BLOM Bank HI Results Conference Call Transcript 22 August, 2017 Beirut time 15:00

Transcription

1 BLOM Bank HI Results Conference Call Transcript 22 August, 2017 Beirut time 15:00 Anas Aboul-Hosn: Ladies and gentlemen, welcome to BLOM Bank Quarter Two 2017 Results C onference Call. I will now hand over to your host, Mr. Anas Aboul-Hosn. Sir, please go ahead. Good afternoon everyone and thank you for joining us today. This is Anas Aboul- Hosn from Arqaam Capital and I'm pleased to welcome you to BLOM Bank's Q2 earnings conference call. I have with me today Mr. Saad Azhari, the Chairman and General Manager of BLOM Bank. Without any further delay, I will now turn the call over to Mr. Saad. Please go ahead. Okay. Thank you very much and good afternoon to all. As you know, we published our second quarter results where profits for the first half of 2017 were $234M, up by $7M from the same period last year. Our total assets increased to $31.3B with a year to date growth of around 6.2%. Customer deposits rose to $26.67B, up by 7.5% from the beginning of the year. And loans also grew to around $7.7B, higher by 7.4% since year start. Our return on common shareholders equity was around 16.7% and the cost to income ratio at around 34.4%. Moreover, our capital adequacy ratio is slightly above 17% and the coverage of non-performing loans, including real guarantees and collective provisions, are above 150%. In general, I think the important points to note for the first half of this year is that we have fully redeemed our $200M worth of preferred shares. We also completed the acquisition of the three branches of HSBC on 14 June. At the time of acquisition, HSBC deposits were slightly below $600M. Loans were around $473M and total assets stood at $840M. The cost of acquiring HSBC is around $144M which includes around $58.8M of goodwill. The rest is equity and fair value of the fixed assets. In terms of the general situation in Lebanon, it's important to note that the law relating to the increase of public sector wages was ratified about three weeks ago. The country s President signed it yesterday. In parallel, a series of fiscal measures were approved that included taxation affecting banks. Corporate taxation increased to 17% from 15%. The tax on interest deposits went up from 5% to 7%. Additionally, banks are subject to pay tax on their CDs and treasury bills earnings. This used to be tax exempt. So, effectively, the banking sector will be double taxed. In our case, we estimate that the tax rates for this year will be between 20% to 22%. 1

2 Within this context, I would like to note that our first half results were provisioned for the tax increases as we expected that they would be passed. Otherwise, in general and as highlighted in the previous quarter, our regional results were dampened due to the deconsolidation of our Syrian operations and the depreciation of the Egyptian Pound. Nonetheless, we have sustained our profit levels as of year start and expect good prospects for our Egyptian operations with the stabilization of the Egyptian currency. Other than that, there's nothing important to note and would prefer to give you the floor to raise questions. Ladies and gentlemen, we will now start our question and answer session. If you wish to ask a question, please press zero-one on your telephone keypad. Thank you for holding until we have our first question. Our first question comes from Anna Shaarawy, FFA Private Bank. Please go ahead. Thank you Mr Azhari for the call. My first question would be on the asset and the deposit growth in the domestic component of BLOM's operations. How do you see it in the first half? And do you expect the improvement to be maintained in the second half of the year? We are seeing a very strong growth in our Lebanese balance sheet. As I mentioned earlier, our deposits increased by around $1.8B or 7.5% out of which one third is attributed to the HSBC acquisition. Comparatively, the growth rate of the Lebanese banking sector was around 2%. In fact, we have been gaining market share following the HSBC acquisition. This is due to the fact that we have been successful in attracting important HSBC clients who were also dealing with other local banks for services not rendered by HSBC in Lebanon. Additionally, we are managing HSBC s liquidity in Lebanese pounds and dollars in a better way. On the other hand, we are also benefiting from some of their centralized processes that we used to carry out at the individual branch level. This will in turn improve the efficiency and profitability of our branches. Accordingly, we expect the percentage of profits coming from Lebanon to increase even though we prefer to diversify our profit generation from outside Lebanon. Okay. Do you have any concerns regarding the increasing cost of funds, mainly in dollars especially that the U.S. Fed has started raising rates? Would the fed rate hikes be matched in Lebanon later in the year or next year? 2

3 Actually between QI and QII of this year, our cost of deposit in foreign currency increased by 1 basis point to 3.35%. So we are not seeing a real pressure in that respect. As for the rate increases by some local banks, this was mainly to attract depositors money on the backdrop of last year s financial engineering. And if I were to look at BLOM s overall cost of deposits, it has actually decreased by 7 basis points to 4.17% between QI and QII. Going forward, the Fed might increase one more time this year and this will not have a major impact on us as we are able to absorb it given the already existing difference in rates between Lebanon and the US. Okay. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press zeroone on your telephone keypad. Our next question comes from Nigel Fletcher of HSBC. Please, go ahead. Thanks for the presentation and taking my questions. The first question I have is on whether you would be able to disclose your open U.S. dollar position at the end of the quarter and whether that represents a year-on-year increase for yourself and the sector as a whole? By law we cannot take a foreign currency position. For dollar deposits, we invest in dollars and the same applies for Lebanese Pounds. Hence, we have zero open positions. The only exception is that we can have part of our Lebanese Pounds equity hedged in dollars. And this level of hedging has not been changed. Okay. In terms of guidance, I think in the Q1 call you were sort of looking at an interest margin of around 2.3% for Is this still the case? I think that the net interest margin is going to be stable. We are currently around the 2.26% level and I expect this to be around 2.3% by year end. In general, we tend to be conservative in our estimations for a given year, and by the end of it our results turn out better. The most recent example is our provisioning for the increase in corporate taxation that was signed yesterday. Okay. That is all the questions I have for now. We have no other questions at this time. Ladies and gentlemen, if you have any further questions, please press zero-one on your telephone keypad. Our next question comes from Rahul Shah of Exotix Capital. Please, go ahead. 3

4 Rahul Shah: Rahul Shah: Sahil Kumar: Sahil Kumar: Good afternoon. Thank you for the call. Two questions. It looks as if your NPLs are now close to sort of historical low levels. I was just wondering if you think we could see further improvements over the coming quarters? Or whether we should be expecting some kind of moderation in that trend? And the second question is with regards to any concerns in terms of funding your Qatari operation. The NPL level was around 3% by the end of June. I don't expect major changes. It improved from last year due to writing off a provisioned $110M project loan that was halted by archaeological finding. This has now been resolved where the government will provide the project owners with alternative lands by Oct/Nov. We will also be able to recuperate our mortgage backed loan. Accordingly, our NPLs will be stable or slightly better. With regards to funding our Qatari operation, it is a very small operation in the Qatar Financial Center and we only cater for corporate clients. The balance sheet is also small at $100M with loans of $98M and net profit of $0.6M by June In fact, we will have the opportunity to improve on margins because of the lack of liquidity in Qatar. But overall, it will not be anything substantial as we are talking about a portfolio of few non-qatari clients. Our next question comes from Sahil Kumar, Moody's. Please, go ahead. Thank you for the call and presentation. I have two questions. First, what is your guidance for loan and deposit growth for the full-year? And second, there is a net gain of financial operations in your income statement of around $39M. Can you please give some color on this and how we should think about it for the rest of the year? Our expectation of growth for the full-year will be close to 10% growth for deposits and slightly less for loans as we have already witnessed a 7.5% growth in deposits and a 7.4% growth in loans. With regards to the second question, these are standard financial operations yielding us gains. Our next question comes from Anna Shaarawy of FFA Private Bank. Please, go ahead. Yes. My question is about your exposure to the real estate sector in terms of loans. Are you comfortable with the exposure? And do you expect us to see a shift towards SME loans, especially after the HSBC acquisition. Realistically, the HSBC acquisition will not greatly affect our loan portfolio given that it s $470M against BLOM s $7B. Rather it s the off balance sheet items such LC 4

5 that will add value given that it is equal to our LC business though we have a much larger portfolio. We will surely be witnessing an improvement in commissions income from LCs. As for real estate projects, there are few new projects given the amount of existing ones under construction. On the other hand, our retail housing loans are reasonably doing well given the central bank s recent incentives in lowering mortgage interest rates. Okay. Our next question comes from Aatman Ajmera of East Capital. Please, go ahead. Hi, thanks for taking my question. You earlier mentioned about a tax provision that you took. Could you highlight which line item I can find this in and what's the size of the provision? With regards to taxation, we have factored in the increase from 15% to 17%. Additionally, we have added the double tax of $13M for our placements in CDs/TBs. The latter used to be tax exempt. The total taxation that we have provisioned for the last six months amounts to $37.2M. I think it's slightly above 20% for this half? Yes. We are expecting it to be between 20% to 22%. Anas Aboul-Hosn: Understood. Secondly, you mentioned that your deposit growth for HI has been twothirds organic and one-third HSBC. When you give a guidance of 10% for the whole year, what percentage would be organic? I just want to get a feel for what's coming from HSBC versus what's from the organic growth. As I mentioned earlier, one third of the deposit growth came from HSBC. In terms of loan growth, the size of the HSBC loan portfolio was around $470M. And if you look at our overall increase in loans, it was around $530M. So a big part of the increase in lending came from HSBC. Understood. Very clear. That's all for me. Ladies and gentlemen, I would like to remind you if you have any further questions, please press zero-one on your telephone keypad. We have no further questions. Dear speaker, back to you for the conclusion. Thank you very much and we appreciate your participation. If you have any further questions, please do reach out. Thank you again Mr. Azhari. 5