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Edited Transcript of QNBK.QA earnings conference call or presentation 15-Oct-19 9:30am GMT

Q3 2019 Qatar National Bank QPSC Earnings Call

Doha Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Qatar National Bank QPSC earnings conference call or presentation Tuesday, October 15, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Abrahams

Qatar National Bank (Q.P.S.C.) - Assistant General Manager of Treasury

* Ramzi Talat A. Mari

Qatar National Bank (Q.P.S.C.) - Group 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

* Elena Sanchez-Cabezudo

EFG Hermes Holding S.A.E., Research Division - MD & Head of Financials Equity Research

* Janany Vamadeva

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

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Presentation

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Operator [1]

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Good day, and welcome to the QNB Group Q3 2019 Results Conference Call. Today's conference is being recorded.

I would now like to hand the call over to Elena Sanchez. Please go ahead.

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Elena Sanchez-Cabezudo, EFG Hermes Holding S.A.E., Research Division - MD & Head of Financials Equity Research [2]

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Thank you. Good afternoon, and good morning, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to QNB Group's Q3 2019 Results Conference Call. It is a pleasure to have in the call today Ramzi Mari, Group Chief Financial Officer; Noor Mohammad Al-Naimi, General Manager, Treasury; and Mark Abrahams, Assistant General Manager, Trading, Treasury of QNB Group. The call will begin with a brief discussion of Q3 '19 results and Qatar's macro, and then we will move on to the Q&A session.

I would like to hand over the call now to Mark Abrahams. Thank you.

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Mark Abrahams, Qatar National Bank (Q.P.S.C.) - Assistant General Manager of Treasury [3]

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Thank you very much, indeed, Elena. I will begin by giving a brief overview of the macroeconomic environment in Qatar, and then we'll cover QNB's interim Q3 '19 financial results, and finally, open the floor to questions and answers.

Qatar's economy has adjusted to the regional economic environment very well. Real GDP growth was 1.5% in 2018, with growth primarily from nonhydrocarbon sector coming in at 3.5%. Qatar's economic growth is expected to accelerate to around about 3% over the next few years, as tailwinds from increasing gas production more than offset slower growth of construction with positive spillovers for the manufacturing and services sectors. The Barzan gas project is due to begin operation by the end of 2019 and will boost raw gas production by up to 1.4 billion cubic feet per day. This will be followed by the construction of 4 new LNG liquification (sic) [liquefaction] trains, which will increase Qatar's LNG production by over 40% to 110 million tonnes per annum by 2024 from 77 million tonnes per annum currently. Qatar already has world-class transport and logistics infrastructure in place. The initial phases of Hamad International Airport, Hamad Port and the Doha Metro, all now up and running. As projects that are critical for the World Cup near completion, the focus on the next phase of infrastructure and project spending will return to further expansions of Lusail city, Qatar Rail, Hamad International Airport and Hamad Port.

Transport and logistics infrastructure will support and enable stronger growth in the manufacturing and services sectors. Qatar has accelerated the development of new legislation and front-loaded key structural reforms, including ownership laws, which allow for foreign ownership of companies operating in almost all sectors of the local economy, labor laws and also a program for permanent residency and visa waivers.

I will now move on to QNB's Q3 2019 financial results. The key financial results for the 30th of September 2019 are as follows: For the 9 months ending September '19, net profit increased to QAR 11.21 billion or USD 3.079 billion, up by 4% compared to September 2018. This was mainly driven by operating income, which increased to QAR 19.07 billion or USD 5.239 billion, up by 4% compared to September 2018, demonstrating QNB group's success in maintaining growth across the full range of revenue sources. Total assets reached QAR 911.8 billion or USD 250.5 billion, up by 7% from September 2018. This was driven by growth of 8% in loans and advances to reach QAR 653 billion or USD 179.4 billion. QNB Group remained very successful in attracting funding, which resulted in an increased customer funding base of 7% from September 2018 to reach QAR 662.5 billion or USD 182 billion. This maintained the group's loan-to-deposit ratio at 98.6%. 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, reflecting the high quality of the group's loan book and the effective management of credit risk. The group's conservative policy in regard to provisioning continued with the coverage ratio maintained at 104% as of the 30th September 2019. The capital adequacy ratio stood at 18.2% at the end of the 30th of September 2019, higher than the regulatory minimum requirement of the Qatar Central Bank and the Basel Committee of 16%. The group is keen to maintain a strong capitalization in order to support future strategic plans.

Thank you very much for your attention, and we can now turn to questions and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And I will 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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I have 2 quick questions. My first one is, I want to get some clarity on the write-off. I see there is a pickup, sharp pickup, in writeoff in this quarter. So if you can throw some light on what exactly it's coming from, where is exactly it's coming from? That's my first question. And the second one is, over last 2, 3 quarters, your lending book has gone towards the services sector. So if you can throw some light on what exactly constituted the services sector? Is it just hospitality -- or what exactly constituted the services? That's all from my side.

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [3]

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In terms of writeoff, loan writeoff, that's mostly in Turkey. There is a policy in the Turkish market that every writeoff for loans, which is 100% provided for, is that they tend to sell them when they get good prices. Usually, prices range between 15% to 25% to the dollar, and this is a norm in the Turkish market. Can you tell me exactly, what exactly is the second part of the question?

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

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No, I guess, I see that your lending book has primarily gone to the services sector. So what exactly constitute the services sector? Just to get some idea, what exactly is under the service?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [5]

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It's different sector. It can be telecommunication. It can be transportation. It's all type of services, normally like any other market. There is no specific concentration on one -- in one specific sector within the services sector.

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

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Okay. And just a continuation on the first one, so what exactly is the condition of Turkey overall? I mean how are you seeing it, the asset quality of the Turkish entity and then the outlook on the Turkish operation?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [7]

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The most important issue is, number one, the growth in the Turkish market and in terms of QNB Finansbank. QNB Finansbank continues to grow normally as we have seen in the last 2, 3 years. If we look at the asset growth, in 9 months period, it grew by around 1% in dollar, loans grew by 9% and deposits grew by 20%. The other important issue is that we were able to reduce their loan-to-deposit ratio from 112% in December to 106% in September. So from a liquidity profile perspective, they are much better. Profitability-wise, they were -- there was an impact because of the devaluation because for profit, we use average rate. So we have seen an increase in Turkish lira profitability of 14%. Whereas if you compare it to dollar-wise, there was a drop of 7%.

For the entity, we still expect it to be up more than 17% in December. Now in terms of NPL and coverage ratio, NPL has dropped during the 9-month period from 5.2% in December to 4.9% this year, and the coverage ratio is continue to be higher than 100%. It's 103% in September. So all in all, from a performance point of view and growth perspective, bank is still growing. NPL transfer control: coverage ratio is still strong, liquidity profile is much stronger than before. The cost-to-income ratio is 42%. There was an increase from last year, but still, if you compare Finansbank with the peer group, they have one of the best cost-to-income ratio in -- within the peer group.

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

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That's great. Just from asset quality side, that's what I was more bothered about, so asset quality side, the outlook seems to be fine, right? I mean you are not seeing any worrying sign on the asset quality side?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [9]

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We are not seeing worrying sign, but that does not mean that we are not going to keep a very close eye to NPL numbers in Turkey. What is extremely important for us, which is a number that you need to keep an eye on, is our debt coverage ratio. We are keen to maintain debt coverage ratio over and above 100%.

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Operator [10]

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We will now take our next question from Aybek Islamov from HSBC.

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Aybek Islamov, HSBC, Research Division - Analyst [11]

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I had a question about your loan growth in the third quarter, quite robust. It looks like you've mastered Qatar. So I haven't seen what other banks are going to report in terms of loan growth. Can you comment, please, what's driving that? And are you taking market share in the market? If yes, then what segments -- in which segments are you taking market share? That's my first question.

The second question, I wanted to ask you about your net stable funding ratios and liquidity coverage ratios. What do they look like at the moment? Do you comply with the Qatar Central Bank requirements? And do you have to maintain these ratios by currencies or do you calculate them, so do you have to maintain them across all currencies at a certain level? So would you just -- this is a technical question, if I may.

And thirdly, I mean, at the beginning of the call, there were some good optimistic comments about the performance of the Qatar economy. So good to know that. How does that affect your growth outlook, in particular, balance sheet growth, loan growth outlook in Qatar?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [12]

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Okay. Number one, NSFR, LCR, both of them are more than 100%. And definitely, we are extremely careful to maintain these ratios over and above the minimum required by Central Bank. Calculation is done as far as I know, and I will check this after the meeting. Based on that, total, not by currency, but I will confirm that to you in case there is a different answer.

Loans. The growth in loans. Now we always said to investors that when the public sector loan -- when oil prices are high and they have a surplus, the government tend to repay loans in QNB. And that's exactly what's happened this year. Oil prices are averaging more than $60, and that's why the state materially pays a lot of their loans in QNB. Total loans repaid by the public sector until September was QAR 47 billion. And this is usually give us a lot of ammunition to grow our private sector loans. Private sector loans in QNB grew by QAR 78 billion during the first 9 months period of the time. And most of that came from different industry, services is one of them -- and industries, commercial, different industries within the private sector. We expect this to continue until the end of the year. That's the answer to your second question. The third one was?

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Aybek Islamov, HSBC, Research Division - Analyst [13]

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Third question was...

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Unidentified Company Representative, [14]

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(inaudible) economic growth.

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [15]

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Was economic growth. Now at the beginning of the year, we used to give you expectation that we are going to grow between 6.5% to 8.5% in terms of balance sheet and profit and loss between 4% and 6%. We -- based on the growth we have seen, especially in the private sector, we expect the balance sheet to grow more than what we have given you, and we expect you know that now the growth to be between the 7.5% to the 8.5%. In terms of profitability, no, I think we will continue to be between the 4% and the 5.5%.

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Operator [16]

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(Operator Instructions)

We'll now take our next question from Amit Mamtani from Goldman Sachs.

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Unidentified Analyst, [17]

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This is [Damian Gossamer] from Goldman Sachs. I had this one follow-up question on your central exposure, about the asset quality in Turkey and Turkey in different sectors currently. You mentioned that the NPL ratio has improved somewhat year-to-date, and you are not too concerned about asset quality. So as you know since the regulator in Turkey is asking banks to classify around $8 billion of loans as NPLs by year-end, and most of the banks from our discussion with them are provisioning for that by year-end, which is going to lead to higher NPL ratio and a higher [bank deposit] cost of risk. Are you able to discuss what's Finansbank's portion of this NPLs or this loans and whether that will have an impact on cost of risk and NPL ratio?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [18]

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Okay. QNB FB received a lot of requirements from BRSA that amounted to USD 280 million, which is covering the energy and construction sector. All BRSA requirements for provisioning have been met as of third quarter. We do not expect any additional provision requirements for this sector in Q4. Just to give you also more data, the balance for energy sector and the construction sector for the bank, which is classified as per BRSA, in Stage 1 represents around 4% of the total loans for the group; in Stage 2, it's around -- between 20% to 25%, which is mainly focused on the construction sector; and towards Stage 3 it's around 8%, which is again mostly the construction sector.

In summary, that project for Finansbank is limited, and more importantly, all BRSA requirements in this regard has been met. This is where I need to really differentiate between how Finansbank is managing their NPL with the peer group. Since we acquired Finansbank, we were extremely conservative in how we manage their provisioning, how we manage their NPL, in order to build a buffer for the entities to protect its own (inaudible). And this is -- now we can see the fruits of what we have been doing for the last 3 years in the construction and the energy sector.

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Operator [19]

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Our next questions comes from Janany Vamadeva from Arqaam Capital.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [20]

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I just have a couple of questions, if I may. First to margins, if you could talk a bit about the main drivers in the third quarter because margin was broadly stable actually despite the 2 rate cuts we saw. So if you could trace some color on that and how you see that going into 2020, that's next year.

And my second question, actually, it's a follow-up on loan growth. Along the lines of the previous call on loan growth, the loan growth is quite strong, like at 10%, and the sector has only grown like 5% year-to-date until August. And if you look at QNB's local book, it's almost the size of Qatar GDP. So just trying to understand how -- like, you are able to grow much faster given the size of your book. So just trying to understand that. And how you see that going into next year as well? Do you think the same momentum will continue?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [21]

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For September, growth in loans was 7%, and the bulk of that growth is coming from the private sector. As I mentioned, historically QNB and year-to-date is a purely corporate financial institution. And whenever we have the right funding, we are able to capture market share because we have the relationship with the large corporates. Considering that the state during the 9-month period repaid some of the loans, this gave us that cash that is required to push the growth in the private sector and to generate a higher market share. But all in all, the growth in QNB in terms of loans is 7%, which will be close to the sector growth. But for QNB, the bulk of that growth is coming from the public sector -- sorry, it's coming from the private sector, as I mentioned before.

Margins. At the beginning of the year, we said that we expect margins to come down by 5 to 6 basis points. What we have seen until today is only a drop of 2 basis points. And this is what helped us in having a better margin -- we were very successful in reducing cost of funding in the first 9 months of the period. Number two, we were able to do a major shift of some of the loans that we had that were fixed in terms of pricing to floating. Most of these were public sector loans. And this materially helped us in reducing the overall impact of the drop -- the decrease in said interest rates. By end of this year, we do not expect margins to decrease by more than 3 basis points, maximum 4 basis points. Next year, again, another drop of 4 to 5 basis points. Most of that drop will come from -- either from Turkey, not from the operations.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [22]

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Just -- do you think you can give any guidance for 2020 in terms of loan growth at this stage?

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [23]

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Yes. So we already have started the balance sheet projection. It's not finalized, but I can give a ballpark number, and in January conference call, we will confirm the number. Balance sheet, we still expect it to be 6% to 8%, and the profit and loss, 4% to 6%.

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Operator [24]

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Because there are no further questions at this time, Elena Sanchez, I'd like to hand the call back over to you for any additional or closing remarks.

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Elena Sanchez-Cabezudo, EFG Hermes Holding S.A.E., Research Division - MD & Head of Financials Equity Research [25]

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Thank you. As there are no further questions, this concludes the call. I would like to thank QNB's management for their time and everyone for participating in the call. Thank you.

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Ramzi Talat A. Mari, Qatar National Bank (Q.P.S.C.) - Group CFO [26]

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Thank you, everyone. And if anyone have any additional questions, feel free to please drop us an e-mail, and we will ensure to respond as soon as possible. Have a good day, everyone.

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Operator [27]

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This concludes today's call. Thank you for your participation. You may now disconnect.