Abu Dhabi Commercial Bank PJSC (ADCB) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the UBS Abu Dhabi Commercial Bank Q2 '26 Earnings Call. [Operator Instructions] I'll now hand over to our UBS host, Jon Peace.

Thank you, and good afternoon, everybody. Welcome to ADCB's Second Quarter 2026 Results Call. My name is Jon Peace, and I'm Head of MENA Research at UBS. Before we start, I'd like to read a disclaimer. This webcast is for analysts and investors only, and any media personnel are requested to drop off. This call may be recorded. And by participating in this call, you agree that the recording of your participation may be made publicly available for replay purposes. For further information, please see the disclaimers issued in the event e-mail confirmation from UBS. At the end of the management presentation, the operator will give instructions on how to take questions. Please limit your questions to 2 per person to give time. Any unanswered questions can be directed to Investor Relations. I'll now hand the call over to Harsh Vardhan, Senior Head of Investor Relations. Harsh, over to you.

Thank you, Jon, and good day, ladies and gentlemen. Welcome to ADCB's call on our second quarter 2026 financial results. We will be referring to the earnings presentation available on our Investor Relations website. I am joined today by Deepak Khullar, Group Chief Financial Officer; Robbert Muller, Group Treasurer; and Dr. Monica Malik, our Chief Economist. We will discuss the key financial highlights as well as the operating environment and guidance before opening the floor for questions. With that, I will now hand over to Deepak to begin on Slide 5.

Thank you, Harsh, and good afternoon, everyone. ADCB delivered an excellent first half performance, reflecting the strength of the franchise, the resilience of the UAE economy and the disciplined execution of our 5-year strategy. Against the backdrop of sustained economic momentum in the UAE, we continue to generate broad-based growth across our businesses while maintaining strong risk discipline. This resilience is evident across multiple dimensions from corporate lending and customer acquisition to revenue diversification and efficiency gains. Quarter 2 profit before tax increased 26% year-on-year to a record AED 3.83 billion, marking the bank's 20th consecutive quarter of profit growth, an unbroken run that stretches back to 2021. Half 1 profit before tax increased 28% year-on-year to AED 7.61 billion, demonstrating the consistency of our earnings trajectory and the strength of our business model. Net profit after tax reached AED 3.38 billion in the second quarter and AED 6.74 billion in the first half, delivering a half 1 return on average equity of 16.2%. Noninterest income remained a key driver of performance, increasing 22% year-on-year in the first half, supported by higher fee and trading income. This reflects the continued diversification of our earnings profile. Additionally, cost-to-income ratio improved by 90 basis points year-on-year to 26.8% in the first half, reflecting double-digit top line growth combined with disciplined cost management. Balance sheet momentum remains strong. Net loans increased by AED 42 billion or 10% during the first half, with growth across a diverse range of economic sectors. Customer deposits increased by AED 27 billion or 5% year-to-date, underscoring the depth of our client relationships and franchise strength. This growth continues to be characterized by strong asset quality metrics. Cost of risk improved to 38 basis points in the first half, remaining comfortably below our through-the-cycle guidance range. ADCB remains in a robust financial position with a CET1 ratio of 13.66% and a liquidity coverage ratio of 109.5% at June end. On Slide 6 and 7, you will see key income statement details for the first half and second quarter. Operating income increased 12% year-on-year to AED 11.98 billion in the first half, with particularly strong momentum in noninterest income. This not only reflects robust revenue growth, but also the continued diversification of our earnings profile with a broader mix of income streams. Operating profit before impairment charge increased 13% year-on-year to AED 8.77 billion in the first half and rose 3% year-on-year to AED 4.36 billion in quarter 2. The consistency of these outcomes is important. This is not a franchise that has simply delivered a strong quarter, but one that continues to compound. The combination of sustained business growth, improving profitability, strong returns and disciplined risk management gives us confidence in the durability of our earnings and our ability to continue creating long-term shareholder value. Turning to Slide 8 and a more detailed look at net interest income, which increased 6% year-on-year in the first half to AED 7.47 billion. This was driven by significantly higher volumes and disciplined pricing despite a lower interest rate environment following 3 benchmark rate cuts in September 2025. In the second quarter, net interest income was AED 3.73 billion, broadly stable quarter-on-quarter and 2% higher year-on-year. As expected, NIM moderated to 2.26% in the first half and 2.2% in quarter 2, reflecting the lower rate environment and a shift in liability mix to maintain a resilient liquidity position. Notably, risk-adjusted NIM increased to 1.91% in the first half, supported by a lower cost of risk and continued asset quality strength. Turning to Slide 9. Noninterest income remains a key growth driver, increasing 22% year-on-year to AED 4.5 billion in the first half. Growth was broad-based. Half 1 net fee and commission income increased 21% year-on-year, primarily driven by higher activity across cards, lending and trade finance. Card-related fees rose 34% year-on-year and loan processing fees 24%, complemented by higher trade finance and asset management income. This breadth gives us confidence that fee generation is structural rather than driven by any single line. Net trading income increased 35% year-on-year to AED 1.93 billion, supported by higher gains from FX, derivatives and financial assets at fair value through P&L. As a result, revenue diversification continues to strengthen with noninterest income contributing 38% of operating income in the first half compared with 34% in the prior year period. As rates normalize, the growing contribution from noninterest income provides a natural offset to margin pressure and supports a more balanced and resilient earnings profile. Momentum remained strong in the second quarter with noninterest income increasing 12% year-on-year and fee income rising 28%. Turning to Slide 10. As mentioned earlier, the cost-to-income ratio improved by 90 basis points year-on-year to 26.8% in the first half, achieving positive jaws as income growth outpaced the cost base. I would like to highlight that the bank continues to invest in strategic growth initiatives, including talent, technology, AI and new business capabilities. Operating expenses increased 8% year-on-year to AED 3.21 billion in the first half and were up 12% year-on-year at AED 1.69 billion in quarter 2. I will skip over Slide 11, where you will find key balance sheet metrics and go straight to details of the bank's strong loan growth on Slide 12. As mentioned earlier, net loans increased by AED 42 billion during the first half or 10% year-to-date and by AED 22 billion or 5% during the quarter to reach AED 445 billion. Credit demand has remained robust across a broad range of economic sectors with growth in the first 6 months of the year, driven by energy, trading, manufacturing and government-related entities. The strong demand we are seeing reinforces our confidence in the economic outlook and our ability to support clients across a wide range of industries. It is worth underscoring the momentum behind this growth. We extended AED 85 billion of new credit during the first half against AED 44 billion of repayments. Geographically, the UAE represented 70% of gross loans, while international exposure stood at 30%, supporting ADCB's strategy of balanced domestic and international growth. The portfolio is becoming larger, more diversified and increasingly resilient. Turning to Slide 14. Asset quality metrics continued to improve during the period, reflecting the strength of the portfolio and disciplined risk management. The NPL ratio declined further to a record low of 1.71%, while provision coverage ratio increased to 159.4% Total coverage, including collateral, remained exceptionally strong at 272%. Net impairment charge was AED 1.17 billion in half 1, 36% lower year-on-year, primarily due to higher charges related to a few legacy corporate accounts in the prior year. The lower Q2 charge is driven by higher recoveries and portfolio quality. On a like-for-like basis, the underlying gross charge was essentially flat, [ AED 711 million ] in Q1 and AED 695 million in Q2. What changed is recoveries, AED 159 million in Q2 versus AED 73 million in Q1, more than doubled. That accounts for the bulk of the roughly AED 100 million improvement in the net charge from AED 638 million to AED 536 million. I will now hand over to Robbert to cover the investment portfolio, customer deposits and capital position.

Thank you, Deepak, and good afternoon to everybody on the call. Please turn to Slide #16. The investment securities portfolio continues to provide liquidity, diversification and a stable contribution to the bank's overall balance sheet strength. The portfolio increased to AED 171 billion at June end, up 11% year-on-year and 3% year-to-date, with 99% invested in well-diversified bonds. In terms of accounting treatment, 41% of the investment securities were carried at amortized cost and 59% at fair value through other comprehensive income and mark-to-market on a daily basis. Turning to Slide #17. We continue to see solid momentum in deposit inflows during the first half. Customer deposits increased by AED 27 billion to reach AED 527 billion at June end, up 5% year-to-date and 14% year-on-year, reflecting the strength of the ADCB franchise and customer relationships. CASA deposits increased by AED 9 billion in the first half to AED 241 billion and represented 45.7% of total customer deposits, up from 44.7% a year earlier. In the second quarter, we attracted AED 8 billion in term deposits, supporting a resilient liquidity position. Reflecting this funding strength, our loan-to-deposit ratio stood at a comfortable 84.4% at June end, and ADCB was a net lender of AED 40 billion in the interbank market. Turning to Slide #18. The bank maintained a solid capital position at June end. The CET1 ratio stood at 13.66%, while the capital adequacy ratio was 16.5%, comfortably above regulatory requirements for D-SIB or Domestic Systemically Important Bank. This provides a strong foundation for disciplined growth, continued investment in strategic priorities and resilience in the dynamic operating environment. I will now hand back to Deepak to discuss the operating environment and guidance.

Thank you, Robbert. Turning to Slides 20 and 21. The UAE economy continues to demonstrate significant resilience, supported by strong fundamentals and sustained domestic investment. Within the banking system, credit growth outpaced deposit growth in yearly terms during the first 4 months of 2026. Overall, liquidity remained comfortable and deposits were higher year-to-date. The investment outlook also remains constructive. Project awards in the first half reached the equivalent of nearly 2/3 of the full year 2025 level. While activity moderated in the second quarter, we expect momentum to strengthen, led by critical infrastructure and oil-related investment with continued support from the government and GRE sectors. Finally, turning to Slide 22. Let me close with a summary of where ADCB stands at the end of the first half. Half 1 '26 is a record on almost every metric. The underlying performance is strong and genuinely broad-based, diversified income, positive operating leverage, strong lending momentum and improving asset quality, all delivered in a demanding operating environment. This financial strength provides significant capacity and flexibility to support our clients, capture growth opportunities and meet the financing requirements arising from the UAE's continued economic transformation. Our performance in the first half gives us confidence in the durability of the bank's earnings trajectory and long-term value creation. We remain on track against our 2026 guidance and the 5-year strategy launched in early 2025. We will now open the floor to questions.

[Operator Instructions] Our first question comes from Shabbir Malik with Morgan Stanley.

Apologies for that. Can you hear me now?

Yes, we can, sir.

I have 2 questions. Year-to-date, your loan growth has been about 10%. Can you give us some sense based on your discussions around the potential CapEx in Abu Dhabi, what can we expect in terms of loan growth for the second half of this year? And maybe also on the margins, we saw a dip in margins in the second quarter. How do you see the margin kind of trending for the rest of the year? And how do you think it's likely to end up by the end of 2026?

Thank you, Shabbir. Yes. Year-to-date loan growth, 10% we are positive on the trajectory and the momentum that we've seen so far to continue into the second half of the year. The pipeline is strong. The demand is strong, and we expect to have a loan growth of high teens by the end of the year. So we are on track to deliver the kind of growth that we had promised in our guidance. In terms of potential CapEx, there is a lot of CapEx in the UAE economy. I'll let Dr. Monica Malik comment.

Thank you, Shabbir. As Deepak mentioned, the pipeline of project awards is very broad. It goes everything from the hydrocarbon sector, including gas to chemicals, downstream, but also in the non-oil economy, transportation projects, but also in Abu Dhabi, there's a lot of real estate projects going on as well. Tourism, hospitality and of course, renewable energy. A big focus also, I think, in the next 2, 3 years will be diversifying supply chains and transportation links. So there will also be a lot of investment into new ports, pipelines and export capacity. And we see the pipeline broadening from here. So we think this isn't just remainder for the 2H of this year, but also going into the medium term.

Thank you, Monica. And in terms of margin, yes, we've seen margin compression come through in the first -- sorry, second quarter of this year. But I think most importantly, what we're running the bank to is the risk-adjusted NIM, which has improved over last year. So it's 1.91% is our risk-adjusted NIM for the first half compared to 1.83% in the first half of 2025. The margin compression that we saw in the second quarter was driven primarily by the higher cost of funds, which moved up based on the environment that we're in. Our composition and mix of deposits also changed more term deposits than CASA, even though we grew the CASA balances, but our term deposits grew at a faster rate than that. And that is to be expected in this challenging operating environment. Yields held steady between quarter 1 and quarter 2, yields were steady at 5.3%. So it's basically driven by the cost of funds. And for the balance of the year, we expect NIMs to be stable, but obviously hoping that the environment will improve. And I'll also let Robbert comment on that.

Yes. Maybe to follow up on the funding side. Of course, the funding market in UAE was always very competitive before the conflict started and that remains to be the case. So you can also see it in the liquidity surplus. So at the beginning of the crisis, they had, I think, AED 240 billion. But that's come down to AED 80 billion as of late. So there is more pressure on the surplus. So there's also more pressure on the funding costs. And we expect that also to be continuing in the quarter 3.

Our next question comes from [ Liu Chinchu ] with China Securities.

Can you hear me?

Yes. We can. Please go ahead.

Yes. I have a question about balance sheet that I found that international loans grew much faster than the domestic UAE loans in Q2 and contributed to the majority of the quarter loan increase. Could you please break down the international growth by key geography and borrower type and product? And domestic loan growth was comparatively moderate during this quarter, was it mainly due to the temporary wait and see approach in UAE project award and geopolitical uncertainty. How do you see -- now expect the full year loan growth, including the domestic and international lending?

Thank you for the question. Yes, we did see international lending grow in the second quarter, and that's more of a timing issue on the drawdowns of the pipeline of deals that we have to international clients. Domestic demand remains very strong. The pipeline even domestically remains very strong, and we expect to see that growth go up domestically as well. In terms of the lending, it's primarily in the GCC sector and in our presence in Egypt, Kazakhstan and Saudi Arabia, where also now we very recently opened a branch. So basically, these 3 or 4 countries, along with the GCC sector makes up most of the international lending. Our commitments to lending also remains strong at over about AED 90-odd billion, and those drawdowns would happen in the coming quarters. So again, most of the exposure is between Egypt, Saudi Arabia and the GCC countries and including Kazakhstan.

Our next question is from Murad Ansari, GTN Middle East.

So just a quick question on fee income. That's been quite strong this quarter. So just if you could just give maybe a broad overview on how that's kind of trended given the current environment? And how do you see that in the second half? Do you expect this trend to continue? And then on the loan book, pleasing to see some pickup on the retail side versus the previous quarter. And Deepak, you've talked about retail being a key focus area. Are we seeing now this is really turning the corner and expect retail growth to continue to accelerate from here?

Thank you, Murad. And yes, we've had a strong first half on fee income across every line item, card-related fees, loan processing fees, asset management, trade finance, account-related fees, all of which have grown in the mid- to high teens. And in particular, card-related fees, we've had a strong first half, and that's also driven by certain fees that we get not on a regular basis, but they come periodically. So as you would have seen in the first quarter, those were slightly lower, but now in the first half, those have increased significantly to 34%. A lot of the fees are also correlated to the lending. And as lending improves 10% growth, clearly, the correlation between loan processing fees also that is likely to go up. And trade finance commission as we add newer clients and the lending clients that we've added, we also do trade finance, FX, derivative business with these clients. So with a larger client base, we would expect the fee income to grow as well. As we also mentioned on earlier occasions, as part of our 5-year strategy, the growth in income and profitability is going to come not only from lending, but the fee income. And our goal was to take it from the early 30s percent of total income to closer to 40%. And we're pleased to see that momentum. We're now at 38%, and we'd like to continue to see that grow. Retail also will pick up. We are seeing good momentum on the retail lending side as well. And the second half of the year looks promising for us on that front.

Yes. Maybe, just a follow-up. I mean, you did mention in the first quarter that there were some fees from Mastercard, Visa, et cetera, that were late because of timing issues, and that was the reason the first quarter number was low. So is the second quarter number in particular, largely reflecting that kind of income coming through?

Yes, it does. Part of that is because of that one-off gains, yes.

Yes. And if I may add, just on the investment income, that's trading income, that's another strong quarter here. I think Robbert did talk about some expectations of moderation, but that's -- it's kind of held up very strongly in second quarter as well. So just some thoughts, I mean, are we still seeing a lot of demand on hedging products, et cetera, that we saw in the first quarter? And how do you see second quarter -- sorry, the second half on this?

Thank you. Yes. No, I think we still continue to see a strong momentum also in the second quarter, and I have limited reason to believe that it will change going forward. So I think we're still quite bullish on this. At the same time, like I said on the previous call as well, we continue to invest in people, continue to invest in new products, continue to invest in infrastructure that hasn't slowed down since the start of the crisis, we continue to do so. And again, I also said again on the last call that we think that roughly 60%, 65% of this is repeatable. Of course, trading income will also have an element of variability in it, and that has to be seen how that develops. But overall, on the flows, what we see from our client, client behavior, I think we're still very positive on.

Our next question comes from Olga Veselova with Bank of America.

I have 2 questions. One is on net interest margin and second is on costs. So on net interest margin, I want to come back to the increase in cost of funds in the second quarter. I see that your deposit growth was actually pretty moderate, less than 1% Q-on-Q. So you didn't really compete for deposit gathering. Was there a mix effect or what was behind this increase in blended cost of funds? And maybe you see that this pricing competition is coming down in the second half of the year. So do you think your margin can recover a little bit after the decline in first quarter -- second quarter? And my second question is on costs. In previous quarters, you have mentioned good room for cost optimization, and we saw this in the numbers. And now we see that OpEx grew by 8% year-over-year for first half, 12% year-over-year for the second quarter. So these are well above domestic inflation. Is there actually a room for optimization or your investments in the IT and people and AI will more than offset the optimization efforts?