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Edited Transcript of CBQK.QA earnings conference call or presentation 23-Oct-19 11:00am GMT

Q3 2019 Commercial Bank PSQC Earnings Call

Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Commercial Bank PSQC earnings conference call or presentation Wednesday, October 23, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rehan Khan

The Commercial Bank (P.S.Q.C.) - EGM & CFO

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Conference Call Participants

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* Aybek Islamov

HSBC, Research Division - Analyst

* Chiradeep Ghosh

Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst

* Janany Vamadeva

Arqaam Capital Research Offshore S.A.L. - Analyst

* Vikram Viswanathan;NBK Capital;Head of Buy-Side Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Commercial Bank Quarter 3 2019 Investor Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Rehan Khan, Chief Financial Officer of Commercial Bank. Please go ahead, sir.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [2]

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Thank you and good afternoon, everyone. Our Group CEO, Joseph Abraham, is traveling at the moment, so today, I'm joined by Zubair Chaiwalla, who heads up our investor relations function. I'll start with a brief overview of the results, and then we can move to the Q&A session.

As you can see, we've made a profit of QAR 1.5 billion for the 9 months year-to-date, which is up 19.4% year-on-year. Page 5 shows the quarterly progress we're making. For the -- also the profit is QAR 570 million, and this is driven by an improved performance of Commercial Bank in Qatar, our subsidiary of Alternatif Bank and a steady performance by our associate National Bank of Oman. UAB continues to be reported as an asset held for sale.

From a balance sheet perspective, we've seen loans increase by 5.2% as compared to December 2018 and 3.8% year-on-year. We've grown our share of government and public sector while, at the same time, reduced real estate and contracting, as we had set out to do in our 5-year strategy. Given the schedule of repayments and de-risking for the fourth quarter, I do not expect the net loan book to grow between Q3 and Q4.

Deposits are up 3.5% compared to December 2018 although slightly lower year-on-year. Low-cost deposits are up 12% year-on-year, and this has been one of our focus areas. We've been very active in transaction banking as well as our leading remittance product, which has resulted in higher cost -- low-cost deposit balances.

Let's now turn our attention to the P&L and key ratio. Total operating income has improved by 7% year-on-year and 6% against the previous quarter. Net interest margins have improved from 2.2% in the second quarter to 2.4% in the third quarter. The increase in net interest income is due to the impact of managing the cost of funds and the increase in low-cost deposits that I referred to earlier as well as a slight increase in asset yields. There's also some reversal of suspended interest as recoveries are coming through, and we expect that to continue in coming quarters.

Costs have reduced by 7.6% year-on-year. We've made very good progress on operational efficiency and achieved a cost-to-income ratio of 27.1% on a consolidated basis for this quarter and at 24.1% for the Domestic Bank in Qatar. Alternatif Bank has also reduced its cost-to-income ratio, which is now 35.8% for the quarter. We will continue to focus on improving our cost-to-income ratio largely through a growth in income and, at the same time, investing in our technology and service delivery.

In terms of ratios, both return on equity and return on assets have improved. For the quarter, they are 10.6% and 1.6%, respectively.

Nonperforming loans are steady at 4.9%. The cost of risks target, which is what we are focusing on for this year, is 0.8%. We are currently at 0.9%...

(technical difficulty)

...as at Q3.

Capital adequacy is steady and in line with guidance. Our aim of operating in the 11% to 11.5% range for CET1 remains, whereas Central Bank minimum is 9%, and this includes a [decent] buffer of 0.5% in Commercial Bank.

Moving on to our subsidiary and associates. Alternatif Bank has delivered a year-to-date net profit of TRY 170 million and this compares to TRY 92 million for this period last year.

National Bank of Oman reported a net profit of OMR 38.3 million, which is steady year-on-year. And as mentioned earlier, United Arab Bank is held as an asset for sale although we are moving this to an associate at the year-end.

Let me now hand you back for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Chira Ghosh from SICO.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [2]

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First, congratulations for a fantastic set of results. My 2 questions are -- is I see your loan-to-deposit ratio has gone up quite a bit. If you can give us a guidance of what will be your strategy going forward. Do you believe that there might be some pressure from Central Bank to lower it down? One -- my first question is on that. The second one is I see your NIM has gone up, and you give the reason also. Just want to know how sustainable is the NIM. I mean do you believe that the NIM -- there might be NIM pressure, or we can maintain this [kind of level]? Yes, they are my 2 questions.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [3]

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Okay. Thank you, Chira. In terms of loan-deposit ratio, as you know, the balance sheet is a moment in time. During the quarter, during the month, the balances vary both in the loan and the deposit area. We do expect the ratio to gradually come down in the coming quarters. So this is slightly higher than our previous quarters. And I would expect that to rectify, as I said, in the coming quarters.

In terms of net interest margin, I explained the reasons for the increase. We believe that's sustainable. And we believe that going into 2020, we will have similar NIM and we don't forecast a decrease from this level.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [4]

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So just a small follow-up for the first one. So if your leverage comes down, won't that have any -- won't that put pressure on your net interest margin? Or still the same?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [5]

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No. One thing to highlight is that we do have a Tier 2 maturity, middle of November. This was taken 10 years ago at 7.5%., so it's very expensive by today's standards. So when that matures and that's replaced, we don't expect Tier 2 to be needed, and therefore, that will be replaced by alternative funding for that. I think we'll also contribute to a lower cost of funding going forward. I think generally, the environment is at a much lower cost that we're seeing now for deposits than earlier quarters. So all of those lead us to believe that the NIM is sustainable going forward, and the -- any change in the LD ratio can be accommodated going forward.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [6]

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Brilliant. Yes. That makes a lot of sense. If any, [CL] looks quite good.

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Operator [7]

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Our next question comes from Aybek Islamov from HSBC.

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Aybek Islamov, HSBC, Research Division - Analyst [8]

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So I wanted to ask a couple of questions, I would say. Firstly, when you spoke about the deposits that you're looking to slowly improve your loan-to-deposit ratio over time, what are you looking for in terms of source of deposits? Is it going to be domestic Qatari deposit, or is it going to be a non-resident deposit, collection mostly? That's my first question.

And secondly, can you give us some guidance about how big was the reversal of interest in suspense. And during the third quarter, if we look at interest income, we see there's a good jump quarter-on-quarter. In the press release, you were saying that the improvement in NIM is due to a higher ratio of high-yielding assets in your balance sheet. I see 2 things which increased. It's loans and securities. And now you said that there's interest in suspense. So I'm curious to know how much is interest in suspense, how much is the yield pickup from securities that you bought during Q3 and how much is the yield pickup from loans, if any. So that would be my kind of second question, yes.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [9]

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Okay. Thank you, Aybek. Firstly, in terms of deposits, as I said, it is a moment in time, and deposit volumes vary between months, between quarters. What we have seen is generally a liquid market in Qatar, so it has not been an issue picking up deposits as we go along. At the same time, we do expect to be working on an issuance as well a [re-get] in the coming few months. So there'll be -- what's important for us is primarily to have a diversified stream of liquidity. Deposits is one of those and we have other long-term liabilities as well that make up the overall liability book. So I think both deposits can be coming from both domestic market as well as international. We typically have a fluid stream on both of those areas.

In terms of the net interest margin and the contributors to those, you're quite right that it's both loans and securities that have contributed to that. The reversal of suspended interest, we actually had the largest quarter so far in terms of recoveries of previously provisioned accounts this quarter, and therefore, there was some reversal of suspended interest as well. Not a large contributor, I would say, overall, in terms of the net interest margin, more in terms of the low-cost deposits, deposit rates coming down generally as a function of the market as well as holding up on the asset yield from the (inaudible).

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Aybek Islamov, HSBC, Research Division - Analyst [10]

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Okay. And a follow-up question, if I may. Can you describe to us if the credit quality of the securities portfolio changed in one way or another during the third quarter given the strong growth, yes, we had till September?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [11]

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Can you repeat the question, Aybek? I didn't quite catch what the question was.

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Aybek Islamov, HSBC, Research Division - Analyst [12]

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Yes. The question is the credit quality of the securities portfolio changed in any way during the Q3, right, so it looks like you're onboarding a lot of securities. It looks like they're helping your yield, your investment income. What about the credit quality of the securities have you booked -- have you bought during the quarter? Can you comment on that?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [13]

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Yes. I mean as you can see, Page 11 actually shows the breakdown of the investment book. 89% of it is government bonds we have. And you can see also in terms of the credit rating, 87% is in the AAA to AA- range. But it continues to be a straight book, and we've seen here that new purchases have been primarily sovereign bonds that are highly rated.

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Aybek Islamov, HSBC, Research Division - Analyst [14]

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So yes, looking at Page 11, so other debt securities, 11% in Q3 '19 versus 8% last year. And you are saying these are mostly government securities. There are other debt securities, right? Is that the case?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [15]

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Yes. They're primarily sovereign bonds that we are holding overall.

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Operator [16]

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We will now move to our next question from Vikram Viswanathan from NBK Capital.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [17]

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Rehan, congrats on the good results. I had a follow-up questions on the margins. Just looking at the net financing income, the funding costs more or less remained stable quarter-on-quarter, around QAR 980 million. Most of the increase in margins came from increase in interest income. So interest income this quarter was about QAR 1.7 billion compared to QAR 1.62 billion last quarter. And you also mentioned that the reversal of interest suspended is not material. So I just wanted to understand what caused this increase from QAR 1.62 billion to QAR 1.7 billion as far as the interest income is concerned.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [18]

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Thank you, Vikram. Yes, there's a number of contributors. Firstly, in terms of the asset yield, which is a combination. You saw that we've got new -- we've got growth in the loan book in the quarter. We've got an increase in the investment book. So just in terms of the amount, we'll obviously contribute to a higher interest income, just a higher number of assets that we hold versus the previous quarter. That will be the main contributor if you're looking at interest income of one quarter versus another quarter. And then as I said, the suspended interest reversal also helps with the nonmaterial amount for Q3.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [19]

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Okay. Okay. And I'm just looking at the loans and the investment line. There's a good pickup quarter-on-quarter. Is this sustainable or this is mostly uneven for this quarter?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [20]

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Yes, I believe that given some of the -- what I see in the pipeline is some repayments and de-risking. I don't believe that the loan book will grow in the fourth quarter versus the third quarter. And the investment book, if it grows, it will be marginal. But certainly, there's momentum in the NII as a result of the pickup that we've seen over the last quarter.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [21]

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Okay. Okay. All right. And just the last question on the margins. The margins which we reported in Q3, can we use this as a benchmark for 2020? Or would you say there is more upside risk coming from further decline in funding costs?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [22]

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No, I think it's fair to use this as the -- as your baseline. There is going to be, as I said, the Tier 2 maturity, which should help cost of funding further in the fourth quarter. But I think it's fair to use what you see now as the baseline.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [23]

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Okay. Okay. I also had a question on ABank -- sorry, ABank in Turkey. I was just looking at your presentation or the slide on ABank. There seems to be a good jump in the operating income. Just sort of given the weakness in the Turkish economy, I just wanted to understand what are the drivers behind this operating income. I think it went from TRY 500 million -- I'm talking about 9-month periods here. It went up to TRY 735 million this year compared to about TRY 500 million the last year in Turkish lira terms. I'm just trying to understand what is driving this operating income.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [24]

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Yes, it's Page 18, I think, that you are referring to in the investor pack.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [25]

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Correct. Correct.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [26]

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There's -- again, there's a couple of things that are contributing to that. In the 9 months of 2018, they actually had FX losses which were dragging down the overall operating income. That is actually positive this year. The loan book has grown, which has also contributed to higher NIM and interest income for Alternatif Bank in the first 9 months of this year. And also, there's been some transactions where Commercial Bank and Alternatif Bank have combined, and that has helped their non-funded income in particular. I see that the [cost/income] ratio has come down, and we're very pleased with the results we're seeing from the total book.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [27]

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Okay. Okay. I'm also looking at the balance sheet on the same page. If we look at the total assets and total loan book, more or less it remains stable compared to last year. So is it fair to say that most of this increase in operating income came from the FX line?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [28]

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FX and fees and commissions.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [29]

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Fees and commissions. Okay. Okay. Yes. And just a question on the asset quality, sorry. I had a question on the asset quality. I did not get a chance to go through the Stage 1, Stage 2, Stage 3 exposures. Were there any movements? But I think in the second quarter, there was a good movement in -- or at least momentum was positive. I think Stage 2 loans -- Stage 2 exposures as a percentage of total exposures declined sequentially. Are there any similar trends in Q3 when we look at Stage 2 and Stage 3 exposures?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [30]

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Yes, there is, Vikram. So the Stage 2 has gone down further by 1% in Q2 and Q3. The Stage 3 we saw is the same as previous quarter. And Stage 1 is up slightly as a result of the new loans that we've made. So Stage 2 now is 19% of the overall loan book.

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Vikram Viswanathan;NBK Capital;Head of Buy-Side Research, [31]

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Sorry? Sorry, were you saying something?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [32]

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Yes. Just lastly, we are looking to reduce the Stage 2 further in the first quarter and in '20.

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Operator [33]

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(Operator Instructions) We'll now take our next question from Janany Vamadeva from Arqaam Capital.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [34]

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Congratulations on a good set of numbers. I just have a quick follow-up question on margins. I think too many questions on margins, just to follow-up. Just trying to understand that you mentioned that there is a maturity of a loan in Q4, but then you are looking to issue another one like in Q1 2020. And given that, of course, the deposit cost has improved, but there should be a lag effect on the asset side as well. And the growth came mostly from PSE, like the public sector. And given Q3 was -- like had significant recoveries. How sticky do you think this NIM will be going into 2020 given the declining rate environment for the [what have] -- these recoveries, and the cost of funding, of course, will be matched by the asset repricing. So how comfortable and confident are you with the NIM movement?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [35]

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Yes. Thank you, Janany. On the maturity, this is a Tier 2 instrument that was taken out at the end of 2009, so the 10-year Tier 2 which is maturing on the, I think, 17th or 18th of November. As I said earlier, that's up 7.5%. We would expect to renew in whatever shape or form we decide, firstly, on a short-term basis; and then, as I said, probably a [re-get] later on at a much reduced rate. So I think that will have a very positive impact on our net interest margin. As I mentioned, the low-cost deposits are also going up. They're up 12% year-on-year and are really a function of some of the products that we've been working very hard on. So I expect that to continue.

And thirdly, the overall low-cost environment that we're in right now is leading to renew at lower rates than what we had in mind. I think those are all the positives on the cost of funding side.

On the asset side, while we are increasing our government and public sector, this has not been at any material depression in the -- that yield impact -- yield's gone up. And this has been also boosted by some of the investment book increases that we've made as well. So we see that this is now a sustainable level at 2.4. And we're -- we have actually targeted to reach 2.5 by the end of Q1 next year.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [36]

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Just trying to understand where the public sector growth came from because there were a lot of repayments in the sector. So just trying to understand like how CBQ was able to grow in the public sector space in Q3.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [37]

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It's from a low base, Janany. So we, traditionally, were not operating in this area to any large degree. And now we are very focused on this area, and therefore, we are forming new relationships with public sector companies that we didn't have previously. And that's been a very positive result for us in terms of growing our loan book and growing our share of public sector.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [38]

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And my last question is on ABank's asset quality. If you could throw some color on the provisioning, especially going into Q4 and given the recent requirements by the Central Bank to write off some bad loans in energy and construction, how do you see that impacting your cost of risk outlook for ABank and for the group?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [39]

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Yes, I think that's still under discussion. We are in very close contact with our subsidiary in terms of how that will turn out. Clearly, Alternatif Bank has taken very high provisions in previous years and still forms a relatively small percentage of our overall asset book. And therefore, we believe that we can manage that within our overall cost of risk. As I've said, our target is 0.8% for the year. We're at 0.9% as of Q3. So we believe that is still achievable even with the discussions that are happening between the regulator and the Turkish bank. We expect that to get resolved sometime during the course of next month.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [40]

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Would you able to share like what percentage of ABank's loan is, like, spreads to these 2 sectors, energy and construction, if possible?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [41]

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That's not something that we have in -- so I can have a discussion with you offline, Janany, for any further information on it.

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Operator [42]

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(Operator Instructions) We appear to have no further questions at this time, so I'll turn the conference back to Mr. Khan for any additional or closing remarks. Thank you, sir.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [43]

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So thank you, everyone, for joining the call and look forward to talking to you again for Q4 results. We do intend to hold an Analyst Day as well shortly after the Q4 results are finalized and published, and we will share more details with you in due course on that. Thank you again.

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Operator [44]

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Thank you, sir. Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.