Edited Transcript of QNBK.QA earnings conference call or presentation 20-Apr-20 9:30am GMT

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 tenor.

I will now move on to QNB’s quarterly financial results for the 3 months period ended 31st of March 2020. Key financial results for the 3-month period ending 31st of March are as follows. Net profit was at QAR 3.6 billion or USD 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 USD 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 USD 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 USD 194.5 billion. QNB Group remained successful in attracting funding, which has resulted in an increased customer funding by 11% from December 2019, to reach QAR 706.3 billion or USD 194 billion. This maintained the group’s loan to deposit ratio at 100.2%. The group was able to maintain the ratio of nonperforming 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Waleed Mohsin from Goldman Sachs.

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Waleed Malik Mohsin, Goldman Sachs Group Inc., Research Division – Equity Analyst [2]

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Excellent numbers and a 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 will 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.

And then 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 growth is likely to respond to that on both the lending and the deposit side.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [3]

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Thank you, Waleed, for the question. This is Riaz Khan. In terms of guidance, see, it’s the — as you’d acknowledge that there’s a lot of uncertainty today, and we will have more to say both of the top line impact as well as expenses in the coming months in Q2 as impact of COVID-19 is better understood. For the growth 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 on 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 is — does not really have a material impact on QNB. The way — the ratio is slightly difficult, has a formula. And when we look at it on a prima facie basis, there’s not material impact that’s going to be on QNB Finance Bank from that. Any other questions?

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Waleed Malik Mohsin, Goldman Sachs Group Inc., Research Division – Equity Analyst [4]

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Got it. And 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?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [5]

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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 5.28% 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. And however, we — as we have said, going forward, we expect overall growth to remain modest for both of these markets. In the — in both of these markets, you would realize that the governments have announced a lot of actions to support the economy on an overall basis. And the impact of this action is yet to be seen in their financials. So anything that we would be saying would be preempting what government actions will happen later on the companies that we are working with. So that’s the overall comment for us.

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Operator [6]

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We have a question from Chiro Ghosh.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division – Research Manager & Senior Analyst [7]

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Chiro Ghosh from SICO Bahrain. 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 also outside Qatar. So if you can throw some light on how are the things translating there. Are you seeing some funding pressure? Or are you seeing flow from those countries? That’s one. And the second one is if you can please tell us again and bought on facilities have you extended to your existing customers. And what will be the — what would the financial implication of this?

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Mark Abrahams, Qatar National Bank (Q.P.S.C.) – Assistant General Manager of Treasury [8]

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Thank you very much for your questions. It’s Mark here. I’ll handle the first part on funding. You’re right. We do have a large and very, 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. And we’ve been very, very successful in doing that. So 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 markets moved over the last 6 weeks, that there is more pressure on the premium being paid for money at the moment. But 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 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. And on the back of that, yes, we have seen obviously pressure on cost. But in terms of the actual overall liquidity pool of the bank, it remains very healthy, and there’ll be no particular runs in any particular geographies away from that.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [9]

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And in regard to your second question, in terms of…

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division – Research Manager & Senior Analyst [10]

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Any NIM impact? Excuse me, sorry, on the first part, so what kind of NIM impact would you expect from this because of this?

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Mark Abrahams, Qatar National Bank (Q.P.S.C.) – Assistant General Manager of Treasury [11]

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It will be minimal. I mean, we don’t know at this stage. Obviously, it began to happen, obviously, later on in Q1. There will be pressure on NIM, probably just a small number, a single-digit basis point, I would have thought, maximum. No more than that.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [12]

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And in regard to your second question, in terms of facilities, which are available from the Central Bank, we just like first tell you exactly what Central Bank has announced. They have announced that they’re looking for 6-month loan postponement for selected sectors. They have established 0 cost repo window for QAR 50 billion for banks to obtain. And 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 SMEs, we have given currently 3-month loan postponement for all SMEs. But however, in Qatar, the SME loan balance is very, very small. And the impact of this is very minimal in terms of overall financials. We haven’t had any — we haven’t tapped the repo window as of yet because we have ample Qatari riyal liquidity available with us. And 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. And what we expect is that as we will report Q2 number, we will have good amount of loans to be reported under this scheme.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division – Research Manager & Senior Analyst [13]

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Just on the first line, which you said that 6 months of deferment, so this you’re extending to — this you’re already extending to your customers or especially these sectors, which are getting impacted.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [14]

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Currently, this has been extended only for the SME sector, number one. And for other cases, we are looking at it on a client-by-client basis. If there is a requirement of it. 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. So as — we’ll be looking into it on a client-by-client basis as we get requests.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division – Research Manager & Senior Analyst [15]

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To — just help me understand a bit. So why won’t any bank tap this liquidity, which is like a 0 cost, this QAR 50 billion liquidity window? I mean, it makes sense to tap it, right?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [16]

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Yes, it makes sense to tap it, but we already have ample liquidity available with the Central Bank. Why would we take more money when we can’t really utilize it efficiently? Of course, if there is a requirement, we will tap it. We are not saying we will not tap it. But right now, there is no — we don’t see a need for tapping it.

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Operator [17]

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We have another question from Rahul Bajaj from Pictet (sic) [Citigroup].

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Rahul Bajaj, Citigroup Inc, Research Division – Banking Sector Analyst [18]

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I have 3 quick questions, actually. The first one is on margins. So I appreciate the point that you’ve made earlier that — I mean it’s really difficult to give guidance at this stage. But just so — and kind of I get a sense that when you gave the full year guidance previously after the full year results 2019, you mentioned about 3 to 4 basis points drop in margins for 2020. Just wanted to understand what kind of interest rate cut was that guidance based on. And more broadly, for every 25 or 100 basis points of cut — 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. But then which are the sectors — which are the particular sectors where you see — where you are most cautious in terms of your lending book?

And then, 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?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [19]

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Okay. We’ll just take one by one. The first question is for margin. Yes, when we gave you the guidance, the margin that at that time, we had anticipated interest rate cuts at that time. But what the interest rate cuts that have happened in a quite succession, which was not anticipated at the time. At this time, we stick to that 3, 4 basis point decrease compared to what we gave you at the start of the year because of the same factors. And 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 and being — because of our international operations and the different situation that we are in, we expect it to remain at around similar levels between 55 to 65 basis points for the full year. And where we are going to see pressure is against 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 reliefs on 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. And most importantly, we don’t even need any ratio relief as well. As you’d see, we have reported our capital at 18.4%, which is higher than the 16% minimum level. We have decent fully phased in. We have all the other ratios also fully phased in.

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Operator [20]

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We have another question from [Mohammed Adel from Faisal Investment].

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Unidentified Analyst, [21]

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Most of my questions have already been answered. So my last question is on — now if you have a customer, a client that have a facility in hard currency on their SMEs and they want to defer their loan, so is the government going to compensate for this hard currency? That’s my question. And also on the — I mean, on the QCB capital ratio relief and also on IFRS 9, because now especially in the global markets, we see that there’s a lot of talk about relaxing the IFRS 9. So do you expect the situation to get worse from here? This would be on the table or not?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [22]

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On your first question in terms of SME relief that has been provided, will the government compensate the hard currency, as we have said, yes, the 0 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.

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Operator [23]

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(Operator Instructions) We have a question — sir, if you’d like to continue.

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Aybek Islamov, HSBC, Research Division – Analyst [24]

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While we wait for the question, it’s Aybek here on the line. So I think I’ll just jump in with the follow-up. Can you comment about your ability to control costs in the current environment? So 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? So that will be my first question.

And 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. All the draft lines of credit that can be utilized. On the other hand, there is government bond issuance. What do you expect on that front? So how do you exhibit your asset growth given these 2 components in 2020?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [25]

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Aybek, we’ll first address the cost question first. As you would also acknowledge that we have a very long history of well disciplined 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 will — we are continuing to looking at opportunities where we can lower our expense base, keeping in view, there are 2 factors. First is the additional technology cost that we have to incur. As you would acknowledge, a lot of people are working from home. And then there are also sales coming in, in terms of lower discretionary expenditure. So in terms of cost, we are very carefully looking at it, and we will most likely finish at a better efficiency ratio coming quarter — in the coming quarters.

Specifically, on the second question on balance sheet growth, as you would see, we are — even in the environment, we basically, on a quarter-on-quarter basis, we were up between 2% to 3% on different metrics, whether it’s loans or deposits or total assets. And we — 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 raised enough deposits, both from international and local sources to meet the capital requirements from our clients.

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Aybek Islamov, HSBC, Research Division – Analyst [26]

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And in terms of — so that was your comment about the funding outlook. And what about asset growth outlook? What 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 in Q1? And secondly, how do you envisage the — for example, government debt purchases in 2020?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [27]

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Specifically, see, as you’re aware, government has raised the financing recently in the market. And — but what we know is where the oil price is and where it’s going to end up is anybody’s guess. But we do expect some sort of credit demand to continue throughout the period from the government if the oil price remains low. And if there is pickup in activity in quarter 3 or quarter 4 from the private sector, that also might flow it into the numbers towards the end of the quarter or presumably next year.

In terms of drawdowns, yes, the drawdowns, we are seeing those drawdowns that has happened. And as you would acknowledge that for a bank, if a committed line is given, they are always — we always ensure that the resources are available to meet the commitment whenever a drawdown happens. So those measures are being taken care of.

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Operator [28]

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We have a question from Waruna Kumarage from SICO Bank.

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Waruna Kumarage, [29]

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I have a couple of questions. Firstly, on the forbearance of loans, especially on SMEs, you mentioned that you — deferment is about — up to 3 months currently what you are providing. And given that this is backed by the 0 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?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [30]

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It’s very, very small amount, lower than any of the numbers that are appearing in any of the P&L items, very small.

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Waruna Kumarage, [31]

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Okay. But that is on account of the funding that you can match with the relief, right, because of that.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [32]

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No. The way relief works is that for 3 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 3 months, the interest amount is not being computed. And our SME loan book in Qatar, which is under this relief, is very small on an overall basis. So the NIM impact of this is not material. That’s what we’re trying to say, irrespective of whether we tap the window from Central Bank or not.

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Waruna Kumarage, [33]

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Okay. So what you mean to say is that you are not (inaudible) on these loans for the 3 months.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [34]

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Yes.

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Waruna Kumarage, [35]

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Okay. So that the — okay. So it’s not — so the relief sometimes with Central Bank doesn’t really have an impact — positive impact on the bottom line as such.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [36]

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It’s liquidity relief.

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Waruna Kumarage, [37]

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Liquidity, okay. Right. Okay. And secondly, could you comment a bit more on the relief measures announced by the Egyptian Central Bank and how is it affecting — or how is it impacting your financials there?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [38]

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So for Egypt Central Bank, as we understand the way it has worked in their financials is that their Central Bank has said that total interest that is due for the 6 months, this will not be paid. However, interest will continue to accrue on the overall amount. So 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. So it doesn’t change my NIM for that particular division.

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Waruna Kumarage, [39]

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Okay. And how different is it in Turkey? Is it similar to that in terms of deferments?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [40]

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Yes. In Turkey as well, it is a similar measure that interest deferment is happening on — but they don’t have — they have different classes for different types of customers. Somebody — some are 3 months, some are 6 months, some are 1 or 2 months. For them, again, it’s only a payment deferment, not an interest deferment.

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Waruna Kumarage, [41]

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So the interest will be — so are they supposed to pay interest on interest? Is that what it means?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [42]

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Yes.

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Operator [43]

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We have another question from [Mohammed Adel from Faisal Investment].

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Unidentified Analyst, [44]

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Sorry for taking another chance to ask the question. But now we have noticed that compared to — I mean like QNB book to reserves and provisions compared to what we saw, for example, from JPMorgan and other banks in another country, we saw like the eightfolds or fourfolds increase in results debonding to their expectation of what the coming during the year. So now QNB have increased the provisioning, but do you expect you could see this new magnitude during second quarter or third quarter this year?

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [45]

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Thank you. So in terms of American banks, which have announced, you should also keep in mind that their provision increase not only is spot COVID, but they had their IFRS 9, which they call CECL effective from the 1st of January of this year, so which really helped them a lot in building up the provisions, which you’re seeing a cumulative effect of both COVID 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 to be — we are working in very different environment. And QNB’s primary customer is primary economic environment, which is operating is Qatar, Turkey and Egypt. And again, the business is heavily tilted towards Qatar in terms of overall structure, whereas those are global banks which have operations, I mean, God knows, so many countries. So this is not a like-for-like comparison. For us, as we have said, we expect our cost of risk to be around 55 to 65 basis points for this year. And as — and whenever we think that for 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 we may — when it eventually is resolved, we will get a P&L — it will be P&L positive net for us at that time. So we are going in it in a much stronger position, and we will be building reserves as and when it is required.

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Unidentified Analyst, [46]

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Okay. But as of now, you’re not seeing this now. You don’t expect to see this — I mean from what do you see since April or since end of March, you don’t see that you may need to build this kind of reserve during this year.

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Riaz Khan, Qatar National Bank (Q.P.S.C.) – Head of Group Financial Consolidation and IR [47]

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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 then we’ll — and will be reflected in those numbers eventually. As — and 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.

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Operator [48]

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We currently have no questions registered at the moment, so if you’d like to continue. Mark, if you’d like to continue.

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Mark Abrahams, Qatar National Bank (Q.P.S.C.) – Assistant General Manager of Treasury [49]

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Thank you. I think if we have no further questions, we are happy to wrap it up then.

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Aybek Islamov, HSBC, Research Division – Analyst [50]

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Yes. Well, thank you. I would like to thank QNB Group for hosting this conference call. Thank you for your guidance and insights from the markets. We all appreciate it. And I think on this note, operator, we can close the call.

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Operator [51]

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Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.