Banking M&A has been something of a theme in Qatar this year, but for some banks in the country, achieving organic growth and maintaining cost control is more strategically important than dealmaking.
Commercial Bank of Qatar is one such bank that is maintaining a disciplined focus, even though its improved financial strength, the result of a lot of hard work reshaping the bank’s balance sheet under its current five-year strategic plan, gives CBQ a strategic advantage.
For Khan, he says CBQ is not proactively looking for deals, but recognises that “one of the consequences of having a stronger balance sheet, of having stronger profitability, and performance, is that we are better able to capitalise on any suitable opportunity that comes in.”
He adds: “We obviously owe it to our shareholders to look at any opportunities that come our way, to assess them and work out whether they would be shareholder enhancing or not.”
This stronger financial position was evidenced in the bank’s most recent (third quarter) set of results in October, which included net profit of QAR 2.13bn – up about 85% on the same period in 2020 – net interest income of QAR 2.7bn (up 17.5%), total assets of QAR 165.3bn (up 15.5%), a cost-income ratio of 24.8% and a capital adequacy ratio of 18.3%, up from 17.4% in September 2020.
Yet, even with this improved financial strength, there is no room for complacency, says Khan. “We've come a long way from where we were at the end of 2016, but I think there are many areas still for us to improve further,” he says. “Something that we're very careful about is that our success doesn't lead to complacency, and that we still continue to drive performance in the way we have.”
There have been a number of improvements since 2016 that the bank is pleased with, one of the most striking is the drop in CBQ’s cost-income ratio from the mid-40s five years ago to about 25% today, which is “a considerable improvement and one of the big success stories,” says Khan.
Contributing to that has been the investment the bank has made in the digitization of its operations and banking products and services over the past five years.
“One of the key pillars of our five-year strategy was automation and digitization,” says Khan. “We now have five times more people using our mobile app than we did in 2016. Cheque books can be printed at machines without staff involvement. Our 60 second remittance programme is completely automated. These are just some examples of how our investment in digital is translating very visibly into our financial results and into the customer experience.”
In addition, he says, reshaping the balance sheet – reducing the bank’s loan exposure to the real estate sector and increasing its lending to the government and public sector – has also been another notable achievement, together with growth in remittances, payments and cash management, businesses which have led to CBQ to attract “much larger, low-cost deposits.”
This is beneficial because, together with careful liquidity management, CBQ has been able to improve its net interest margin year-on-year, says Khan.
One other key financial focus, where there has been material improvement, has been in the bank’s capital adequacy ratio. The bank’s core tier one capital ratio has increased from sub-10% to just under 12% today, with its total capital adequacy ratio up at 18.3% from sub-16% a few years ago.
“That's been a big area of focus for us,” says Khan, adding that these improvements “give us a fairly strong foundation and momentum to build on as we get underway on the next five-year strategy.”
We've done much of the hard work on reducing costs, so when it comes to what's going to drive our cost income ratio further, it’s really going to come from revenue generation.
While 2022 will be big year for Qatar as the country hosts the FIFA World Cup, it is no less significant for CBQ as the first year of its new growth and development strategy.
So, what’s the focus for the bank over the next few years?
Khan says that the bank will continue to make cost savings, reinvesting those proceeds into areas such as digitisation which could improve revenue streams further, and that as the country and the world emerge from the pandemic, they will also be “watching the cost of risk very carefully”.
“We made a lot of provisions during 2016-18 when we were reducing our exposure to the real estate sector. Since then, our cost of risk has come down. Whether or not those levels can be maintained is one risk for us, but we are fairly confident they can be maintained. However, that’s probably the most difficult area to predict accurately, especially given what's going on in the world right now.”
“We will be focusing a lot on growing and developing revenue streams,” says Khan. “We've done much of the hard work on reducing costs, so when it comes to what's going to drive our cost income ratio further, it’s really going to come from revenue generation. For instance, on the non-interest income side, we think we can do more in wealth management, as well as in areas such as mortgages, asset management, and brokerage. We see these as big growth areas for us where there is a lot of opportunity and potential.”
Importantly, CBQ’s payments and cash management business will also be a powerful contributor, not least because it helps attract large, low-cost deposits, which has a positive impact on the bank’s net interest margin. “On this side, when I look at what will make-up our revenue, it's going to be improving our net interest income through improving net interest margins,” says Khan.