Abu Dhabi Islamic Bank PJSC (ADIB) Earnings Call Transcript & Summary

Good morning, good afternoon. This is Rahul Bajaj from the Citi Research team in Dubai. It is our pleasure to host Abu Dhabi Islamic Bank for their fourth quarter '23 and FY '23 earnings call this afternoon. From ADIB to represent the management team, we have Mr. Mohamed Abdelbary, the group's CFO. We also have the Group Head of Investor Relations, Communications and Marketing, Ms. Lamia Hariz; and Group Financial Controller, Mr. Ahsan Ahmed Akhtar. At this point, without further delay, I would like to pass on the call to the ADIB team for the opening remarks. Over to you, Lamia.

Thank you, Rahul. Good afternoon to everyone on the call, and thank you for joining us today. Before we started, I just wanted to remind everyone that our Investor Relations part as well as our financial disclosures are all available on our corporate website as well as the dedicated IR app. As Rahul have mentioned, I'm here joined by Mr. Mohamed, our Group CFO; and Mr. Ahsan, our Group Financial Controller. So the agenda of the day is like every quarter, we will start with the key highlights of the quarter and the full year followed by an update on our strategy and a detailed analysis of our financial performance. Then we will give some guidance for the 2024 and that will open the room for some Q&As. With that, I will now hand it over to Mohamed to start the presentation. Mohamed.

Thank you, Lamia, and good morning, and good afternoon, everyone, and thank you for joining us on today's call. We are very pleased to have reported yet another record-breaking set of results with net income for the year reaching AED 5.25 billion, which is an impressive increase of 45% year-on-year. This result was driven by strong revenue momentum, up 36% year-on-year driven by broad-based revenue growth. Return on equity in the full year of 2023 expanded by 5.7 percentage points, reaching 27.1%. Given the strong results, the bank has proposed an attractive dividend of AED 0.71 per share, and this compares to AED 0.49 per share in the year of 2022. So with that, I'll move on to the next slide, and let's talk a bit about our strategy. As you know, our strategy is informed by our purpose as a lifelong partner for customers, colleagues and community. And our vision is to be the world's most innovative Islamic bank. The strategy is built on 4 key pillars, which I will expand on each of the next few slides. So on Slide 7, we are showing the main pillars. If I start with continuous innovation. Innovation of new Sharia-compliant banking product is an area where we can differentiate our value proposition and gain a competitive advantage over our peers. Additionally, the bank has reengineering delivery of products and services and plans to launch innovative digital ventures and new business models. Finally, ADIB is building a market-leading Islamic Wealth management business and asset management proposition. Second pillar of our strategy, which is segment focused. So under that specific pillar, ADIB's strategy is building on our existing strength in the Emirati retail segment, while attracting and developing new business segments where the bank can grow profitably. In this regard, a core focus area includes the development of an ecosystem to support Emirati customers across all financial stages in airlines. Other focus areas include expanding customer proposition and product offering across SME, mid and large-sized corporate, improving cross-sell of products and service and also building our FI business. Our third pillar, digital excellence. Under digital excellence, it remains the heart of our strategy and the bank is becoming a digital first financial institution. I did aim to elevate customer convenience through its digital platform and become a data-driven organization by leveraging advanced analytics and artificial intelligence. At the same time, we're building a modern technology stack and new digital tools and capabilities for staff to enable seamless digital processing and frontline delivery. Last but not least, sustainable future. So ADIB is embedding sustainability and ESG into our existing Islamic banking DNA. Here, we are also focusing heavily on optimizing, growing and developing our human capital, reinforcing the risk and compliance culture and optimizing our Digital Technology Foundation. Also under continuous innovation, Amwali is one of our key pillars. And the next over 10,700 new Amwali accounts have been opened in the year of 2023. Okay. So also, I'm going to call out a few of our financial performance highlights if we can move to that Lamia. As mentioned in my opening remarks, we are excited to see continuation of strong growth momentum by delivering 45% growth of net income and a record breaking AED 5.25 billion of net profits. Revenue growth was strong at 36% year-on-year and 7% quarter-on-quarter. The strong growth was backed by funded revenue of growth of 47% as well as I think one of the more important KPIs here is also a return on equity of 27.1%, which reemphasize again, our ability to originate capital-accretive business. One of the, I think, very important KPIs to call out is our cost-to-income ratio at 32.9%. If you just go back a couple of years, you would have seen that number in the high 40s range. Moving forward on Slide 11. We are very pleased with the quality of the profits that we are delivering. As you can see on the top right chart, the key drivers of profit growth were 47% funded income and 18% increase in non-funded income. This was partially offset by growth in expenses and where we're seeing 670% -- AED 675 million growth and AED 160 million growth in Zakat as well. From a segmental perspective, retail and wholesale business and all other business contributed quite nicely to that growth. Moving forward on the funded income side. As mentioned, funded income has grown 47% year-on-year. In terms of performance by segment, funded income improved across the board, aided by margin expansion from higher benchmark rates. The consolidation of ADIB-Egypt also positively impacted funded income and it's reflected in demand, which we call associates and subs. In terms of net profit margin, and I believe that's probably also a question which will come up just to call out our sensitivity, latest calculation point to the fact that a 50 basis points still give us a sensitivity up and down of AED 120 million impact on our net profit. Moving forward to Slide 13, nonfunded income. Nonfunded income has grown 18% year-on-year. If we just look at the waterfall to the top right, we can see that a big component in the growth and nonfunded income has been on fees and FX, which is very much talking to our strategy where we are more and more focusing on generating higher gross and nonfunded income, which will allow us to continue growing without putting undue pressure on our capital position as well as maintaining the high return on equity, which we have been reporting. Moving forward on the costs, again, I think this is really a cost story, which we need to celebrate we are having very, very sustainably to, I would say, market level cost to income ratios. And the positive point, which I need to call out is that we are benefiting from top line growth, which has given us some of that lift. But under no circumstances, we have stopped investing in our systems and people, and that's why you see that both employee cost as well as the costs have grown. That is a strategic direction for the bank to invest in our capabilities and to be able to support future growth as well. Okay. On the impairments. Again, if you look at year-on-year, we have kept impairments relatively flat. The story is that on the UAE specifically, we have seen a slight reduction and that is in line with the improvement and what we see in the external environment, but also our ability to have pushing over the years, some of the exposures we have, which was offset by some increases we have seen in our Egypt franchise, but we have kept our impairment levels flat year-on-year. And hence, our cost of risk has normalized to around the 49 basis point level, which is very much in line with the guidance we have also provided at the beginning of the year. Okay. Yes. Sorry, one more. Yes. Yes. This is a very important slide. And it is, again, talking to what we have been signaling to the market over the last, I would say, 12 to 18 months. Our focus on enhancing our nonperforming asset ratio has continued. We are reaching a 6.1% level from a high of 7.7% last year. How would does it come about? It comes from 2 things. Number one, we are controlling the flow into our stage 3 position. So very strict underwriting standards proactive measures to control any flow from stage 2 to stage 3, and at the same time, focusing on our legacy nonperforming exposure, which has been coming off over the quarter. And hence, we see that improvement and we are looking forward to further improvement in 2024 as well. At the same time, as we are also proactively writing off legacy exposure we were able to protect our provision coverage ratio, which has shown improvement to 74% without collateral in the last quarter of the year, but also including collateral has moved up to 139%. So all KPIs is really moving in the right direction. From an asset perspective, we have seen a growth year-on-year of 14%, in line with the growth in deposits as well is 14%. The customer financing has grown 7% on average and that is above market norms. Latest numbers we've seen, I think, we're turning towards 5%. So it means that we have been able to take market share. And then the other increase you see there in cash and balance is predominantly effect of the change in the reserve requirement, which moved up from 7% to 11% this year as well. From a financing perspective, you would see that we are normalizing this to give the market a true picture of the underlying growth. So while headline shows 6%, underlying is showing 8%. And the reason is that our Egypt franchise has grown financing from a local currency perspective. But given the devaluation, it has taken away AED 2 billion or so in dirham terms. So underlying growth of 8%, headline growth of 6%, again beating market consensus. If I just take a closer look at our retail book in specific, we are very happy to report that our 3 flagship products with its home finance, personal finance or auto finance, have equally grown around the AED 2 billion or AED 2.5 billion, and that is a strategically important element to allow our customers to have a complete value proposition when the bank was ADIB and offering them all kinds of products, which suits their needs, whether it's auto, personal or home finance. This is our investment, also book portfolio in line with our strategic direction as well. We have grown the book from AED 19.4 billion to AED 25 billion. And that is driven by our aim to, first of all, explore opportunities, but also the investment book provides the bank with a natural hedge in an environment where we are expect it to reduce. And hence, building that book at a very timely manner by our treasury team has allowed us to create that natural hedge for longer even if rates are starting to come off. From a deposit perspective, healthy growth of 14%. The majority of growth has been contributed by our 2 flagship segment, which is in the retail, AED 10 billion as well as wholesale bank, [indiscernible] billion. If one would look at which products they have contributed, you would see that around AED 9 billion has come from CASA accounts and AED 7 billion from [indiscernible]. Now it is a quite, I would say, a success story to be called out that in such higher environment, you are still growing your CASA book by AED 8.7 billion, which is predominantly coming from the retail book, and hence, the contribution of the total deposits coming from very efficiently priced deposits is now 65%. And I would like to believe that's probably one of the highest, if not the highest in the month. Last, but not least, our capital position. So we are reporting a CET1 of 12.2% and a total CAR of 16.8%. And this is after factoring in the proposed dividend of AED 0.71 per share allowing us still enough room to create growth for the business in 2024 [indiscernible]. On the last slide, we will talk about is our guidance. What are we saying? So this year, we've driven headline financing by 6%. We are maintaining a view early in the year between 5% to 7%. We will continue reviewing that as we go through the year. But I can -- if I just look at the last -- the first 24 days in the year. It's a very promising pickup and driven by the strong close of Q4, giving us tailwind into 2024 as well. Net profit margin, we are maintaining at 4.5% in anticipation of some of the rate cuts we are expecting. So we're not expecting that number to go down but actually to remain flat. If a rate reduction are being prolonged or decision is taken later in the year, we'll probably be able to adjust that number upwards. Cost of this normalizing at today's level. So we closed at 49 basis points. Probably in 2024, we're looking at anywhere between 50 to 70 basis points. Our view is that probably going to be at the lower range -- lower point of that range. Our cost-to-income ratio at 32.9%. At this stage, we are signaling that this number will continue to improve. And hence, we're saying that below 32% is going to be probably the exit point for us. At return of equity at 27.1%, we are saying that number would probably be maintained. So we're saying above 25% for the year.

Thank you, Mohamed. We've concluded the presentation. And now we are -- we will open the floor for some questions.

[Operator Instructions] We've got several questions coming through. The first one is from Shabbir Malik.

All right. Can you hear me?

Yes, we can hear you. Please go ahead, yes.

This is Shabbir. Just a couple of questions from my side. So I just wanted to talk about the NIM expectation that you provided. How many rate cuts are you assuming in this guidance? And have you considered any scope for competitive pressures or changes in balance sheet mix to shape this NIM outlook? So that's my first question. My second question is regarding your fee income, which seems to be pretty strong in the fourth quarter. Were there any nonrecurring items -- elements in the fee income this quarter that you can highlight? And maybe a third question on expenses, which look pretty strong. If you can break down the drivers of that? And what's the best way of looking at expenses going into 2024. Is it going to be more or less in line with inflation? Or is there's a growth element in there as well? So maybe if you can talk about these 3 points.

Happy to, Shabbir and thanks for the question. So I'll start with the first, the net profit margin outlook. So we are expecting 4.5% average. And what we are factoring in is that I wouldn't say the number of cuts, but just let me know where probably the rates will end up. So we're thinking maybe anywhere between 75 basis points to 1% could be the total impact of rate cuts in 2024. The timing in our view will probably be starting from half one onwards. That is the assumption we have. Now if that changes earlier or later, I think the impact will not be that material given the structure of our balance sheet and I'll talk about it now in a second, is that if one would look at our financing book of around AED 115 billion, our retail book is predominantly towards fixed pricing, right? So it gives you that natural hedge for longer and will not be impacted immediately. The new vintages will be priced maybe at a lower rate, but again, sensitivity will not be that high. We have the Sukuk book, which is also long term, which gives you that ammunition or that air cover as well. It's only the retail -- the wholesale bank book, which will price at a 3-month intervals, but it will take some time. You need it to be fed. Now the good thing on the funding side now is that our wakala deposits, we will have the ability to mitigate some of the maybe possible impact on the financing side. And hence, we will protect our corridor and be able to protect the profit margin as given the guidance for 4.5%. The second point question you had on fee income. There were some spikes in fee. I wouldn't say there were one-offs in my view, they are maybe seasonal, but not one-off and they're predominantly in the wealth management space. And the campaigns we have been running over the last few quarters are clearly paying off. And I think they're probably one of the best campaigns where we are mainly talented to our retail clients of moving their banking relationship to ADIB. They have an opportunity to get back anywhere between 50% to 100% of their salary back. And hence, our cost sale opportunity has really picked up in the last few quarters and given us a lot of fee uplift in that quarter as well. Our expense outlook, the last quarter is a quarter, which I think was on the higher side because a lot of catch-ups we have been doing in line with the high profitability, whether it's on some of our maybe incentive bonus accruals, it's linked to profitability, which has seen in quarter 4 as well as some of the digital delivery of products had happened in quarter 4 as well, which reflects in the form of depreciation and some of the AMCs or software costs. Guidance for this year in terms of cost, I would probably back to an inflation guidance, but nothing out of the usual because whatever we have kind of wanted to do in terms of investment has not happened. We will continue at the same pace but it will not create any huge increase towards what you've seen in '23. So probably inflationary adjustment would be a prudent way to look at it.

The next question comes from Chiro.

Chiro here, can you hear me?

Yes, we can hear you, please go ahead.

Yes. Yes. Perfect. So the first one is related to asset quality. So it's quite evident that the asset quality continues to improve but NPL coverage, the pure cash fund, the noncollateral part of it seems to have stagnated. So what -- how should we see it? I mean what should be your strategy going forward related to that? And what would be your comfort level? I mean, at what level would you like to see this number going forward? That is my first question. Second one is little continuation on the margin side, which you just answered, is as things looks, I mean -- are you being a little conservative with your NIM guidance where you begin it to remain flattish because your retail book most likely will not -- which is a big chunk of your loan book will not get repriced and it is at a much higher rate and your Wakala deposit also you can reprice it. So I just wanted to get a sense that are you being a little conservative with your margin guidance? And the third one is quickly on the -- so what is the tax rate which we should assume for 2024 onwards considering there is a zakat component as well as the corporate -- yes, these are my 3 questions.

Sure. Happy to answer the question. Please let me know if I miss any of your points. So on the provision coverage. So the 74% is actually an improvement of what you see in the past few quarters. And you are right, some of the legacy exposures, you lose some of that capital as well, right? So if you don't do anything, your coverage will go down with that off, but in fact, has grown, which reflects that we actually prudently building some of these provisions as well. What is our comfort level. We are quite comfortable with that level. It will continue to improve, but it's important for us to continue looking at the coverage including collateral as well, which has really improved quarter-on-quarter and we do the assessment quite frequently to ensure that with a 50% haircut on the collateral value, we still have a good cushion at the 139%. So that's on the coverage. And on the net profit margins, when you say conservative, you expected the 4.5% to be higher or lower?

Yes. Maybe on the -- slightly on the higher side, I mean -- would you think that it might be a little higher? Because I remember last quarter -- in the last part, you were saying that there are loans which have been disbursed at a much lower rate and which might -- will be lend right now at a slightly higher rate on that context.

I understand. No, I think could they be slightly higher. Not unreasonable to think about it, but the point which we need to consider is that you are at a cycle where your gross financing cost to your clients is quite high, right? So why you could protect it for longer, you have to take into consideration market dynamics and competitive pressure in terms of ensuring that not all the increase continues to be passed on to your clients for too long. Hence, we are saying that we are happy at the level we are now and we will not be looking at increase it any further. That's why the 4.5% at this stage seems to be quite feasible part as well. Yes. Your last -- Yes. You had a third question was the...

Yes, it was the zakat and corporate tax, yes.

We think that the attractive rate at this stage will be probably around 11%. As we go into Q1 and announce our numbers, we'll obviously give you a much more accurate dynamic because this is the first quarter we will report on corporate tax. But for now, I would fact, 11% effective tax rate.

Just one quick follow-up on the first answer, which you gave. So as a collateral value goes up or say, maybe real estate prices remain high, you would be a lot more comfortable with the 74% NPL coverage. Am I right in my understanding?

That's absolutely correct. And I also -- just to reemphasize, we don't take the collateral evaluation at face value. We actually take a haircut on it as well, right? So it's not -- because we understand there are time to sell, there's the stress sell. So the overseas can go up to a 50% haircut on the value of taking on the collateral, which is predominantly real estate.

Our next question comes from Waleed.

Thank you very much for the presentation and congratulations on a strong set of results. So 3 questions, please, from my side. First, I just wanted to quickly confirm that the guidance that you provided for ROE for 2024, which is above 25%. The step down is mainly on account of the tax, right, which you're incorporating, which is 11%. So that's the delta between the 2 years? So that's the first question. Second, I wanted to ask you about the retail book. I think in your answer to Shabbir, you were talking about the difference between the back book and the front book. I just wanted to get a sense of where your back book -- retail back book is priced at this moment? I understand rates obviously going down will impact the pricing of new origination. But I was just thinking that if your average duration of retail loans is, call it, 2 to 3 years, then something which was written at the end of 2021, was written off an interest rate, which is even below where the market expects rates to settle medium term. So if you could just provide a little bit of clarity on the back book versus the front book pricing, that will be very helpful. And my third question is on your asset quality. I wanted to get a sense of how much of the back book has been worked through by now. Any major legacy accounts, which could come as a positive surprise. We saw it with one of the peer banks in their earnings earlier this week. So your thoughts on that will be helpful. And linked to this, how are you managing Egypt risk at this moment? I mean, given that in the parallel market, the Egyptian pound rate is significantly lower than where the official rate is. So how are you going about managing Egypt risk in your book?

Sure. Thank you for the question. So I will take them one by one. The question on ROE going to 25%. Yes, clearly, an element of it would be tax. But because we're saying 25% and above, we are taking into consideration not only the tax impact, but you're also creating -- enhancing your capital position. So naturally, as your capital goes up, your effective return might go down as well. I wouldn't be surprised if we get closer to the number we have this year. But for now, we are signaling a 25% and above in terms of ROE, which is put us really comfortable level and mainly driven by our ability to create, as I mentioned, the fee component and the Capital Life business and even in your financing book, having your corporate book tilted towards GRE and public sector gives you lot of capital relief and in your retail book tilted towards home finance also gives you a huge capital rate as well. So ROE, very happy with that, and it's one of our most important KPIs we look at. In terms of your -- our retail book, I think you called it quite rightly, is that we are at a cycle where the financing originated at the lower point of the curve now not on our books anymore, right? So we are benefiting from that. And hence, when I mentioned that as rates go down, some of your fixed price financing elements are giving you that natural hedge for maybe another -- maybe -- and that book specific another 2, 2.5 years, at least. Now we need to look at the mix because you have also financing, which have been priced more frequently. But that specific book is giving you a good hedge. To answer your question, yes, most of the lower price vantages are now off our book now. In terms of the third question on Egypt. Our Egypt franchise obviously is going so not Egypt as a franchise, but Egypt as a country has its change in terms of the FX availability and hence, the -- there's an official rate and there's probably another rate, which is being dealt with. We are obviously doing a lot of stress testing to ensure that the impact on the UAE franchise is mitigated. But it's important to put into context is that of our AED 193 billion balance sheet, our Egypt franchise is probably AED 15 billion also in terms of dirham terms. So it is -- constitutes a fairly small 7% to 7.5% of our total assets. So any shock even in rates, we will be able to absorb whether it's from a capital position as well as from a balance sheet or P&L perspective.

Just a few -- a couple of follow-ups, please. So on capital, you talked about the capital buildup and obviously, some of the benefit you get from secured lending on the retail side and government lending. So what levels of capital are you comfortable with? It seems that you would like to build up capital little bit if I got that correctly. So any comments on that would be helpful. And regarding your first point about ROE could well be close to what you've delivered in 2023, that number that you're talking about, that's a pretax ROE being close to 2023 number, right, not on a post-tax basis?

That's correct. So let me take your second point first, you are correct, but you also expecting growth and profitability as well, right? So that will definitely help us. So we cannot give you too much forward-looking view on that, but we are cautiously optimistic that our profitability will continue to grow as well and your ability to grow profitability much faster than you're putting on RWA will eventually relieve capital pressure, but also give you a return and hopefully cover some of the tax impact as well. The first point you had, I think, was on the Egypt point, right?

No, the ROE, as you said, so ROE, I was saying and then the other one was the capital, where would you like your capital to sit? Like are you comfortable with current levels? Or would you like to build up?

So I think at the levels where we are today is a comfortable level to be in. And if there is clearly any difference, we will signal to the market. But CET1 and total CAR at these levels historically and today have been very comfortable levels.

Got it. And then there was one question left on the asset quality back book. Is there anything on the legacy side, which is spending, which could be a positive surprise this year?

I guess the short answer is yes, there are a few names which we will give us, hopefully, some positive news in which we will signal to the market as and when they happen. But yes, there will be some persons there.

But that's not factored into guidance of 50 to 70 bps?

It will be factored. It will be mainly reflective of our NPA ratio more than a direct P&L impact.

Our next question comes from Jagadishwar.

Can you hear me?

Yes, we can hear you. Please go ahead.

Yes. Congratulations on good set of numbers. I see your CASA deposits are going up and up every quarter and compared to some of the other banks. What is contributing to this? Who are the end customers that's helping you improve CASA ratios? That's one thing. And second thing is on this retail loan book being priced. All of your retail loan book priced, repriced to the latest interest rates or you have any certain percentage of the loan book is not still priced into the higher interest rates. Can you help me understand that? These are the 2 questions from my end.

Sure. So the CASA growth is a factor of 2 things. One is the type of clients we have and the product offering as well. So we are in a position whereby we are receiving a lot of new clients into the bank, which are salary back, which are usually also government operations, which are you [indiscernible]. So this combination is the outcome of what you see there, coupled with very targeted campaigns to ensure that we are able to build CASA balances, but also benefit the clients. It is a 2-way arrangement where the client sees the value of moving his relationship to ADIB, opening a long-term relationship with ADIB and the added value they will get not only from keeping CASA with us, but also from the fact that they will be able to benefit in other products and services as well. And not to mention that some of the CASA, I did mention that it's predominantly retail, but there's also an element of some of the escrow accounts from our corporate relationships, particularly on the commercial real estate, which we have been able to onboard in 2023 as well. So that really has helped us on that front as well. That was on the CASA. Your second question, yes?

So what percentage of your loan book is not repriced yet or is it fully repriced to the higher interest rates?

Yes. So if I just split them into buckets, our wholesale bank book is on 3.3% so that's taking care of immediately without any intervention. And our retail book, our personal finance book is usually advantage of, I would say, the ADIB entire book, right, the park home finance for a second, it's going to be on a 2, 2.5 years repricing tenure as well. The home finance book, while it is longer term, it's behavior like is usually shorter, you can take it from maybe 5 to 6 years. And hence, majority of the book would have been repriced at that level. In addition, that we also always embedded floor in our financing structure, whereby it never drops below certain levels. So we are now at the inflection point where the majority of the book is really enjoying from a better rate environment.

Our next question comes from Aaron.

One second, Paul. There is also Naresh from JP. He's not able to raise his hand, if you can? For some reason, it's not worthy. So the next one, let it be Naresh, okay.

Can you hear me?

Yes, we can hear you. Please go ahead.

Okay. Excellent. I appreciate the opportunity to ask question. A bunch of questions, please, from my side. One is, would you please be able to throw some color on the sensitivity that you provided for the net interest margin. If you can please just throw some light on how should we think of such a sensitivity if we exclude Egypt from a franchise? So I'm kind of trying to understand how the core UAE book works in a declining interest rate environment? That's the first question. My second question is, if I go to your strategy slide, I think in one of the points that you mentioned, you mentioned establishing FI as a future growth engine. If you can please throw some further light on that on what you effectively intend to do while at this point, that would be great. My third question is -- if I assume [indiscernible] and Egypt in the Egyptian pound versus FX over the course of '24. Would you please be able to throw some light on how does that affect your capital at this stage? And my fourth and final question is, I know you're still not reporting the core Basel III liquidity ratios on LCR and NSFR. If you have done some excise on that and if you can please confirm where do you stand on LCR and NSFR? That will be super useful.

Sure. Thank you, Naresh. So I'll start with the first point, so sensitivity and net profit margin. What we are saying is that, again, the 50 basis points is approximately AED 120 million sensitivity on our net profits. Egypt, just to give you some context, actually, Egypt has been a positive contribution to our net profit margin because of the high financing yields in Egypt versus the funding cost. So the funding cost is also high, but the code has been widening in Egypt much faster than in the UAE and it's been positive. But in the bigger context of it, Egypt being only 7% to 7.5% of our balance sheet, the movement on that specific front is not very high. The second point on FI being called out as a strategic initiative. What we meant by that is that our FI proposition has been very successful in the markets, which we are operating and part of our expansion is to explore more markets where we could add value in terms of our FI relationship and ADIB's establishment in the UAE. Our devaluation on capital, again, linking back to the Egypt point is that given that Egypt its size relative to the group, it's not very big. It's not going to be material, but we did disclose in our financial statements that we were impacted by approximately AED 200 million plus/minus in our capital CET1 in 2023 from the age of devaluation. Now if there is a further devaluation to be happening and if you think about it, in 2023 on its own, there was quite a severe movement in rates from where we started until where we ended, and that was a AED 200 million. Assuming a replication of that will happen, then you could probably factor another AED 200 million and the sensitivity on our CET1 is probably anywhere between 17 to 18 basis points on CET1 from that impact. And as Ahsan is calling out that also on the flip side, as devaluation happens, your risk-weighted assets from Egypt will also go down, giving you some cushion in terms of your capitalization. The last point on -- we do not disclose these numbers. And also the Central Bank is not reviewing them. But for your benefit, our LCR today is at 250%, and our NSFR is currently at around 107%. And these are not numbers that Central Bank have used for ADIB by now, but these are numbers, which we take internally.

Excellent. That was very clear. Just one very quick follow-up. When you talk about the FIs, could you please just give a flavor of what the counterparties are in this business?

So the FI is looking predominantly at the African market, North Africa, also some of the Asian markets, which fall in our risk appetite. We have -- in some of the markets, we already have some sort of relationship, but we're looking at extending that relationship given the success over the past few years.

Our next question comes from Aaron.

Congrats on the good set of numbers. Could we talk a little bit about the net interest margin near-term trends, please? So I think on the slide, you show the 9-month number and the full year number. Could you talk a little bit about the sequential change, please, from Q3 to Q4, net interest margin, maybe break that down into the yields and cost of funds? And then talking about the first 1 or 2 quarters of this year, if you were to see, say, stable interest rate environment, would you expect your NIMs to increase over the next 1 or 2 quarters in that scenario?

Yes. Sure. Thank you. Lamia I think you have it on the screen there. Okay. So what are the dynamics of how we see net profit margins evolving for ADIB. Now if you look at the full year numbers, where our funding for is at 2.09% and our gross yield at 6.78%, giving us 4.5%. Just to put things into context, the UAE on its own is probably funding cost closer to 1.4%, right. And rest is coming from our international businesses. To address your question, where we see the near-term net profit margin movement and hence, the full year 4.5%, I would believe -- I would like to believe that in Q1 and to some extent, Q2, this number will improve because your exit point of Q4 of '23 has been on the higher side because the 4.5% is the average of the year but you had a -- and the quarter 4 is kind of your peak point. This peak point will continue because you're resetting the clock now into '24, that becomes your entry point. So you would probably see a higher net profit margin in Q1 and Q2 before it tapers off in the second half of 2024 and hence, the average for the year will go back to 4.5%.

That's very helpful. Are you able to share what the exit rate was for 2023?

Yes, as I said it was coming out, it's around [ 455 to 457 ].

That's great. And I think similarly on your slide for cost of risk, you have a full year number, but not a Q4 number. Is that something you could also share, please?

Yes. So the cost of this level, we can put the -- yes.

Yes, yes.

So yes, the cost of risk on average has been 49 basis points at the group level. The reason why it has also gone up and then going down again is that we did have some curing of one of -- some of our legacy exposures, which is also then reflected in reduction of our NPAs to 6.1% from quarter 3, which was at the higher level. And hence, we believe that our normalized level will be slightly. So we ended the year slightly lower because, again, the 49 basis points is the full year average. So we will enter the year slightly lower. But as we aim to enhance our coverage ratios during the year and as we start seeing maybe some of the growth in some of the sectors particularly in corporate, which are not [indiscernible] mid market, that will go up, but the average will probably still be around the 50 basis points with the top end of 70 basis points. But I think the range will be closer to the 50 basis points.

That's great. And I think you made a comment in response to a previous question about RWA density. Are there any changes we should expect there this year?

We think that the RWA density will probably be at the levels where we are today. And the reason we are saying that even as we go maybe in corporate side to more to -- I would say, I wouldn't say this here, but more towards the large corp or mid corp in the ecosystem of the [indiscernible], which we are operating in. The -- some the growth we expect on the retail side will be on the own finance side given the pickup in the property market. And usually, the RWA density in home finance is effective. [indiscernible] percent of the financing is only RWA consumed. Hence, we believe that this ratio will be maintained.

Our next question comes from Musa.

Hello, can you hear me?

Yes. We can hear you, please go ahead.

Okay. Just one question. Is there any guidance on the payout ratio going forward?

As dividends you mean -- we don't actually give forward-looking -- yes. But usually, what I always said to the market is that ADIB has been very, very consistent in this dividend policy. So we don't give forward-looking statements. But I think if you look at the past few years, you will see the consistency in the way we are treating what we consider as the need for creating internal equity for future growth versus what we would like to also give back to our shareholders in terms of cash. And this year, just -- again, a reminder, we did recommend a dividend payout ratio in terms of percentage of net profit of around 49.4% on average, which translate into AED 0.71 per share.

The next question comes from Fredrik.

So I just have a quick question around your fee and commission income. When I look at your disclosure per segment, what it looks like that really drove the sequential increase this quarter was income from cards. So the number that you have reported was AED 343 million, if I'm doing the math correctly here, which basically compares to the 9 months of '23, accumulated value of AED 360 million. And we saw some quite similar to that also happening in the fourth quarter of '22. So last year, we actually reported AED 325 million above the 9 months '22 level of AED 235 million. So if you could give me just some additional color here as to why this is happening and if it's something that we could expect going forward to always happen in the fourth quarter?

Yes, sure. So I think when you look at the nonfunded income and particularly the waterfall we have there, it is important that you probably will have to do take into consolidation last year's Egypt consolidation because when we did the consolidation last year for Egypt, there was an element of recycling some of the FX losses into our P&L and then taking on some of the fee income. So you would see the investment income was negative and FX positive. The delta between last year and this year is nothing but the impact of the Egypt consolidation from recycling the FX, which was on the balance sheet last year and had to be put in the P&L upon consolidation. But normalizing for that, you would see that in FX income in fees and commissions on investment income, all of them have grown in double digits and have contributed to that growth.

Okay. But looking at cards income specifically, do you have a sense of what would have driven such a large pickup? I mean it's equivalent to the 9 months of '23 value. So I was just trying to understand what could have happened there?

Yes. In ADIB, we are probably one of the highest spend numbers in terms of cards, whether it's debit or credit card. So these are, I think, the numbers which are published maybe also by the issuers -- but particularly this year, we've continued to increase our acquisition strategy. Our cards are considered to be flagship cards in the market and hence, that increase is reflective of the higher volumes and the higher cards. I should just give you some context in terms of number of cards issued in 2023 versus 2022, we've grown that volume by almost 40%.

And our final question comes from Ankit.

Yes. Thank you for the opportunity. This is Ankit from HSBC. I have just 2 questions. First is on capital ratios. So I wanted to confirm if the consolidation of ADIB Egypt has been like fully completed in 2023 with respect to the risk-weighted assets? I think last year, you mentioned that you're doing a phased consolidation of Egypt RWA. So I just wanted a clarification on that. And secondly, on loan growth, are there any plans to tap markets like Saudi to accelerate the loan growth? Like we have seen few banks like tapping Saudi? So just wanted to understand your strategy here.

So thanks so much for the question. So on your first question, yes, Egypt now is fully consolidated into UAE books from all aspects, including its fully loaded RWA. So the capital issues you see here is a fully loaded number with Egypt. Nothing left in terms of phase consolidation. The second point, again, the answer is yes. Saudi is a very, very important market to us. We already have a very calculated, healthy exposure to the Saudi market within our risk appetite. And I don't see that trend changing any way. It is an important market for us. It links very nicely to the UAE and to our clients to create that code between UAE and Saudi and we are very committed to continue investing and growing in the Saudi market as well.

And that concludes the questions in the queue. I'll now hand back to Rahul.

Actually Rahul from Citi. I have a couple of questions because we have a couple of minutes. Maybe I can take this opportunity. So a quick one on the legacy exposures. You've heard from banks like yourself that being an Islamic bank, it's difficult to write off loans and legacy assets were being kind of held on the book for a very long time. Just wanted to understand what has changed that ADIB is able to now remove those legacy exposures from the book? And related to this, if you could please comment on NMC, where do we stand on NMC now? And is it anyway part of NPL now or it is completely out of NPL? That would be very useful.

Thanks for a very good question. So difficult but not impossible, right? So we are able to write off, but all the reductions you see here are because you are curing these legacy exposure. So not by way of write off but because of settlements and restructuring and final closure with some of these clients, whether it's in core or outside core. So that's the main reduction you are seeing here. In terms of NMC, yes, NMC is now completely out of our NPA book. It's been taken to Phase 2 as part of their plan for NMC. And you will not see any exposure in the NMC book as well, whether it's from a provision perspective or from a gross NPA perspective.

Thank you, everyone. So if you have any follow-up questions, you can always e-mail us or call us, and thank you and hopefully we would see you in the next quarter. Thank you very much.

Thank you.