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

Hello. Good morning, good afternoon to everyone on the line here. This is Rahul Bajaj from Citi Research in Dubai. We are delighted to host Abu Dhabi Commercial Bank's Third Quarter 2026 Earnings Call today. Representing ADCB, we have Deepak Khullar, the group Chief Financial Officer. We have Robbert Muller, Group Treasurer; Monica Malik, Group Chief Economist; and Harsh Vardhan, Senior Head of Investor Relations. At this time, without further delay, I'll pass on the call to Harsh. Harsh?

Thank you, Rahul, and good day, ladies and gentlemen. Welcome to ADCB's call on our third quarter 2026 financial results, which were announced yesterday. We will be referring to our earnings presentation available on our Investor Relations website. I'm 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, followed by 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 morning, everyone. ADCB record results for the first 9 months of 2026 demonstrate the earnings power of ADCB's franchise, supported by positive momentum in the UAE economy and disciplined delivery against our 5-year strategy. We continue to generate broad-based growth across our businesses, while maintaining strong risk management with significant lending activity and increased increasingly diversified income streams. Third quarter profit before tax increased 28% year-on-year to a record AED 4.06 billion, marking our 21st consecutive quarter of profit growth and more than tripling since the third quarter of 2021. Net profit after tax reached AED 3.56 billion in the third quarter, up 15% from a year earlier and at AED 10.3 billion in the first 9 months, up 27%, demonstrating the consistency of our earnings trajectory. Return on average equity for the 9-month period was 16.2% compared to 14.7% a year earlier. Noninterest income continues to be a key driver of performance in the first 9 months, increasing 21% from a year earlier and contributing 38% of operating income. Over the same period, the cost-to-income ratio improved by 40 basis points year-on-year to 27.3% as revenue growth outpaced operating expenses. We continue to expand the balance sheet at base. Net loans grew by AED 66 billion or 16% over the first 9 months and customer deposits by AED 58 billion or 12%. We have also gained market share in both Loans and Deposits, reinforcing our position as one of the leading banks in the UAE. We achieved this growth while continuing to strengthen asset quality. Cost of risk improved to 36 basis points for the first 9 months compared with 73 basis points a year earlier and the nonperforming loans NPL ratio reached a record low of 1.6% at September end. Reflecting the strong underlying credit quality of our portfolio, we have lowered our cost of risk guidance to below 50 basis points from below 60 basis points for both the full year 2026 and our 5-year strategy. Our capital and liquidity position remains robust with a CET1 ratio of 13.79% and a liquidity coverage ratio of 116.8% at September end. We are now one year into our AI transformation program and making significant progress in embedding it across the bank with a disciplined governance framework. AI is increasingly becoming a core enabler of our operating model, raising productivity, improving the customer experience and giving us greater operational scale. Together with our broader digital capabilities, these investments are delivering tangible business value and strengthening our competitive position. Turning to Slide 6 and 7, which present the key income statement details for the first 9 months and the third quarter. Operating income rose 10% year-on-year to AED 18.31 billion in the first 9 months, led by another strong contribution from noninterest income. Beyond the headline growth, this reflects an earnings base that is becoming steadily broader and less reliant on any single source of revenue. Operating profit before impairment charge increased 11% year-on-year to AED 13.3 billion for the 9-month period and 7% to AED 4.53 billion in the third quarter, up 4% on the previous quarter. What stands out is the repeatability of this performance each quarter this year has built on the last. Sustained business growth, rising profitability, strong returns and a rigorous approach to risk, give us confidence in the resilience of our earnings trajectory and our ability to continue creating value for shareholders. Moving to Slide 8. Net interest income rose 4% year-on-year to AED 11.34 billion in the first 9 months. Strong loan growth more than offset the impact of lower interest rates, following three benchmark rate cuts between September and December 2025. In the third quarter, net interest income grew 4% quarter-on-quarter and 2% year-on-year to AED 3.87 billion. Net interest margin was 2.22% for the 9-month period and 2.16% in the third quarter, 4 basis points lower than the previous quarter. Asset yields improved during the quarter, but funding costs rose slightly faster as we increase term deposits and wholesale funding to maintain strong liquidity coffers. Importantly, as we have highlighted on previous calls, we manage the bank to a risk-adjusted NIM, which increased 11 basis points from a year earlier to 1.89% in the first 9 months and held steady at 1.87% in the third quarter, supported by a lower cost of risk and our strategic emphasis on lending to government-related entities. On Slide 9, Noninterest income increased 21% year-on-year to AED 6.96 billion in the first 9 months, continuing to play a central role in our growth. Fee income was a major contributor with net fee and commission income rising 24% to AED 3.37 billion in the first 9 months. Loan processing fees increased 39% on the back of strong lending origination and card-related [indiscernible] grew 22%. With growth spread across products and closely tied to client activity, our fee income rests on a broad and sustainable base. Net rating income for the 9 months rose 39% to AED 2.89 billion, driven mainly by gains on financial assets at fair value through P&L as well as higher foreign exchange income. Noninterest income now represents 38% of operating income, up from 35% a year earlier. This rising share reduces our sensitivity to interest rate movements and add stability to our earnings. The third quarter extended this trend with noninterest income up 19% year-on-year to AED 2.45 billion and fee income up 28%. Turning to Slide 10. Income growth again outpaced cost in the first 9 months, delivering positive jaws and a 40 basis point year-on-year improvement in the cost-to-income ratio to 27.3%. Operating expenses rose 9% year-on-year to AED 5.01 billion, as we continue to invest in our people, technology and AI and in building new business capabilities. We remain focused on delivering efficient growth, continuing to optimize our cost base while maintaining a significant level of investment in the franchise over the coming quarters to support future profitability. I will skip Slide 11, which summarizes the key balance sheet metrics and move to Slide 12. Strong credit demand across the UAE economy supported loan growth in Corporate, Retail and Private Banking. Net [indiscernible] rose by 16% in the first 9 months, including AED 24 billion of 5% in the third quarter. The third quarter was driven by domestic lending with the UAE [indiscernible] for over 90% of the quarter's loan growth, with Personal Lending increasing by AED 14 billion during the quarter, alongside further growth in lending to government-related entities. New lending reached AED 128 billion, more than double the AED 62 billion of repayments on the same period. Geographically, the UAE accounts for 71% of gross loans and international exposure for 29%, consistent with our strategy of a balanced domestic and international portfolio. As the loan book grows, it continues to become more diversified and increasingly resilient. Turning to Slide 14. The credit quality of our portfolio strengthened further, supported by sound underwriting standards and close portfolio oversight. The NPL ratio fell to a record low of 1.6% at September end from 1.7% in June. Provision coverage stood at 156% and total coverage, including collateral, at 263%. Net impairment charges were AED 1.65 billion in the first 9 months, 44% lower year-on-year. In the third quarter, the charge declined 57% year-on-year and 12% quarter-on-quarter to AED 472 million. The year-on-year reduction largely reflects elevated provisions on a small number of legacy corporate accounts in the second and third quarters of 2025. Asset quality has strengthened alongside the strong loan growth, confirming that the quality of our lending has kept pace with its scale. Cost of risk was 31 basis points in the third quarter and 36 basis points for the 9-month period, around half the 73 basis points recorded a year earlier. With that, I will hand over to Robbert, who will take you through the investment portfolio, customer deposits and the capital position.

Thank you, Deepak, and good morning to everybody on the call. Our Investment Securities portfolio remains an important source of liquidity and diversification for the bank. At September end, the portfolio stood at AED 169 billion, an increase of 6% from a year earlier and 2% year-to-date. Approximately 99% of the portfolio was invested in bonds, maintaining a high-quality and well-diversified investment profile. In terms of accounting treatment, 41% of the investment securities were carried at amortized costs, with the remaining 59% at fair value through other comprehensive income and mark-to-market on a daily basis. Turning to Slide 17. We continue to see strong momentum in customer deposit inflows, reflecting the strength of the ADCB franchise and customer relationships, the [indiscernible] increased by 12% during the first 9 months to reach AED 558 billion at September end. The third quarter was especially strong with inflows of AED 32 billion growth across every business segment. Over the past 12 months, deposits increased by AED 76 billion ahead of the AED 71 billion growth in net loans. So our lending expansion remains well funded by our customer base. Deposits account for 70% of our total liabilities. Current and savings accounts balances grew 16% year-on-year to AED 251 billion and represent 45% of total deposits, and that's broadly unchanged from a year earlier. Term deposits accounted for AED 21 billion of the quarterly inflows, which, together with our wholesale funding activities and balance sheet optimization, supported a robust liquidity position at quarter end. Reflecting this funding strength, our liquidity cover ratio increased to 216.8%, up from 109.5% in June. Other loan-to-deposit ratio remained comfortably at 84%. Turning to Slide 18. Our capital position strengthened further during the quarter. The CET1 ratio rose to 13.79% at September end from 13.66% in June and the capital adequacy ratio stood at 16.54%. Both ratios are [indiscernible] regulatory minimums, and the CET1 remains ahead of our 12% guidance. Our growth is also generating its own capital. Earnings added 192 basis points of CET1 in the first 9 months, which supported 16% loan growth while holding the ratio steady compared with December. This gives us room to keep on investing in our priorities while maintaining adequate buffers above requirements. With that, I will 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 resilience, supported by strong fundamentals and sustained domestic investment. The PMI has remained an expansionary territory throughout the year, strengthening in September as output and new orders picked up pointing to renewed momentum in non-oil economic activity. There has been some tightening in banking sector liquidity, though still comfortable as loan growth has outpaced deposit growth. The investment outlook also remains constructive. Project awards have built up well during the first 9 months with Abu Dhabi accounting for almost half of the total across the UAE. Looking to 2027, we expect a rebound in economic growth, led by both the oil and non-oil sectors. Strong government spending, the ongoing investment cycle and the recovery in externally facing sectors should support this rebound. Finally, turning to Slide 22. I would like to bring together the key messages from the first 9 months. Our performance this year has been strong on every front. Record profitability, supported by growth in both net interest income and noninterest income, positive jaws, substantial expansion in loans and deposits and a further improvement in asset quality. The sustained performance of the portfolio has allowed us to lower our cost of risk guidance to below 50 basis points, and we remain on track to deliver against our full year 2026 guidance and the targets of our 5-year strategy. With a solid capital and liquidity position, we are well placed to keep supporting our clients and the UAE's economic ambitions and we approach the final quarter of the year with confidence. We will now open the floor to questions.

Deepak, this is Rahul from Citi. Maybe I'll kick off and then we have others come in as well. So two questions from my side to begin with Deepak. The first one is on deposit competition. You mentioned earlier that clearly, there has been some elevated cost of funding and deposit competition in the market. Have you -- are you seeing any signs of easing in the fourth quarter so far of this competition easing? And how do you see this competition evolve on the deposit side and over the next a couple of quarters? So that is my first question. My second question is on the lending growth that ADCB has seen during third quarter. Just wanted to understand, were you involved in the leveraged part, the [ FCNRB deposits ], which Indian banks were doing? If so, what part of the growth or what percentage of the growth that you saw in third quarter Q-on-Q came on back of those leveraged FCNR products, which I would assume as one-off in nature and that should normalize in fourth quarter? So those are my two questions, Deepak.

Thank you, Rahul. Let me take the second part of the question on lending growth, and then Robbert will respond to the deposit competition, et cetera. So Again, as you can see, we've had a strong third quarter in terms of lending growth as well, both from the Corporate side, and on the Retail side as well. Retail has grown significantly. And yes, the FCNR product, which is well known, has been part of that. So FCNR is a seasonal product and we've leveraged on that. It's delivered an uplift to both the assets and the revenues in the third quarter, and we expect to offset any normalization through other opportunities in the pipeline for the following quarter. So yes, we did participate on that, and it has been a significant contributor to the uplift in both the assets and revenues in the third quarter. Robbert.

Sure. And on the deposit, I mean, we have been talking about the deposit competition in the past as well. Even prior to the contract, this market has been competitive. That, of course, has not changed since the start of the conflict. I mean now we have seen the excess liquidity in the system go down significantly over the last 6 months or so. And then, of course, the last quarter, it was also unclear as to what was going to happen with the resilience package that the Central Bank extended on the 30th of September. So I think going forward, I do expect this competition to be there. It may be slightly less. It's still early days, that were only 3 weeks into quarter 4. We do see some easing on pricing, but that may be also be anecdotical, I think from our perspective, we will continue to see competition for deposits and as a result, elevated prices. But also to put it a little bit into context, this is only a certain segment where there is this competition. As we have said before, there's also a large part of our funding base that we continue to roll on pre-war levels. It is not price sensitive. But there is clearly a segment, which is the more professional part of the funding market that is asking for higher returns. And that's what we continue to see so far.

Interesting. That's very clear. Operator, can you please open the floor for questions?

[Operator Instructions] Our first question comes from Naresh Bilandani with Jefferies.

It's Naresh from Jefferies. Congrats on the results. Two questions, please. One is, Deepak, thank you for confirming on the FCNR product. Would you please be able to enhance on the let of participation. I think, I'm trying to just gauge how would the normalized run rate in the loan processing fees and the non-mortgage retail product look like, had the FCNR sort of product not been around. And generally, it's fair -- would it be fair to assume that you garnered a new customer base there? Would you see any cross-sell sort of like a potential into this new customer base that you have garnered from the scheme? So just trying to understand the extend of participation so we can look at the normalized run rate, excluding the FCNR. So that's the first question. My second question is on asset quality. Would you please be able to share any thoughts on the [ FRIP 3.0 ]. Just trying to understand what that looks like, how does that compare to the FRIP that was originally announced at the start of the conflict. And what benefits, if any, have you accrued a bank from these measures that we may not see repeating into the next year. And just one side question on asset quality. There was a reversal in the general impairment reserve and equity that we are seeing in Note 19. And if I compare that to the second quarter, would you please be able to confirm what drove that? And I'm assuming this reversal, as I understand, was done directly in retained earnings and did not pass via the P&L. I'm sorry, there's a bunch of questions in here. So I'm happy to repeat any if you would have missed that.

Thank you, Naresh. And let me take the first question. So in terms of the FCNR, as I mentioned earlier, we do have a very strong customer base, existing and some new as well, who've been participating in this product. And as I mentioned, this is a seasonal product. Obviously, it won't be repeated every quarter. It has delivered a significant uplift to both the assets and the revenues in this quarter. And any such normalization, we obviously will not be repeating in quarter 4. But we -- through other opportunities that we see in the pipeline. So we expect to see that normalization come through other opportunities that we have in the pipeline. So I don't want to give you excluding FCNR numbers, et cetera, because that's not what we split out in our public disclosures. But suffice to say that we expect to compensate that. In terms of asset quality, I think you're seeing strong asset quality, both in terms of NPLs and the coverage ratio and some of the deferrals that we have done earlier, obviously, have now moved [indiscernible] the stages. So we haven't seen any significant movement there, except in probably credit cards a bit. But other than that, the asset quality of the bank remains quite robust. In terms of the last one on reversal in general, the reserve through equity. So the way this works is that the impairment reserve under equity is a function of the IFRS provisions and the CB UAE's requirement of 1.5% of credit risk-weighted assets. And the provisions for this purpose includes both IFRS provisions and certain other adjustments on assets. So anything that we take through this gets run past equity and if there's any release, it also gets released to the reserves and equity and not through the P&L. So obviously, we reassess this at every quarter, and we'll continue to do that.

So this would have gone effectively back into retained earnings, right?

Yes.

Then Deepak, what was the need for doing this shifting from one line? Ultimately, this is is -- would you be able to clarify whether this reserve forms a part of the CET1? Or is that not the case?

It does form part of that, yes. Absolutely. But this we reassess it every quarter. So it's not that we look at it only at the year-end or at the beginning of the year. So this is reassessed at every quarter.

Our next question comes from Jitendra Singh with Al Ramz Capital. Looks like we're having some issues with Jitendra's audio. We'll now move to Rahul Rajan of Bank of America.

This is Rahul Rajan from Bank of America. Congrats on a good set of results. A few questions from my side, please. Firstly is on the NIM trajectory and loan growth into the next year into 2027. I understand you don't give a guidance yet. But broadly, how would you see in terms of loan growth next year versus this year, and also on NIMs in terms of potential rate hikes and also the cost of funds pressure? Therefore, how would you see NIMs trending through next year? That's one. Secondly is from a tax rate perspective, how should we see tax rates in 2027 and beyond, should we see ADCB continue to avail the benefits from the lower tax rate? And thirdly, a smaller one. Any one-offs in terms of gains that you might have recorded in your nonfunded income in the third quarter? These are my three questions.

Thank you, Rahul. So loan growth next year, we expect the same momentum of 2026 continue. We have a good line of site of deals in the pipeline. What we see in the macroeconomic environment also supports that. So we expect to see similar double-digit growth coming in 2027 as well. On the NIM side, for the rest of the year, we expect them to be broadly stable to slight compression on NIMs, but risk-adjusted NIMs, we expect those to hold up. And next year, similarly, I think a small compression in NIMs but not significant. In terms of tax rates, 2027 and beyond, again, this depends on the exemption that a bank can claim, maximum period that's allowed for is 5 years, and you have to qualify for that each year. Clearly, the bank's intention is to continue to work towards that. But if there are any changes to that, we will signal that to the market with the year-end results. And lastly, in terms of any one-offs, there aren't any significant one-offs that have contributed to the uplift in the income. Similarly, on the cost side as well, we haven't seen it.

And Rahul, maybe on your question on rate sensitivity. As you are aware, ADCB has limited its rate -- its exposure to rate sensitivity over the last couple of years. So if rates were to go down, which is unlikely at this point in time that would have an impact of minus AED 100 million on an annualized basis, if rates were to go up, which I think is more likely, that we'll have an uplift of AED 126 million on an annualized basis, and that will equate to approximately 2 basis points of NIM uplift. And the difference between rates going up and going down. That's because the assumptions about pass-through or pass on are different for the various scenarios.

Got it. Just to follow up on the NIM aspect. So you mentioned risk-adjusted NIMs to hold up through the rest of the year, maybe small compression next year. So what is your -- the Central Bank rate assumption in these numbers?

We see one more rate hike by the Fed which we see the UAE Central Bank continuing. And that would be in December, then we see rates on hold for 2027, though we do highlight risks of one further rate hike in the first quarter of next year. But our core scenario is one more rate hike and then hold.

Our next question comes from Jitendra Singh with Al Ramz Capital.

Just a quick question maybe on -- I want to come back on the loan growth, particularly on the retail side. We noticed that in other retail loans, there's increased quite sharply from around AED 46 billion to AED 59 billion this quarter. Could you give us some color on what's driving this growth? Is it all unsecured personal loans or secured auto? Is this mainly organic? Or is there any change in the portfolio mix? That's one. And second, I just wanted to check on your trading income side. On the previous calls, you have mentioned that around 60%, 65% of trading income was repeatable. Now trading income has remained strong at nearly like AED 1 billion this quarter, in the last few quarters has been around that level. Does that 60%, 65% estimate still hold? And how much of trading income is coming from realized client activity versus unrealized fair value gains? So those are my two questions.

So I'll let Robbert respond to the trading income, but let me take your question on the lending side. Again, on the Retail Lending side, I think I've mentioned this earlier in the call. Clearly, with the increase in the asset balances and the strong lending that we've seen, loan-related fees has also moved up in concert. And a lot of that is both secured lending, which is the FCNR piece. And so yes, that's on the loans side and the fees and on trading income, like Robbert to...

Yes. So again, like we've discussed before, we continue to invest heavily in our franchise and our capabilities. And I think the 60% to 65% still holds up. And we have seen, I think, a very constant performance in this area over the last few quarters, and we expect that to continue going forward as well.

Our next question comes from JON Peace with UBS.