QNB Group's Net Profit for 2023 Surged Amidst Adversity, Driven by Remarkable Growth in Interest Income and FX Operations

• The company's interest income grew by 63% year over year, while the net interest margin experienced a notable decline.

• QNB Group's shares’ price fell as much as 8% during 2023.

• Despite a challenging macroeconomic backdrop, net profit jumped, primarily driven by higher interest income as well as a significant increase in foreign exchange operations income.

Throughout 2023, QNB Group faced a notable 8% dip in its stock price, commencing the year at 18.00 riyals per share and concluding at 16.53 riyals per share by year-end. In comparison, the QSE index experienced a marginal decrease of around 1% during the same period. This indicates that QNB Group's stock performance lagged behind the market average. Noteworthy insider activity unfolded throughout the year, with company insiders acquiring shares totaling 1.6 million QAR.

Here are the key numbers:

● Interest Income: 97,133 million QAR vs. 59,672 million QAR in 2022 (a 63% YoY increase).

● Net Interest Income: 30,417 million QAR vs. 28,865 million QAR in 2022 (a 5% YoY increase).

● Net Profit: 15,665 million QAR vs. 14,449 million QAR in 2022 (an 8% YoY increase).

● Earnings per Share: 1.55 QAR/share vs. 1.44 QAR/share in 2022 (an 8% YoY increase).

● Dividend per Share: 0.65 (proposed by the Board) QAR/share vs. 0.60 QAR/share in 2022 (an 8% YoY increase).

In the initial quarter of 2022, the Federal Reserve (FED) initiated a noteworthy trend marked by a consistent increase in interest rates, which endured throughout the entire year. This pattern persisted until July 2023 when the FED implemented its final interest rate hike. The decision to halt further increases was influenced by a deceleration in inflation and a move toward the targeted rate.

The global shift towards elevated interest rates had far-reaching consequences, notably leading to a substantial rise in financing costs across various regions. As of now, the prevailing outlook suggests that there won't be a resurgence in interest rates in 2024, despite some forecasts hinting at the possibility of a decline.

The Qatari central bank, along with central banks across the GCC region, strictly adhered to FED actions. The shift in interest rates had a dual effect on QNB Group's net profit. On the positive side, it led to a significant boost in interest income. However, on the flip side, it also resulted in a decrease in the net interest margin. This nuanced impact underscores the complex interplay of factors influencing the financial performance of QNB Group in response to the evolving interest rate environment.

The net interest margin underwent a sharp decline, decreasing from 48% in 2021 to 31%. This reduction can be primarily attributed to the impact of the aforementioned surge in interest rates, leading to elevated borrowing costs and a consequential adverse effect on net profit, totaling 16,569 million QAR. Despite this decline in the net interest margin due to the influence of rising interest rates, QNB Group successfully increased its net interest income. This achievement can be attributed to the bank's robust level of activity and a well-balanced portfolio, resulting in a positive impact on net profit amounting to 18,121 million QAR. Such resilience underscores the bank's adeptness in adapting and thriving within a dynamic interest rate environment.

In the backdrop of a challenging macroeconomic environment and the looming threat of a recession, the banking sector faced heightened concerns regarding credit risk. QNB Group, responding strategically to these conditions, opted to incrementally increase impairments in proportion to the rising loan balance. This deliberate decision, while adversely impacting net profit, resulted in a loss of approximately 524 million Qatari riyals. The management's choice underscores the bank's proactive stance in risk management, demonstrating confidence in the resilience of its loan portfolio amidst the complexities of the economic landscape. This move reflects a strategic commitment to navigating and mitigating challenges in the face of adverse economic conditions.

The, QNB Group maintained its robust foreign currency operations, managing substantial assets and liabilities denominated in foreign currencies. This strategic approach rendered the company's net profit highly susceptible to fluctuations in exchange rates. Notably, during 2023, QNB Group reaped the benefits of advantageous exchange rate conditions, securing a significant gain of 1,460 million Qatari riyals in comparison to the same period in 2022. This underscores the company's ability to leverage currency fluctuations to its advantage and highlights the impact of its foreign currency dealings on its financial performance.

In accordance with IAS 29, consolidated financial statements are required to be reported in terms of the measuring unit current at the balance sheet date. This mandates the restatement of non-monetary assets and liabilities to account for fluctuations in the general purchasing power of the currency. Given the company's substantial operations in Turkey, and with Turkey being classified as hyperinflationary starting from April 1, 2022, based on the criteria established by the aforementioned standard, restatements were calculated using conversion factors derived from consumer price indices. Regrettably, these restatements had a significant adverse impact on the company's profit, resulting in a decrease of 1,758 million Qatari riyals. This impact, although substantial, should be understood in the context of an otherwise strong business performance.

In spite of the prevailing macroeconomic and business challenges, the company demonstrates its capacity to effectively manage various risks by capitalizing on its diversified business model and fortified balance sheet. This strategic approach empowers the company to not only navigate challenging economic conditions but also maintain a steadfast and resilient position. The company's commitment to diversifying its operations and upholding a strong financial footing equips it to confront potential market uncertainties and adversities proactively.

Looking ahead, the management should give particular attention to the company's operations in Turkey. It is imperative for them to conduct a comprehensive assessment of the Turkish economic landscape and devise asset restructuring strategies. This proactive stance will help mitigate any adverse effects, such as hyperinflation, and may involve increasing investments in assets that possess inherent value retention characteristics, safeguarding the company's financial health and long-term stability.

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