatar and its authorities have taken the necessary precautionary measures to protect society, its population, and economy, both in terms of fiscal and public health measures, including testing, isolation, social distancing measures, and ramping up of health infrastructure. On the 15th of March, the government announced a stimulus and support package of QAR 75 billion. That's $20.6 billion to the private sector, equivalent to around 10% of nominal GDP.
The support includes targeted measures to defer taxes and government fees, defer loan payments, boost concessional financing for small and medium-sized enterprises, allocate funds to local equity markets, and provide additional liquidity to the banking system. To strengthen the fiscal buffers, the government has deferred an unawarded capital expenditure on projects for QAR 30 billion, $8.2 billion. While the impact of the COVID-19 on the global markets is still very uncertain, Qatar's economy is well-positioned to weather this storm. Despite current exogenous shocks, we expect activity to rebound. Tailwinds from increasing hydrocarbon production and private sector growth will more than offset slower construction growth. Six new LNG liquefaction trains are planned to increase Qatar's LNG production by 64% to 126 million tons per annum by 2027. Abundant feedstock is estimated to a positive spillover for the manufacturing and service sectors, boosting activity and spending.
Moving on now to the QNB Group. The bank has also implemented the necessary precautionary measures to ensure operational business continuity while prioritizing the safety and security of our customers, employees, other stakeholders, as well as the wider community. Apart from our business continuity planning measures, we felt that it is critical at this point in time to take a prudent approach, given the expected slowdown in economic activity and the uncertainty caused by COVID-19. We have strengthened our internal processes with regards to lending to new applications and facilities from new customers, as well as the extension or refinancing for existing customers. From a liability perspective, we continue to attract high-quality funding with a focus on diversification by geography, currency, and tenant. I will now move on to QNB's quarterly financial results for the three months period ended 31st of March 2020.
Key financial results for the three-month period ending 31st of March are as follows. Net profit was at QAR 3.6 billion or $0.98 billion, largely stable compared to the same period of 2019. This was mainly driven by operating income, which increased to QAR 6.7 billion or $1.8 billion, up by 8% compared to the same period in 2019, demonstrating QNB Group's success in maintaining growth across the range of revenue sources. Total assets reached QAR 964.4 billion or $264.9 billion, up by 9% from December 2019. This was driven by a growth of 13% in loans and advances to reach QAR 708.1 billion or $194.5 billion. QNB Group remains successful in attracting funding, which has resulted in an increased customer funding by 11% from December 2019 to reach QAR 706.3 billion or $194 billion. This maintained the group's loans-to-deposit ratio at 100.2%.
The group was able to maintain the ratio of non-performing loans to gross loans at 1.9%, a level considered to be one of the lowest among financial institutions in the Middle East and Africa region, continuing to reflect the high quality of the group's loan book and the effective management of our credit risk. Also, during this quarter, QNB increased its loan loss provisioning by QAR 272 million in light of the COVID-19 and the associated issues arising from lockdown and slowdown in the key markets where QNB Group operates. The group's conservative policy in regard to provisioning continued with the coverage ratio maintained at 100% as of the 31st of March 2020. Capital adequacy ratio stood at 18.4% at the end of Q1 2020, higher than the regulatory minimum requirement of the Qatar Central Bank and Basel Committee of 16%. Thank you very much for your attention.
We can now turn over to questions and answers.
If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted. We have a question from Waleed Mohsin from Goldman Sachs. Your line is now open.
Thanks for the solid first quarter. I had a couple of questions. First, I know it's very difficult to provide guidance at this stage, but just want to get your thoughts on what you're seeing in April, especially in your international markets, Turkey and Egypt, in particular on margins, growth, and asset quality. Any comments on the outlook would be much appreciated. Obviously, understand it's too early to comment on that, but any trends that you can highlight would be great. That's my first question. Second question is on a regulation which has come out in Turkey regarding the assets ratio, which seems where the regulator is trying to encourage banks to lend. Just wanted to get your thoughts on how QNB Group is likely to respond to that on both the lending and the deposit side. Thank you.
Thank you, Waleed, for the question. This is Durraiz Khan. In terms of guidance, as you'd acknowledge, there's a lot of uncertainty today, and we will have more to say both on the top-line impact as well as expenses in the coming months in Q2 as impact of COVID-19 is better understood. For the group perspective, by end of Q2, we'll be in a better position to provide you guidance for the full year. Having said it, for the subsidiary in both Turkey and Egypt, we will expect to remain cautious and our growth will be again modest in those locations, keeping in view the current situation that we are in. Your second question in terms of asset ratio for Turkey, we are aware of it, and this does not really have a material impact on QNB.
The ratio is slightly difficult as a formula, when we look at it on a planning ratio basis, there's no material impact that's going to be on QNB Finansbank from that. Any other questions?
Got it. Thank you much. Any quick comments on recent trends, what you're seeing in Egypt and Turkey on the margin side or anything that you could share, April trends for the bank?
On the margin side, margins in Egypt have improved. If you look at what we have been disclosing in our investor pack. Specifically, net interest margin was 5.8 last March, which became 5.84 in December and 598 basis points in current period that we have reported. That's good for the bank. However, as we have said, going forward, we expect overall growth to remain modest for both of these markets. In both of these markets, you would realize that governments have announced a lot of actions to support the economy on an overall basis, and impact of these action is yet to be seen in their financials. Anything that we would be saying would be preempting what government actions will happen later on the companies that we are working with. That's the overall comment for us.
Thank you much. Thank you.
We have a question from Chiro Ghosh. Your line is now open.
This is Chiro Ghosh from SICO Bahrain. Thanks for hosting the call. I have a couple of questions. The first one is, a big chunk of your deposits are from outside Qatar, or perhaps the liabilities are from outside Qatar. If you can throw some light of how are the things translating there, are you seeing some funding pressure or are you seeing flow from those countries? That's one. The second one is, if you can please tell us again what facilities have you extended to your existing customers and what will the financial implication of that be?
Thank you very much for your questions. Mark here. I'll handle the first part on funding. No, you're right. We do have a large and very diverse funding pool outside of Qatar. I think one of the very good things for QNB is that over the last 2.5 years in particular, we have focused on extreme diversification and moving away from any kind of concentration risk. We've been very successful in doing that. We operate in 31 countries plus around the world. In terms of our deposit base, it's far larger than that. We do not have any particular large short-term concentrations anywhere at all. What we have seen is naturally is on price in terms of the way the market's moved over the last six weeks, that there is more pressure on the premium being paid for money at the moment.
We do find that QNB continues to be very much a preferred safe haven for money, generally speaking. We've always been very selective on the money that we've engaged in in terms of funding. We don't carry hot money on the book. We have long-term partnerships, and we have long-term relationships with our depositors. On the back of that, yes, we have seen obviously pressure on cost. In terms of the actual overall liquidity pool of the bank, it remains very healthy, and there's been no particular runs in any particular geographies away from that. The second question in terms
Any main impact? Excuse me, sorry, on the first part. What kind of main impact will we expect from this, because of this?
It'll be minimal. We don't know at this stage. Obviously, it began to happen obviously later on in Q1. There will be pressure on them, probably just a small number of single-digit basis points over the four maximum, no more than that.
To go to your second question in terms of facilities which are available from the Central Bank, just tell exactly what Central Bank has announced. They have announced that they're looking for six-month loan postponement for selected sectors. They have established a zero-cost repo window for QAR 50 billion for banks to obtain. There is a loan guarantee scheme which is working through Qatar Development Bank, which is up to QAR 3 billion. For us, what we have done for our SME, we have given currently three-month loan postponement to those SMEs. However, in Qatar, the SME loan balance is very small, and the impact of this is very minimal in terms of overall financials. We haven't tapped the repo window as of yet because we have ample Qatar riyal liquidity available with us.
Towards the end of the quarter, we saw a lot of applications coming in for the SME guarantee scheme, which was announced by the government. What we expect is that as we will report Q2 numbers, we'll have good amount of loans to be reported under this scheme.
Just on the first line, which you said that six months of deferment. This you are already extending to your customers, or specifically the sectors which are getting affected?
Currently, this has been extended only for the SME sector, number one. For other cases, we are looking at it on a client-by-client basis if there is a requirement. So far we haven't had material numbers coming in because as you'd understand, it's only 30 days from the time when the crisis started. We'll be looking into it on a client-by-client basis as we get the requests.
To just help me understand a bit. Why won't any bank tap this liquidity window which is like a zero cost, it's QAR 50 billion liquidity window. It makes sense to tap it, right?
Yes, it makes sense to tap it, we already have ample liquidity available with the Central B ank. Why would we take more money when we can't really utilize it efficiently? Of course, if there's a requirement, we will tap it. We are not saying we will not tap it, right now we don't see a need for tapping it.
That's all from my side. Thank you very much for the answer.
We have another question from Rahul Bajaj from [Citi]. Your line is now open.
Hi. Thanks for this call. I have three quick questions, actually. The first one is on margins. I appreciate the point that you made earlier that it's really difficult to give guidance at this stage. Just so I get a sense that when you gave the full year guidance previously after the full year results 2019, you mentioned about three to four basis points drop in margins for 2020. Just wanted to understand what kind of interest rate cuts was that guidance based on? More broadly, for every 25 or 100 basis points of cuts, U.S. rate cuts, how do you see your margins progress? That's my first question. My second question is on cost of risk.
I understand it's really difficult to give guidance now, which are the sectors, which are the particular sectors where you are most cautious in terms of your lending book? Finally, one on the capital ratios. Just wanted to understand if there has been, with the slew of stimulus measures that the regulators have announced, has there been any sort of point on forbearance on the capital ratio for the bank? Thank you.
We'll just take one by one. The first question is for margin. When we gave you the guidance, the margin that at that time we had anticipated interest rate cuts at that time. What the interest rate cuts that have happened, have happened in a quite succession, which was not anticipated at the time. At this time, we stick to that 3, 4 basis points decline, compared to what we gave you at the start of the year because of the same factors. We will update this guidance in Q2 as we get more information. Specifically on second point, on cost of risk, as you'd acknowledge that our cost of risk, what we have reported this quarter, is around 55 basis points.
Because of our international operations and the different situation that we are in, we expect it to remain at around similar levels between 55-65 basis points for the full year. Where we are going to see pressure is again, some sectors which are obviously impacted. We are looking at services, hospitality, we are looking at hotels. We are looking at things which are basically greatly impacted by the COVID-19 pandemic. In terms of capital ratios, yes, other regulators have announced certain relief in capital ratios, but so far QCB hasn't announced anything. If there's anything, it would obviously come to everyone's knowledge at the same time. Most importantly, we don't even need any ratio relief as well. As you see, we have reported our capital at 18.4, which is higher than the 15% minimum level. We have ECL fully phased in.
We have all the other ratios also fully phased in.
Got it. Thank you so much.
We have another question from Mohammad Adel from Al Faisal Investments . Your line is now open.
Hi. Thanks for taking my questions. Most of my questions have already been answered. My last question is on, now if you have a customer, a client that have a facility in hard currency and they are SMEs and they want to defer the loan. Is the government going to compensate for this hard currency? That's my question. Also on the QCB capital ratio relief and also on IFRS 9, because now, especially in global markets, we see that there's a lot of talk about relaxing the IFRS 9. Do you expect if the situation got worse from here, this would be on the table or not? Thanks.
On your first question in terms of SME relief that has been provided, will the government compensate in hard currency? As we have said, yes, the zero cost repo window is available for any relief that is being provided. If any banks want to tap that window, that is available, in terms of hard currency, which can come in. Your second question, in terms of capital relief for IFRS 9, so far, we haven't heard anything from QCB, whether IFRS 9 conditions are being relaxed. For us, IFRS is working as is, both from a capital perspective as well as from a reporting perspective.
Okay. Thank you.
As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We have a question. Sorry, if you'd like to continue.
While we wait for the question, it's Aybek on the line. I think I'll just jump in with a follow-up. Can you comment about your ability to control costs in the current environment? What could be your cost discipline like in 2020? If you have to cut costs, how far can you cut if you see more revenue pressure down the line? That'll be my third question. I think second question is, how do you see your balance sheet growth outlook? On one hand, there is lending activity. There are off balance sheet commitments from the clients, overdrafts, lines of credit that can be utilized. On the other hand, there is government bond issuance. Where are you expecting that from? How do you envision your asset growth given these two components in 2020.
Hi, Aybek. We'll first address the first question first. As you would also acknowledge that we have a very long history of really discipline in terms of expenses, and our efficiency ratio has actually dropped for the quarter. In this environment also, we have not lost that focus. We are continuing to looking at opportunities where we can lower our expense base, keeping in view there are two factors. First is the additional technology cost that we have to incur. As you would acknowledge, a lot of people are working from home. Then there are also saves coming in terms of lower discretionary expenditure. In terms of cost, we are very carefully looking at it, and we will most likely finish at a better efficiency ratio in the coming quarters.
Specifically on the second question on balance sheet growth, as you'll see, even in environment, we basically on a quarter-on-quarter basis, we were up between 2%-3% on different metrics, whether it's loans or deposits or total assets. What we expect is going forward, we expect modest growth in public sector funding. That again, we have to match it with making sure that we have enough liquidity available. We raise enough deposits both from international and local sources to meet the capital requirements from our clients.
In terms of, that was your comment about the funding outlook. What about asset growth outlook? Where do you see in terms of loans? Do you think there will be a run for credit lines, credit commitments of balance sheet items given current circumstances, for one? Secondly, how do you envisage the rough government debt purchases in 2020?
Specifically, as you're aware, government has raised the financing recently in the market. What we know is where the oil price is and where it's going to end up is anybody's guess. We do expect some sort of credit demand to continue throughout the period from the government if the oil price remains low. If there is pickup in activity in quarter three or quarter four from the private sector, that also might flow into the numbers towards the end of the quarter or presumably next year. In terms of drawdowns, yes, we have seen those drawdowns that have happened, and as you would acknowledge that for a bank, if a committed line is given, we always ensure that the resources are available to meet the commitment whenever a drawdown happens. Those measures are being taken care of.
Okay. Thank you. Back to the operator just to check if we have any questions in the queue.
We have a question from Waruna Kumarage from SICO Bank. Your line is now open.
Hi. Thank you very much. I have a couple of questions. Firstly, on the forbearance of loans, especially on SMEs, you mentioned that deferment is about up to three months currently what you are providing. Given that this is backed by the zero-cost funding by Central Bank, is it fair to assume that the impact on NIMs on this relief measure is minimal or nothing at all?
Very small amount. Lower than any of the numbers that are appearing in any of the P&L items. Very small.
Okay. That is on account of the funding that you can match with the relief because of that.
No. The way relief works is that for three months, you don't have to pay any of your interest or principal repayments which were due during this time. You will have to pay it later. For only for three months, the interest amount is not being computed. Our SME loan book in Qatar, which is under this relief, is very small on an overall basis. The NIM impact of this is not material. That's what we're trying to say, irrespective of whether we have the window from C entral Bank or not.
Okay. What you mean to say is that you are not on these loans for these three months?
Yes.
Okay. The relief from Central B ank doesn't really have any positive impact on the bottom line as such for the forbearance?
It's a liquidity relief.
Liquidity. Okay. Right. Okay. Secondly, could you comment a bit more on the relief measures announced by the Egyptian Central Bank, and how is it impacting your financials there?
For Egypt Central Bank, as we understand the way it has worked in their financial is that their Central Bank has said that total interest that is due for the six months, this will not be paid. However, interest will continue to accrue on the overall amount. That again, that doesn't change my NIM for that particular country. Again, it is more of a liquidity measure that has been given that for those customers, instead of paying now, they will pay later, but they will pay a higher amount because interest will continue to be accrued. Doesn't change my NIM for that particular division.
Okay. How different is it in Turkey? Is it similar to that in terms of deferments?
Yes, in Turkey as well, it is similar measure that interest deferment is happening. They have different classes for different types of customers. Some are three months, some are six months, some are one or two months. For them, again, it is only a payment deferment, not an interest deferment.
Are they supposed to pay interest on interest? Is that what it means?
Yes.
Okay. Thank you so much. Thanks a lot.
We have another question from Mohammad Adel from Al Faisal Investments. Your line is now open.
Yeah, sorry for taking another chance to ask the question. now we have noticed that compared to QNB building reserves and provisions compared to what we saw, for example, from JPMorgan and other banks in other countries. We saw there the eightfold or fourfold increase in reserve building for the expectation of what is coming during the year. Now QNB have increased the provisioning, but do you expect we could see this magnitude during second quarter or third quarter this year? Thank you.
Thank you. in terms of American banks which have announced, you should also keep in mind that their provision increase not only is for COVID-19, but they had their IFRS 9, which requires CECL effective from the 1st of January of this year. which really helped them a lot in building up the provisions, which you're seeing a cumulative effect of both COVID-19 as well as their version of IFRS 9 starting at the beginning of this year. That's one. As we have said, we expect our cost of risk. We are working in very different environment. QNB's primary economic environment which it's operating is Qatar, Turkey, and Egypt. again, the business is heavily tilted towards Qatar in terms of overall structure. Whereas those are global banks which have operations in God knows so many countries. this is not a like-for-like comparison.
For us, as we have said, we expect our cost of risk to be around 55-65 basis points for this year. as and when, whenever we think that any problem loans are coming in, we will acknowledge them. You should also note that our coverage ratio has always been above or at 100%. We don't take any benefit of collateral for any of the loans that have gone bad, even though when it eventually is resolved, it will be P&L positive net for us at that time. we are going in it in a much stronger position, and we will be building reserves as and when it is required.
Okay. As of now, you're not seeing this now. You're not seeing this from what you've seen since April or since end of March, you don't see that you may need to build this kind of reserve during this year?
Yes. As you would see that, it is too early to actually predict. Government has announced a lot of actions. All those actions have to flow through the economy, and will be reflected in those numbers eventually. At the end of Q2, which we'll be in a much better position to actually comment on how much provision is required, how much numbers have to be built up, and then we can have a more meaningful discussion at that time.
Okay. Thank you. Thank you.
We currently have no questions registered at the moment, so if you'd like to continue. Mark, if you'd like to continue.
Thank you . I think if we have no further questions, we are happy to wrap it up there.
Yes. Well, thank you. I would like to thank QNB Group for hosting this conference call. Thank you for your guidance and insights on the markets. We all appreciate it. I think on this note, operator, we can close the call.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.