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Edited Transcript of CBQK.QA earnings conference call or presentation 17-Jul-19 9:00am GMT

Q2 2019 Commercial Bank PSQC Earnings Call

Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Commercial Bank PSQC earnings conference call or presentation Wednesday, July 17, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Abraham

The Commercial Bank (P.S.Q.C.) - Group CEO

* 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

* Rahul Bajaj

Citigroup Inc, Research Division - Banking Sector Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Commercial Bank Quarter 2 2019 Investor Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Joseph Abraham, group CEO. Please go ahead, sir.

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [2]

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Good morning, everyone, and thanks for joining us for our quarterly call. I have with me Rehan Khan, who's our Chief Financial Officer; and also Parvez Khan, who's our Head of Treasury & Investments.

Firstly, I'd like to say I'm pleased with our first half results, which show a 9.2% increase in our net profit. This is really the result of the strong execution on our strategic plan, which is we are now in the third year of actual execution against it. So if we look at some of our key areas that we wanted to focus on, one was we said we are going to reshape our loan book. I'm pleased to say that the real estate exposure is now down from 25% to 23% and also our public sector, which is an area of focus, has grown from 10% to 15% of our book.

Another area that we had focus on was on our cost side. When we started this journey, we were around 44% cost/income ratio. And I'm very pleased that for the first time, we have now dropped below 30%. We achieved 29.8% at the group level. And at the Doha level, we were at -- in the 28%. So again, we are now much more competitive and in line with market peers. But the journey will continue as we continue to drive through digitization and end-to-end process efficiency.

So the other area that is pleasing as we said that we're going to focus on transaction banking and digitization and lead as a technology provider. And what we found is that we are now being recognized by the market. We won a number of awards from Asian Banker for the Financial Technology Innovation Award for our remittance proposition, which is a unique 60-second credit to your account in a number of countries. And this reflects the strength of the investment we are making into technology through Commercial Bank Innovation Services, our fully owned subsidiary.

And also the focus on transaction banking, where we have won a number of mandates. And Asian Banker again recognized us as the Best Transaction Bank in Qatar. Similarly, our retail franchise continues to grow well, where we were awarded the Best Retail Bank in Qatar for the third year in a row. So these awards are just to me, an acknowledgment that what we are doing is now been recognized by both our clients and the external market. So we're going to continue to focus on that and continue to drive along the areas that we wish to.

As regards our subsidiaries and associates. In Turkey, despite the economic volatility, as you know, we put in a new management team in late 2017. So they have managed the situation well. And whilst there have been some increase in provisions, this has been offset by higher revenues, where they took advantage of the volatility, particularly on the market side. And we continue to remain long term committed to Turkey and we are confident with our management team on the ground.

National Bank of Oman, where we hold 35%, continues to perform steadily. And with regard to the U.A.E., they continue to be held as an asset held-for-sale. But we have brought in a new CEO, and we're going to make some changes and refresh the strategy and the management team. And we are very confident about over the next few years, we'll be able to show a significant improvement in their business. So overall, the strategy and the execution is going well and the results are starting to reflect that.

So I'll now hand over to Rehan, who'll go through in more detail on the actual financials. And then after that, we will take some questions. Thank you.

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

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Thank you, Joseph, and welcome, everyone, to the call. I'll now give you a brief overview of the results and then we can move to the Q&A session.

If we turn, firstly, to Page 5, this shows the progress that we are making against our strategy. I'm pleased to say the increase in profitability to QAR 503 million is through an improved performance of Commercial Bank in Qatar, our subsidiary Alternatif Bank and steady performance from our associate National Bank of Oman.

From a balance sheet perspective, we have seen loans increase by 1.4% as compared to December 2018 but flat compared to previous quarter. There is underlying growth, but it has been offset due to repayments and settlements from our nonperforming accounts as well as due to the derisking. We have discussed in previous quarters our intention to recover on such accounts. I'm pleased that we have seen the positive results of a strengthened legal department and the process that we are following.

Deposits have increased by 5.3% as compared to December 2018. One of the biggest components of that is low-cost deposits, which is an area of focus for us. We've been very active in transaction banking through our payments and cash management products as well as our leading remittance products, which has resulted in higher low-cost deposit balances. And that is helping to improve our net interest margins.

Operating income has improved by 5.4% to QAR 947 million against the previous quarter, driven by an improvement in net interest income and net interest margin. The increase in net interest income is due to the impact of managing cost of funds and maintaining our asset yields. Non-funded income has remained strong and steady in the second quarter. The year-on-year increase in non-funded income is mainly due to fees, foreign exchange earnings and investment income.

We continue to focus on operational efficiency. We've made very good progress in this regard and achieved a cost/income ratio for the quarter of 28.9% and 25.9% for the Domestic Bank in Qatar. We will continue to focus on improving our cost/income ratio through growth in income and at the same time, invest in our technology and service delivery.

We have also seen nonperforming loans reduce to 4.9% as compared to 5.6% in the previous quarter. The reduction in NPLs is due to cash recoveries. Consequently, coverage ratio including ECL has improved to 96.2% as compared to 80.3% in the previous quarter and, of course, does not include the collateral that we hold. The cost of risk target for the year is 0.8%. We are just above 1% currently and working on getting close to that target by the end of this year.

Moving on to our subsidiary and associates. Alternatif Bank, which represents 11% of our balance sheet, has delivered net profit of TRY 67 million for the quarter as compared to TRY 33 million in Q1. And this is driven by an improvement in our operating income by 11.6%. We put in place a strong management team in the latter half of 2017. And it's pleasing to see the positive impact on our results.

Just going back to capital adequacy ratio as well. We've seen that that has improved quarter-on-quarter. Our aim of operating in the 11% to 11.5% range for CET1 remains whereas the QCB minimum is 9%. And this includes a decent buffer of 0.5%. We've now recovered our total capital adequacy ratio to the pre-IFRS 9 implementation level with CET1 at 11% and total capital adequacy ratio at 16.3%. We're also beginning to see an improvement in return on equity and return on assets.

Let me now hand you back to Molly 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 will take our first question from Chira Ghosh of 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 good set of results, especially the asset quality, which was very, very pleasing to see. So I just want to get a sense of the [bank] reality in Qatar. So first off, first, my first question is related to the lending book. So how are you seeing the pipeline? How are you seeing the demand? And which are the sectors on where you can expect the lending book to come? And secondly, are you seeing -- although your margins have improved, but I want to get a sense, are you seeing funding pressures in Qatar?

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [3]

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Thank you for your questions, Chira. Basically, with regard to the growth in our loan book, we remain -- as I said, we remain selective in our approach. We're not -- and we see opportunities in the other strong pipeline, particularly one is in government and government-funded infrastructure. So that will continue to remain an opportunity. The second is around many of these self-sufficiency initiatives, which -- where there's investment in various initiatives to ensure that Qatar is self-sufficient, whether it's in agriculture side or it's in raw materials, logistics. So we see opportunities in that area. And therefore, we do see further loan growth coming through. And we have a strong pipeline.

It's just -- yes. And even in the future, as the government expands LNG production in the North Field by about 35% or 40% and then you're going to see the petrochemical complex coming up, which will be one of the largest in the Middle East, that is again going to provide opportunities. Because when we look in that sector, we look for a good (inaudible) and a good company to execute on it. And even the expansion of the airport, the next phase will start soon. So we see opportunities in that area and with the private sector and some of the initiatives around self-sufficiency, et cetera.

Plus there are some more opportunities internationally, too. And in that, as an example, recently Qatari companies in the public domain refinanced its -- and bought out various shareholdings in Turkey for the Beymen group. And this was done by Mayhoola. And we were the bank which organized the entire bridge funding and the syndication for EUR 300 million. So that's an example of the international connectivity and Commercial Bank acting as a bridge between investments from Qatar to Turkey and in other locations like obviously opportunities in Oman, where we are well-established. So we see opportunities in these spaces. But again, we are always selective to ensure we maintain credit quality.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [4]

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There was a second question that you had?

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [5]

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Yes. I wanted to get a sense about the -- especially the margin. Although I see that the NIM has improved in this quarter, I want to get a sense about is there any funding pressures? And more importantly, if the industry cycle actually goes down…

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [6]

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Actually, we have seen some improvement in, let's say, the cost of funding, particularly on the deposit side. And there seems to be more liquidity. So we don't see those pressures. And we actually expect those cost of funding to go down over time further.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [7]

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Yes. Actually, the renewals on deposits are happening at lower rates each time now. So that's helping the cost of funding go down for us in Commercial Bank.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [8]

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Because the deposit -- actually, there was (inaudible) deposit also. But again I guess that was because in Q1, you witnessed some (inaudible) that's why you let go of some of deposits?

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [9]

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As I said before, deposits, you can grow your deposits anytime you want, particularly in the fixed deposit segment by paying up. Now for us, that's not a goal. And our real aim is to increase our low-cost deposits as a proportion. So if you look last year this time, we were at about QAR 19 billion of low-cost deposits. Today, we're at 21-point -- so almost QAR 22 billion. So that's an increase of over 12%. So this is really our focus. So it's not the high-cost deposits, as we call them, because those are a variable, which we can bring on or let them go as our needs require.

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

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And in calculations of it, there is a rate card on it, maybe a couple of them, how would your margins be? Would we expect to see margin pressures or…

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [11]

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Look, I think at the overall level, where we are -- the duration of our liabilities is shorter than that of our assets, so we should be able to reprice faster. So that's at the macro level, we have that benefit if the costs come down. But we don't see it as having a detrimental effect on our margins at this stage, probably some benefit, given the faster repricing of liabilities versus assets.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [12]

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And this asset quality, just very quickly, the asset quality, this trend, you believe, it will continue? Because it is quite encouraging actually.

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [13]

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Yes. I think again sometimes these very significant cash recovery made, a major significant cash recovery. There's a huge effort, as Rehan said. We strengthened our legal department, the whole processes. There's a huge amount of effort being made on these, sort of, recoveries and settlements. So we expect that to continue. I don't want to give a figure or trend. I don't even expect such a big movement immediately because this was a major cash settlement that we got.

But that focus is going to continue. So we would hope over time that you would see this continue to improve. But I don't think you'll see such an immediate drop as you saw in this case. But there will be a downward trend over time. Because it could also come from as we grow our own book when you see that proportional decrease. But I think from a pure recoveries point of view, there will be recoveries coming through because of the huge focus that we have on that and other arrangements that we put in place to execute on it.

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Chiradeep Ghosh, Securities & Investment Company BSC, Research Division - Research Manager & Senior Analyst [14]

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So it's fair to assume that it will not deteriorate mostly likely?

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [15]

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That's right.

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Operator [16]

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(Operator Instructions) We will take our next question from Rahul Bajaj of Citigroup.

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Rahul Bajaj, Citigroup Inc, Research Division - Banking Sector Analyst [17]

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Two quick questions for me if I can, please. First of all, thanks for hosting the call. I've seen you've done a lot of work on your cost line and the provisioning line over the last 2, 3 years through this strategy, the new strategy process. Are we in a normalized state now or you think there is still kind of a possibility of cost/income ratio, for example, to head further south or maybe the credit cost to decline further? I mean what's the normalized level we are heading towards?

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [18]

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Thanks, Rahul. As you say, this has been a focus and part of our strategy. With regard to the cost line, I would say the cost trajectory of the -- let's take the absolute cost level. Those cost -- that cost trajectory will obviously start to flatten. You can't continuously because you're also investing. We're not depriving the business, the investment in technology, new branch designs, new modular branches, so a lot of work going on there. So I think that part of the cost equation will start to flatten.

But there's still some scope there for reductions. So you should see that coming through. And then also the income side should start rising. That's our view. So it will come from a combination of that. But definitely, we would like to continue to see the cost line drop further, and to us, a sub-25% where we need to be long term. Because that's -- in my mind, that's a sustainable level that we need to aim for, given where our market peer group also is. So that's as far as the cost line is concerned.

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [19]

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Yes. So cost/income ratio is, we believe, going to be more driven by income growth than cost reduction going forward. And then on the provisions side, it's again fairly flat the last few quarters, just around that QAR 200 million mark. It can be impacted by recoveries, this cash recovery that we made that helped the NPL ratio actually did not have a P&L impact on this particular case. But there are others that we're working on that do have potential for positive P&L impact. And that could, therefore, drive down the provision level. More focus for us is the cost of risk, as we've talked about, to drive that down to 0.8%. We're currently just over 1% at group level. And that's something that we will strive to achieve by end of this year.

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [20]

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And of course, our long-term goal is to get to 50 basis points cost of risk. That's our strategic goal.

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Rahul Bajaj, Citigroup Inc, Research Division - Banking Sector Analyst [21]

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Did you say 50 or 60?

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [22]

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50. But that's when we take the…

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Operator [23]

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(Operator Instructions) We will take our next question from Aybek Islamov of HSBC.

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

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It's Aybek from HSBC. So a couple of questions for me. The first one is your interest income in the second quarter, does it include any reversal of interest in suspends? And if yes, can you give us how big that reversal is, if there's any? Secondly, I was wondering, where do you stand on the next stage of funding ratio? I'm not sure if you published it. Also, liquidity coverage ratio and how does the Central Bank regulates and looks at fee levels of NSFR and LCR at the moment? That's my second question, I think. The third question, what do you think the impact of lower interest rates will be on loan growth in Qatar? And also in the case of CDQ, what would you expect to see?

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Rehan Khan, The Commercial Bank (P.S.Q.C.) - EGM & CFO [25]

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Okay. Let's take those one question at a time. The first question was around suspended interest. No material reversal. There were some small reversal as some of the balances became good. But no material impact, I would say, in Q2 of reversal of suspended interest. As far as NSFR goes, the Central Bank long-term aim is 100%. And that's what all the banks have been asked to achieve. They have given banks time to get to that level. We, for example, work in the late 80s, early 90s. It's the kind of range that we're working on at the moment.

We do have plans for potential EMTN towards -- in the second half of this year, which would improve NSFR further. And then we'll work with the Central Bank as well as the other banks in terms of achieving the long-term goals on that front. On the third, you asked about loan growth and the impact of interest rates going forward. I don't think loan growth will be particularly impacted by a low interest rate environment. If that's what does in fact happen, I think the objectives in the country are very clear. And therefore, that loan growth requirement will be there, irrespective of the interest rate. That's my opinion.

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [26]

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On the LCR, we have been operating around 105% to 110%. And we are very comfortably placed on the LCR. NSFR, also as Rehan has said, we are closely monitoring. Given that we have some large maturities of our EMTN issuances, that has brought our NSFR down. But overall, we're operating in mid-90s. And we will continue to focus on NSFR. And we have tools to address that as and when required.

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Aybek Islamov, HSBC, Research Division - Analyst [27]

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Okay. And how do you envisage your margins, net interest margins, as you move towards 100% or higher NSFR ratios? What do you think will be the impact on margins?

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

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I think Aybek, given the interest rate environment is on a downward trajectory, we expect that we can manage the NSFR without a negative impact on net interest margins. And actually, we -- I think at the beginning of the year, the guidance I gave is a potential downward risk of 10 basis points on our net interest margin. In fact, it's going the other way now. And we're seeing net interest margins improve. And we're working on improving that further in the third and fourth quarter of this year.

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Operator [29]

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(Operator Instructions) It appears we have no further questions at this time. I would now like to hand the call back to our speakers for any additional or closing remarks.

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Joseph Abraham, The Commercial Bank (P.S.Q.C.) - Group CEO [30]

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Thank you. Well, I'd like to say thank you to everyone who's joined us for this call today. And as always, Rehan and his team will remain available to answer any queries that you may have after this call or later on. So as there are no further questions, I'm sure you all have to write your notes, so we'll let you get on with that. So thank you again, and goodbye.

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Operator [31]

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This does conclude today's conference call. Thank you for your participation. You may now disconnect.