Abu Dhabi Commercial Bank : 2023 Third Quarter Earnings Call Transcript

Abu Dhabi Commercial Bank

Third quarter 2023 earnings call transcript

Massimo Previ: Good day, everyone. It's Massimo here, Head of MENA Corporate Access with JPMorgan. I'm pleased to welcome you all to the call today for the third quarter 2023 results for Abu Dhabi Commercial Bank. JPMorgan is very pleased to host them. We have with us the wider management team of Abu Dhabi Commercial Bank to present their Q3 results. I will now pass the call over to Harsh Vardhan, Head of Investor Relations at Abu Dhabi Commercial Bank, to introduce management and commence the call. Harsh, over to you.

Harsh Vardhan: Thank you, Massimo. Good afternoon or good morning from where you're dialling in, ladies and gentlemen. I would like to welcome you to ADCB's third quarter earnings call. We will be referring to our earnings presentation, which can be found on the investor relations page of the ADCB website. I'm joined today by Deepak Khullar, Group CFO, Robbert Muller, our Group Treasurer, Paul Keating, Group Chief Risk Officer, and Monica Malik, our Chief Economist. We will be taking you through the highlights of the quarter before opening the floor for questions. I will now hand over to Deepak to begin the presentation from slide five.

Deepak Khullar: Thank you, Harsh. And welcome everyone to our quarter three earnings calls. Overall, we're very pleased with the positive momentum in the third quarter. All our major businesses are delivering on the Bank's strategy, resulting in robust top-line and bottom-line growth. Q3 net profits increased 22% year-on-year to 1.9 billion dirhams. This brought the nine-month net profit to 5.8 billion dirhams, up 24% year-on-year. With a return on average tangible equity of 14.3%. Credit conditions for both corporate and retail banking have been positive. The Bank extended 52 billion dirhams of new credit to diverse sectors in the first nine months, which has further rebalanced our loan portfolio.

Lending to GREs has further increased, while real estate exposure continues to decline. Retail banking had a very good quarter, with strong growth in personal and auto loans, mortgages and credit cards. This strong performance has been driven by solid net loan growth of 10% year-to-date, surpassing our medium-term guidance of mid-single-digit growth and delivered against the backdrop of rising benchmark rates. Given the strong performance, we are revising our full-year 2023 guidance upwards on certain metrics. We are also targeting a 50% cash dividend payout supported by the Bank's robust capital position.

On slide six and seven, you will see the headline numbers for the third quarter and the first nine months of the year. ADCB achieved a return on average tangible equity of 13.3% in quarter three, compared to 13.1% a year earlier. We have continued to generate strong revenue growth across our businesses, with operating income up 21% year-on-year to 4.23 billion dirhams and operating profit up 24% to 2.82 billion dirhams. For the nine-month period, operating income was up 23% to 12.2 billion dirhams and operating profit was up 30% to 8.24 billion dirhams.

Turning to slide eight, quarter three net interest income increased 24% year-on-year to 3.18 billion dirhams, with a 23% increase for the first nine months of the year to 8.96 billion dirhams. This was driven by higher volumes amid a rising interest rate environment. NIM continued to expand during the year and was 2.87% in quarter three, 41 basis points higher than a year earlier and 14 basis points higher sequentially. For the nine-month period, NIM was 2.79%, up 35 basis points year-on-year. Q3 risk-adjusted NIM was 2.17%, 38 basis points higher than a year earlier. While nine-monthrisk-adjusted NIM was 2.05%, up 17 basis points year-on-year.

Cost of funds was 3.71% in the nine-month period, which was 249 basis points higher than a year earlier. This was significantly below the 346 basis points rise in the three-month average IBOR and 383 basis points increase in the three-month average LIBOR/SOFR, reflecting the Bank's effective management of its funding mix. Asset yields have seen a steady upward trend over the course of the year and stood at 6.29% for the first nine months, up from 3.56% a year earlier.

Please turn to slide nine. Non-interest income remains an area of strength for the Bank. For the nine-month period, non-interest income was 3.2 billion dirhams, up 22%, while quarter three saw an 11% year-on-year increase to 1.05 billion dirhams. Net fee income was up 22% year-on-year, mainly driven by higher card and loan-related fees, as well as trade finance commission. The sequential decline in fee income was due to receipt of a significant volume-related incentive fee in quarter two pertaining to a card network partnership. However, I would like to highlight that the card business achieved a record quarter in terms of new card issuance, with more than 67,000 new primary cards issued. Meanwhile, quarter three trading income was up 27% year-on-year and declined sequentially due to lower gains from derivatives.

Turning to slide ten, our cost-to-income ratio has improved significantly in line with our medium-term guidance. For the nine-month period, the cost-to-income ratio improved 360 basis points year-on-year to 32.5%, supported by a 23% increase in operating income. Looking at quarter three, the ratio was 210 basis points lower year-on-year at 33.3%. Operating expenses in Q3 were 14% higher year-on-year and up 7% sequentially at 1.4 billion dirhams, as we invested further in the growth of the business, including digital technology, people and sales incentives.

Onto slide 11, our balance sheet remains strong, with total assets increasing 8% year-to-date to 537 billion dirhams at September end. The Bank maintains a healthy liquidity position, with a liquidity coverage ratio of 130.4%, a liquidity ratio of 32% and a loan-to-deposit ratio of 86.3%.

Please turn to slide 12 for a closer look at our loan book. We continue to strengthen the project pipeline, with a substantial increase in lending across our Retail Banking and Corporate and Investment Banking businesses. As mentioned in my opening remarks, the Bank surpassed the existing medium-term guidance of mid single-digit loan growth, with net loans up 10% year-to-date. The Bank extended 52 billion dirhams in new credit in the first nine months of the year to diverse economic sectors. During this period, the Bank also received 32 billion dirhams in repayments.

Q3 have seen very strong acquisition volumes across card, personal and auto loans as well as mortgages. Total retail asset growth was 15% year-to-date, while gross loans to CIBG customers were up 10% during the same period. As our loan book has grown, exposure to the real estate sector decreased to 19% from 22% at the end of 2022, while lending to GREs increased to 24% from 23%. Our portfolio remains well balanced with loans in Abu Dhabi and Dubai comprising 50% and 25% respectively of the total portfolio.

I will now hand over to Robbert to discuss the investment portfolio and funding mix.

Robbert Muller: Thank you very much, Deepak. Going to slide 13, you will see that our investment securities totalled 122 billion dirhams, which is up 9% year-to-date and 12% year-on-year. This is in line with balance sheet growth. Bonds accounted for 99% of the total portfolio, of which 67% was held at amortised cost, with the balance of 33% accounted for at fair value through other comprehensive income and mark to market on a daily basis.

If we turn to slide 14, the Bank continues to benefit from a well-diversified funding mix, which has produced a very healthy cost of funds amid a rising interest rate environment. Total customer deposits increased 7% year-to-date to 329 billion dirhams at September end. Despite rising rates in a highly competitive landscape, the Bank attracted 6.8 billion dirhams in CASA deposits in Q3. This brought the total CASA deposits to 157 billion dirhams, while term deposits were up 4% sequentially to 172 billion dirhams. As you can see from the table on the right, CASA deposits remain well balanced across the businesses and account for 48% of total customer deposits at September end.

On slide 15, you will see how our capital position has continued to strengthen over the course of the year. The Bank remains well capitalised with a Basel III capital adequacy ratio of 16.16%, up from 15.77% at the end of 2022. Our CET1 ratio has improved to 13.46%, up from 12.96% at December end.

I will now hand over to Paul to discuss the asset quality and subsidiaries.

Paul Keating: Thank you, Robbert. And turning to slide 16, cost of risk was 73 basis points in quarter three, which was steady over the prior year and remaining within our medium-term guidance of 80 basis points. The nine-month cost of risk increased 13 basis points from a year earlier to 73 basis points, as the Bank reported significant releases in the first quarter of 2022. Q3 net impairment charge was higher sequentially, primarily on account of lower recoveries. For the nine-month period, impairment charge was higher due to provisioning on a few corporate accounts.

Our NPL ratio was 4.82% at the end of Q3, reduction from 5.25% as of December year end. Including POCI assets, the NPL ratio was 5.36, compared to 6.07 at December year end. The Bank's provision coverage ratio was 91.4%, compared to 93% at December end. And including collateral held, the ratio was 148%.

Turning to slide 17 for updates on Al Hilal Bank. Since its launch in February 22, Al Hilal super app has acquired approximately 590,000 registered users and growth momentum continued in Q3, with 80,000 joining the platform. Over 33,000 new banking customers were onboarded by the app during the quarter, bringing the total to a circa 223,000.

Engagement on the app remains strong, with around 8,800 daily transactions conducted and an average engagement time of around 19 minutes per visit. Al Hilal Bank continues to increase the app features and offerings, including the launch of a hotel booking service for more than 400,000 hotels, using touch points and credit cards.

Moving to ADCB Egypt on slide 18, ADCB Egypt delivered a strong financial performance despite the challenging macro-economic backdrop. The Bank continued to drive its digital transformation, successfully launching its first digital branch. In Q3, subscribers to the digital banking platform were 48% higher year-on-year, with digital transactions up 273%.

Net profit for Q3 increased 323% year-on-year to £401 million Egyptian, with a return on equity of 21.2%. And then for the nine-month period, the net profit was 136% higher at £1.2 billion Egyptian, delivering a return on equity of 21.9%. Net loans have increased 10% over the course of the year to £32.7 billion Egyptian, while the deposits increased slightly to £75.6 billion Egyptian.

I'll now hand back to Deepak.

Deepak Khullar: Thank you, Paul. On slide 20, we provide an update on digital transformation, which is driving customer acquisition. ADCB Group's UAE operations, including Al Hilal Bank, welcomed around 167,000 new retail customers in Q3, with 81% onboarded digitally. Digital engagement is accelerating, with subscribers to ADCB's mobile banking platforms growing by 114,000 customers in the quarter. The number of active digital users was up 43% and 88% of all customers are now registered for internet and mobile banking. Self-service retail transactions represented 97% of all customer transactions in the quarter.

We're also continuing to enhance our third-party digital partnerships. ADCB recently announced an important collaboration with food delivery platform, Talabat, that allows customers to conveniently apply for an ADCB Talabat credit card on the Talabat app. The Bank also launched self-service credit card applications on its mobile app and website, with straight-through processing, enabling customers to receive operational digital credit cards within 15 minutes. On the CIBG front, we continue to simplify and enhance customer experience on ProCash. Transactions on the ProCash and ProTrade corporate banking digital platforms accounted for 97% of all cash management transactions and 62% of trade finance transactions, respectively.

Turning to slide 21, looking at developments on the ESG front, the Bank successfully issued a US $650 million green bond in September to support further investment in renewable and sustainable projects. This second green bond issuance was 2.9 times oversubscribed. We also published our first green bond report which details the allocation and impact of the Bank's eligible green loan portfolio. Our eligible portfolio has achieved year-on-year growth of 61%, reaching $1.65 billion at June end. In the run-up to COP 28 and as part of ADCB's ambition to support the UAE's net zero agenda, the Bank is finalising an enhanced climate strategy.

We also recently launched a sustainable call account, building on our sustainable/green finance products and services. We have now completed a baseline assessment of Scope 3 finance emissions in accordance with the Partnership for Carbon Accounting Financials (PCAF), standards. The assessment concluded that more than 80% of the Bank's financed emissions were related to the real estate, oil and gas and aviation sectors.

Turning to slide 23, on the operating environment, the macroeconomic fundamentals of the UAE have remained robust. Consumer confidence is resilient and PMI data has remained in expansionary territory in 2023, with supported domestic demand backdrop. Nonetheless, we remain vigilant and are watching closely the global environment, particularly in light of heightened geopolitical risks and the prospect of a continued slowdown in major economies, which may impact the UAE's externally facing sectors.

I will now wrap up with a summary on slide 24, where you will also find an update on our full-year guidance. We're pleased to report strong financial performance in quarter three, primarily driven by accelerated loan growth in a rising interest rate environment. We're seeing healthy demand for credit amongst diverse corporate customers.

Meanwhile, Q3 was a particularly strong quarter for Retail Banking across the product suite, with ADCB's digital proposition acting as a key driver of customer acquisition. In parallel, the strength of our franchise has enabled considerable deposit inflows, including CASA. In light of the Bank's strong performance, we are updating our full-year guidance on certain key metrics. We expect loan growth in 2023 to finish in the 10 to 12% range, with net interest margin at approximately 2.8% for the year. The Bank is on track to deliver a return on average tangible equity between 14% and 15% this year. And we are targeting a cash dividend payout of 50% of full-year profit.

Our expectation for cost of risk and CET1 remain in line with previous medium-term guidance of 80 basis points and greater than 10% to 12%, respectively. While we remain mindful of the global economic conditions and an evolving operating environment, the Bank is highly resilient and well positioned to capitalise further on the UAE's robust core fundamentals.

Thank you. This concludes our presentation. Operator, you may now open the floor for questions.

Operator: Thank you. As a reminder, if you'd like to ask a question today, that's star followed by one on your telephone keypad to enter the queue. If you've joined us online, please use the Q&A textbox provided. Our first question today comes from Nida Iqbal from Morgan Stanley. Nida, your line is open. Please go ahead.

Nida Iqbal: Hi, thank you for the call. And congratulations on a great set of results. Just wanted to start off with my first question on loan growth. 3Q loan growth was very strong, up 5% quarter-on-quarter. Within that, international loans were up 10% sequentially. Can we get some colour about the drivers here and expectations going forward? And then on the UAE loan growth of 7.5% year-to-date, maybe can you elaborate on your expectations as we look forward into 2024 and the key drivers and sectors here?

My second question is on the NIM side, the 14 bps increase quarter-on-quarter in NIMs. Can we talk about local versus international dynamics here? Because for some of the UAE banks, we have seen NIMs compressed this quarter. I just wanted to get a sense of, has the asset yield pricing linked to rate hikes so far come through? And what are you seeing in terms of competition on the loan spread side and cost of funding? Thank you.

Deepak Khullar: Thank you, Nida. Loan growth has been pretty strong in quarter three. And as we mentioned earlier, we said we have a very good and strong pipeline of commitments to extend credit. And a lot of those drawdowns did happen in Q3. We remain positive on that and that's why we've upgraded our guidance to 10 to 12% loan growth for the full year. And, again, strong pipeline. And if you see our retail credit growth has also been extremely strong. Personal loans growing by 11%, mortgage loans 20%, auto loans 26% and credit cards 11%. We're very pleased with that outcome.

Between UAE and outside of the UAE, yes, we're seeing growth in both segments. And we are participating in some of the lending outside of the UAE, particularly Saudi, etc. And we've seen some good growth there. Net interest margin, yes, we've seen a fairly decent uplift in Q3. And we did say that we were expecting slightly higher NIMs. We're pleased with the outcome that we've seen so far. Going into 2024, obviously, we'll give you more detailed guidance with our full-year results. But we see this momentum continuing both in terms of loan growth and either steady to slightly improving NIMs for the rest of the coming quarter, quarter four.

There is competition in the marketplace, both on the loan side in terms of pricing and on the deposit side, again, in terms of pricing. You can see that yields have gone up in Q3 from 6.26% in quarter two to 6.67%. The rate increases are being passed on to the best extent possible to the clients. And with the cost of funds also going up, but slightly at a lower rate. And therefore, we expect NIMs to be around 2.8% for the full year. And more detailed guidance on 2024, obviously we will provide with the full-year results.

Nida Iqbal: Thank you very much.

Deepak Khullar: Thank you.

Operator: The next question comes from Waleed Mohsin from Goldman Sachs. Waleed, your line is open. Please go ahead.

Waleed Mohsin: Thank you much. Good afternoon. Thank you for the presentation and congratulations on a strong set of results. Three questions, please. First on operating expenses. In the results commentary as well as on the presentation, you've noted that there are certain investments which are going into the franchise, both digital and more broadly. I wanted to understand if there are any one-offs in this operating expense number for the quarter. And how should we think about the quarterly run rate in terms of operating expenses, especially given that you have a long-term target of 29 to 32% cost income? And despite a pretty good quarter, we're still sitting slightly outside that 32% for the first nine months. That's the first question.

Second on fee growth, we've seen some volatility and Deepak, you explained during the call some one-offs which came through in the second quarter, which boosted second quarter fee income. But at the same time, we've seen very strong growth. And you talked about broad-based trend across different products. Again, question would be, what is the normalised run rate on fee income? Is it the quarter two number or is it the quarter three number or somewhere in the middle? That would be very helpful.

And third and final question is on cost of risk. We've seen a little bit of a tick-up in the absolute dirham

Are you seeing any early signs of stress which may prompt you to take another elevated charge in the fourth quarter? Or what we've seen in third quarter is pretty much consistent with what we should expect going forward? Thank you.

Deepak Khullar: Thank you, Waleed. I'll have my colleague, Paul, respond to cost of risk later on. But let me take your first question on operating expenses. I think the way we look at operating expenses is we did say, from

the beginning of the year, that absolute amount of costs are likely to increase over 2023, especially because the Bank is investing.

The sequential increase is roughly about 90-odd million dirhams. And I can explain that in three broad categories. The first two are directly related to sales. About one third is on account of sales commissions and incentives and there are also staff to drive those sales. And you can see on the retail side, the results that cost is producing. And another one third is relating to marketing expenses, which, again, is very directly related to revenue that the Bank is generating. And the last one is around variable pay accrual, with higher profits once we've accrued a slightly higher number going forward as well. In terms of one-offs, there has been a one-off of probably about 20-odd million, a little bit more probably, on account of certain fees that we've had to pay for services that we've been using. And that's for the last couple of years. Hopefully, that will not be repeated in the following quarter.

But I think more importantly for us, is this additional expense in terms of cost-to-income ratio. Cost-to-income ratio has come down for the nine-month period. Sequentially, it has gone up slightly. But we expect to remain in that 32-odd percent range going forward. It will not be at all times a sequential stable trend. We will see some variability in that as profit improves. You'll see sometimes accrual for variable pay etc. On fee growth, I think I explained with the Q2 results that, yes, there was a certain variability on account of the credit card fees, which was a one-off. But I think the way to look at going forward is more the Q3 numbers, with prospects of growing on top of that. That's the baseline from which we would like to grow. That's a more reasonable number to think.

And on risk, I'll hand over to Paul to comment.

Paul Keating: Thanks, Deepak. On the cost of risk, your question around are we seeing signs of stress, I'd say no. In the retail portfolio, our days past due are trending okay. Equally, the vintage information coming out of the bookings, when we look across the products in retail, the more recent bookings in terms of 2022, 2021 are still performing better than 2023. Not seeing signs of stress in the retail side of things. In the wholesale book, obviously that is a bit lumpy, but we're not seeing immediate stress in terms of either sectors or specific counterparties.

Yes, we did take some further impairment charges in the last quarter. That is to historical high-risk names as opposed to provisions generated by new bookings that we've made in the last 12 months. Going forward, I think depending on what happens obviously in the geopolitical environment and elsewhere, we would still adhere to our medium- term guidance in terms of the cost of risk. The caveat would be any changes in the regulatory environment that may change the approach to provisioning or staging.

Waleed Mohsin: Thank you much. Very helpful. Thank you.

Deepak Muller: Thank you, Waleed.

Operator: The next question comes from Rahul Bajaj from Citi. Rahul, your line is open. Please go ahead.

Rahul Bajaj: Hi, thanks for taking my question. Two questions from my side, please. First one is on the NIM trends, when I look at the segments that you provide. I see that the wholesale business NIM appear to be quite stable in 3Q sequentially. But it is the retail segment where you're probably seeing some pressure in NIMs on a sequential basis. Just want to understand if my observation is correct. And if it is, what is driving the pressure that you're seeing in the retail business segment NIM? That's my first question.

And my second and final question is on the trends that you're seeing in Abu Dhabi versus what you're seeing in Dubai. I just wanted to understand on key metrics like loan growth or competition, margins, etc., are the trends quite similar on both sides of the Emirates or you're seeing slightly different trends in Dubai versus Abu Dhabi? Any thoughts there will be very useful. Thank you.

Deepak Khullar: Thank you, Rahul, for the questions. On the NIM trends, there is intense competition on both sides, corporate and retail. In certain products, yes, retail NIMs are coming under more pressure. But that's the competition. That's the nature of the competition. But despite that, I think the Bank is doing well to maintain its overall yield on assets and we're booking some really strong loan growth across all the products that I mentioned earlier. Corporate, yes, obviously lower than retail, but steady. And that's what we expect to see going forward as well. It's a much larger book.

Three quarters of our book is corporate. One quarter is the retail. And we expect our competition to continue on both sides. Abu Dhabi versus Dubai, I don't think we see any divergence in trends there. It's a similar level of competition, both on the deposit side and on the loan side. We see similar trends. But I'll probably ask either Robbert and/or Paul also to comment as to what we're seeing on the deposit side and the loan side.

Robbert Muller: Again, on deposit side, there is a competition clearly visible in the market. And liquidity is still ample within the system. But we do see that, from time to time, the more price-sensitive clients will try to negotiate with you on the deposit margins. Therefore, I think it's very important for us to continue to focus on our operational CASA and the quality of CASA to make sure that we target those clients who will hold operational deposits with the Bank, which are much more difficult to move out and are probably much more stickier over time. I think we have been very successful, as we have explained also during this quarter, that we have seen an uptick in CASA. And we continue to focus on building out the liability base.

Paul Keating: And then the other thing I have to tell you…

Rahul Bajaj: Makes sense. Thank you.

Paul Keating: In terms of overall growth, we're seeing it through a number of Emirates. It's not just Abu Dhabi and Dubai. I think each one is contributing in its own right, together with, as Deepak's outlined, the lines of the business, whether it's Retail, our Private Bank or the corporate trends have got on that loan growth.

Rajul Bajaj: Understood. Thank you so much.

Deepak Khullar: Thank you, Rahul.

Operator: The next question comes from Shabbir Malik from EFG Hermes. Shabbir, your line is open. Please go ahead.

Shabbir Malik: Hi, thank you. Most of my questions have been answered. Maybe on your CASA mix has been pretty intact, I think around 47%. I just wanted to hear your thoughts, are you seeing more customers looking to shift from CASA to time deposits? Do you expect this trend to play out more forcefully as we go into the year end in 2024? That's one question. And just a comment. Thanks for providing this guidance for 2023. It's really appreciated. Thank you.

Deepak Khullar: Thank you, Shabbir. CASA, yes, you're right, has remained quite robust for us both in terms of percentage of total deposits and in absolute terms as well. If we look at Q2 to Q3, I think we grew by 7 billion dirhams from 150-odd billion to 157 billion, which we're very pleased with. Is there movement between CASA and term deposits? Yes. That is always likely to be there. But is it significant? No. Do we expect it to continue? For a smaller degree, yes, there'll always be some movement. But any significant moment that was to happen, it's already happened over the course of the year when we saw the interest rate rises happening over the last, not just nine months, but 15 months.

People would really have to move. I think for the next quarter point or half point increase, I don't think we're going to see a significant shift from CASA to term. There will be some, but not significant. And our aim and our goal is to have operational deposits. And on the retail side, to have much more granular deposits, which we're seeing come through. Retail is holding up well and so is commercial deposits, which is the SME segment holding up well. Hope that answers your question, Shabbir?

Shabbir Malik: Yes, it does. Maybe just on time deposit, the rates on those tend to reflect the interbank rate or depending on the clientele and the retail rates are lower than corporate? How does it work?

Robbert Muller: It's indeed very client segment-specific. There is not a rate that I can tell you which we pay on average. But there will be definitely client segmentation. And, of course, at the beginning of this year, we had some evidence of that when we stopped paying higher rates to some client segments, who then subsequently stayed with us. For us, we need to be very mindful as to whom we are offering what. And I think so far, we have been quite successful in doing so. And there will be more market participants who are more market-savvy than some other clients. That's something that we need to manage very carefully at our end.

Shabbir Malik: Thank you.

Operator: The next question comes from the Naresh Bilandani from JPMorgan. Naresh, your line is open. Please go ahead.

Naresh Bilandani: Thank you. Hi, it's Naresh Bilandani from JPMorgan. Thanks a lot. I have three questions, please. One is, year-to-date, the phase of pick-up in the write-offs is looking a lot stronger, especially in the third quarter. We have 2.25 billion of write-offs as of nine months and compared to 2.1 billion booked for the whole of last year. Can you please share some key drivers for this? We saw a similar trend in ENBD results earlier today. Is there anything that is a sector-wide issue or is this trend particularly specific right now to… Or is it something related to ADCB only? Any insights there that you can share, that will be super helpful.

That's first. My second question is on your growth in the international segments. And if I take a look at a bit of history, the mix of these loans has nearly doubled from around 10% in 2021 to roughly about 19% currently. Could you explain how much of this is Saudi-driven? And should we see this mix increase further going forward? Clearly, because the corporate loan growth opportunity is much stronger in Saudi Arabia than what we're seeing in UAE right now. Any thoughts that you can share on this will be very useful. That's the second question.

And my third question is a bit of an academic question. The dollar-denominated assets on your balance sheet, have they all shifted in reference from the LIBOR to SOFR? And under such a scenario, can you please just explain how the pricing on these have changed? Is it pricing-neutral? Is this shift pricing-neutral or does a customer or a bank stand to benefit from such a shift in any form? Any mechanics that you can explain on this will be extremely useful. Thank you.

Deepak Khullar: I'll probably take the first two and then LIBOR, SOFR, Robbert and Paul can comment. Year-to-datewrite-offs, yes. The way write-offs happen are we look at the corporate book and retail book. They're two separate. Retail book write-offs are very much programmatic, after, whatever, a certain period of time, whether it's 180 days past due or if it's mortgages is greater than, whatever, 365 or 730 days, it is automatically written off. It follows a very programmatic point of view. And there are no unusual circumstances that dictate that. Corporate loans are written off only when the Bank, in its opinion, feels that there is no further scope for recovery and the account is fully provided for. We've exhausted all options and then we write it off.

You could see a write-off in a particular quarter at a much higher level and the following quarter at a very low level. It depends on when we make that call on that judgement. In certain quarters, we may have a number of accounts with small value being written off. And in a particular quarter, we may have just one or two accounts with large values being written off. It's a timing issue. There's nothing that dictates that. There's no industry-wide directive or anything like that, that I would say that's driving that write-off.

Growth, yes, we are seeing growth coming from Saudi. We don't break up our loan growth by each country. We just do UAE and outside the UAE. But a lot of that growth is coming from Saudi Arabia. And we decide where to deploy our capital. Yes, there is good demand there and we are participating in a number of deals there. On the last one, in terms of repricing.

Robbert Muller: Maybe I'll give it a start and maybe Paul can add to it as well. We have concluded the transfer to SOFR. And I think, overall, 99% of our book has been transferred to the new SOFR benchmark. Maybe we have one or two loans outstanding that are still now based on synthetic LIBOR, but that must be very minimal. The transfer has been very successful. Obviously, LIBOR and SOFR, their basis is different there. There was indeed a transfer mechanism to the new spread that needs to be determined. And it depends a little bit on the type of loans that we've had.

For syndicated loans, often it's a protocol that was being followed. The same was true for the derivatives. And if there were bilateral loans, then again, we needed to have a conversation with the client as to how this will transfer into the new spread over SOFR. All in all, I think the Bank did very well. We had no disputes with clients. I don't think there was any value transferred from us to clients or from clients to us. But all in all, I think it was a very neutral exercise that was concluded in a very good manner, as far as I can tell.

Paul Keating: I agree. From my side, very risk-free, I guess, transition. There's been a lot of transitions over history, but I think this one certainly went smoothly for ourselves. And we're not facing a number of queries from counterparties around that transition or change in terms of moving to the SOFR.

Naresh Bilandani: Thank you very much for reply.

Deepak Khullar: Thanks, Naresh.

Operator: The next question comes from Olga Veselova from Bank of America. Olga, your line is open. Please go ahead.

Olga Veselova: Thank you. Two questions, please, from my side. One is about Egypt. Could you please remind us the share of Egypt in group assets, loans and net income? Did Egypt have any visible impacts on second quarter margin and cost of risk? And since you commented on margin and ideal cost of risk, you can add. And also, in Egypt, how do you expect the share of Egypt to evolve in the group's P&L going forward? This is my first group of questions.

And second is on Saudi. You mentioned you participate in growth in Saudi. I guess you do it from Abu Dhabi balance sheet. It would be great value if you can shed a bit more light on that. What is percentage of loans provided to Saudi borrowers in total loans? Do you see growing competition for these borrowers from liquidity-rich UAE banks? And do we offer better rates versus Saudi banks? Thank you very much.

Deepak Khullar: Thank you, Olga. Roughly, our balance sheet in Egypt is about $3 billion overall. We do file our local Egyptian financials as well, which is available on our website, Egypt. But over and above that, we also do lend certain corporate and clients from the UAE to Egypt. That's one piece. Saudi, we don't split out Saudi as a separate country by itself. We do participate in a number of other countries. There's Saudi. There could be Oman. There could be some in Bahrain, etc. Saudi obviously being a major component of outside of the UAE lending that we do. I don't know if there's any other colour, Paul, you'd wish to add on the Saudi lending?

Paul Keating: Just that it is very much in the upper end of the wholesale market. We don't participate in retail. We don't participate in that commercial SME sector. It's very much the GREs, the major names that you'd think of when looking at Saudi.

Olga Veselova: That's great. And do you see growing competition for this type of borrowers for GRE borrowers from UAE banks? Is that a pretty crowded segment or not really?

Paul Keating: I think, given the proximity, I guess, same time zones, type, I expect that, yes, a number of banks would also go into Saudi in terms of looking for loan growth. There are a lot of syndicated opportunities. Again, that opens up to the market in terms of, not just UAE banks, but also wider international banks that want exposure to projects in Saudi Arabia, given the online growth and fundamentals there. I think that dynamic will continue.

Olga Veselova: That's clear. Thank you very much.

Deepak Khullar: Thank you, Olga.

Operator: The next question comes from Chander Kumar from Al Ramz Capital. Chander, your line is open. Please go ahead.

Chander Kumar: Good afternoon. What I've noticed is that strong loan growth in third quarter was largely supported by a mobilisation of higher time deposit, which increased by 21% year-on-year. Do you think this move should have any negative impact on your margin in future?

Deepak Khullar: No, I think as long as our proportion of overall liability base remains in that 48% CASA, 52% time deposit. In absolute terms, you're right. Time deposits have grown. But in absolute terms, so has CASA grown. The proportion has remained the same. Therefore, the blended cost of cost of funds remains similar and not a drag. If the CASA was to drop significantly, then, yes, your blended cost of funds would increase. And that would be a negative. On the other hand, if we can move our CASA up to over 50, 54, 55, where we were at one stage, then that would be a positive outcome to the overall NIM. And that's the aim of the management, to see how much more CASA can we grow.

Robbert Muller: And also, to add to that, there are plenty of term deposits that we raise at this sub-benchmark level. It's not only at benchmark level that we raise these deposits. There are also clients who are willing to lend the money to us at sub-benchmark levels.

Chander Kumar: And what deposit growth do you target for 2024?

Deepak Khullar: We will give more detailed guidance with the full-year results. But we expect the current momentum we're seeing in 2023 to continue into 2024.

Chander Kumar: And one last question, what are the key risks that could impact your ability to achieve this minimum 50% payout ratio? Or is it guaranteed payout no matter what happens?

Deepak Khullar: It's a payout ratio depending on the profit of the Bank. Whatever the profit is, that's what is our aim. And obviously, that is the intention of the management. But it has to be approved by the Board and by the shareholders eventually. And of course, the regulators as well have to approve that. But where we stand, the intention of the management and the guidance is that we'll continue with our previous record of paying 50% cash payout ratio.

Chander Kumar: Thank you so much.

Operator: We will now move over to written text questions and we have a series of three questions from Barings. I will read these one at time. Significant opex increased this year and in 2022. I understand it is salaries and IT investment, but you break out general admin, which has gone up the most, 20% in 9M, Q3. What is in this line? And secondly, when does all the digital investments start to reap dividends, given you are demonstrating uptick in apps like Hayyak and Al Hilal super app?

Deepak Khullar: General admin has two major components which is outsourced expenses. These are not full-time employees of the Bank, but these are outsourced staff, etc., who earn a very base minimum salary, but are driven on incentives. That drives sales incentives. That's a key component of that. Marketing is another component that goes in general and admin expenses. And then there are a host of other items such as maintenance costs for computer equipment, communications, rent, consumables, etc. That's what goes into general and admin. I'm just talking of the top six or seven items. And, sorry, could you repeat the second question?

Operator: When does all the digital investments start to reap dividends, given you are demonstrating uptick in apps like Hayyak and Al Hilal super app?

Deepak Khullar: There will be a time period in terms of our investments and the transition from today, let's say, a manual process, to a total digital process. And that transition also depends on consumer uptake. What we've seen so far is a very good uptake on transacting. Once a particular transaction feature is available on the app, our customers are using those 90% - 95% of the time. Remittances is a prime example. Volumes have just quadrupled over there. And they're all going through digital. They are starting to yield results. The key issues around onboarding of customers, where we are in the middle phase of, let's say, assisted digital, if that's the word, while the digital facilities are available. If you don't have also a salesperson calling them, then they are getting a sales call from another bank. And therefore, you may lose that sale. That transition will depend on how the overall sector operates. But we are building out those features. Current and savings accounts, over 80% are now being onboarded digitally. It is yielding results. Remittances, already digital. It is yielding results. If you look at some of the features we put in our app, let's say, WhatsApp banking, all the calls we used to get into the call centre and people visiting branches to inquire about certain aspects of their account or get a certificate or get a statement, etc., people are now getting that through WhatsApp banking that we've launched.

It is yielding results already. We've seen a number of areas where the results are very visible to us, a number of areas where the investments are being made. Probably it'll take 12 to 18 months for that transition to happen, where we can fully realise the cost benefits of that.

Operator: The second of Barings' questions asks cost of risk has sometimes spiked in Q4. I understand in 2022, higher cost of risk was used to offset one-off gain and boost coverage, which is 80 bps, still realistic medium-term guidance, given that this could be pressured from higher rates corporate tax in 2024 that could pressure clients' cash flows and macro geopolitical risk premiums embedded in the ECM model. And how would you weigh these risks versus potential recoveries on NMC or in any other exposures?

Paul Keating: I think, if I start, the guidance given today, it certainly speaks to the end of the year. As part of the annual results that we will speak to the market in January, we'll update that medium-term guidance in terms of going beyond the current 2023 period. It will factor in there at that point. The corporate tax, I see the claims on cash flows will probably happen in 2025, where the actual outflows of tax needed to take place as opposed to 2024. Yes, people will be busy doing their tax returns and submissions in 2024. But the actual cash impact in terms of paying tax department will happen during 2025.

So, obviously, we'll factor that in any consideration. Some, we have done stress testing around that in terms of our portfolio just to try and appreciate what that does. NMC continues to evolve. The operations are out of the administrator, but generating returns in their own right. There've been some management changes there. Again, that will play out over the period as we go forward.

Operator: And one question from Barings on the fee and commissions growth, you've added 50K cards in Q2 and 67K in Q3, which has been a strong driver of fees and commissions. Is there more scope for cards? How much runway is there? And what do you think is a sustainable growth rate for this line? More than 1X loan growth?

Deepak Khullar: Obviously, very strong growth in the last two quarters in terms of card acquisitions. And we expect that momentum to continue at least for the next few quarters. We're not seeing a slowdown yet. Obviously, a lot depends on the macroeconomic environment, which we believe is very strong in the UAE. And we continue to see that. Will there be more growth coming in the next few quarters? Yes, absolutely. We see that coming through. Will the rate of growth be the same? Probably. Maybe not. But we still do see absolute growth coming in both on cards and other retail products as well. And that's the way we're looking forward into 2024 as well, the strong growth numbers to come.

Operator: We have a series of three anonymous questions. I will read these together. Congratulations on the strong results. Question one is, 9M impairment charge is up by 46% year-on-year. Any particular sectors or segments worth highlighting? Question two, what is the latest NSFR? And question three, earlier this year, the Bank had highlighted preference for safer lending and limited NIM expansion. On slide 12, we see large year-to-date increase in retail lending. How best to reconcile these two?