Arab Banking Corporation (B.S.C.) (ABC) Q2 FY2025 Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and a warm welcome to our valued investors. Thank you for joining Bank ABC's H1 Earnings Investors Call. Unfortunately, our Group CEO, Mr. Fayez Al Waary, is unable to join us today due to unforeseen circumstances. Our group CFO, Mr. Brendon Hopkins, will be leading the session. Mr. Hopkins will take us through today's presentation and provide us with key insights on our -- into our strategic progress and our financial performance for the first half of this year. Following the presentation, I'll be moderating the Q&A session, and you are, as always, very much welcome to submit your questions via the questions feature. We will do our best to answer as many as possible, including those submitted ahead of the call. Before we begin, let us take a moment to watch a short video highlighting Bank ABC's strategic achievements and performance milestones in 2025 till date. [Presentation]

Over to you, Brendon.

Thank you, Fatema. Good afternoon, and thank you for joining Bank ABC's investors call. Our presentation today will focus on the first half 2025 financial results, our strategy, sustainability and the many industry awards won during the period. And as Fatema mentioned, we'll conclude with a Q&A session to address your questions. Let me begin with a summary of the group's financial highlights. Our revenues reached $672 million, with good underlying growth in our core businesses. On an underlying basis, adjusting for constant foreign currency, this represents a 6% growth year-on-year. Net profit reached $152 million, a headline 1% and an underlying 9% increase year-on-year, and this is on the back of good revenue growth, cost discipline and well-controlled ECL. While our total assets reached $48 billion, our balance sheet remains strong. All capital and liquidity metrics are well above our regulatory requirements, enabling us to sustain our growth momentum. And this performance translates into an annualized ROE of 7.3%. So we're well placed to deliver another strong year of performance and I'll expand on these excellent results later in the presentation. Turning to our strategy. We continue to progress well on our execution plans. These reinforce our position as MENA's International Bank of the Future, delivering value creation and higher returns for our shareholders. As I'm sure you're aware by now, our strategy is underpinned by three key pillars: accelerating our core businesses, maximizing the value of our digital units and strengthening our operating model. On Pillar 1, acceleration in our core businesses, we made excellent progress. Wholesale Banking and Treasury maintained strong performance, despite the market uncertainties. Islamic Finance maintained a robust activity and in collaboration with Group Capital Markets led a record number of transactions totaling around $6.5 billion. WB also launched a new portfolio management function, which will optimize returns on the credit and lending activities using origination, distribution and other structuring techniques. In Retail Banking, we witnessed resilient growth in our MENA markets and had a fantastic launch of our mobile banking app in Egypt, which gained excellent coverage across all media channels. Bank ABC Brazil app also continues to deliver strong underlying growth, contributing to the group's bottom line and progressing their strategy of middle market corporate banking within Brazil. On Pillar 2, our two digital units that are creating long-term shareholder value in ila AFS also had a great first half. Within ila, we continued the process of carving out ila into separate independent bank, which will create future accelerated growth and different financing options. The standout milestone was the historic partnership with the national carrier of Bahrain Gulf Air to launch the ila Gulf Air co-branded credit card. And AFS continued with its accelerated growth of payments revenue, another key achievement being the successful rollout of its merchant acquiring business in the UAE after securing its license earlier this year. On Pillar 3, we had many new activities to strengthen the group's operating model. We further embedded sustainability strategy, and I'll expand on this more shortly. We've established a data management function, which will strengthen our effective use of AI and data analytics. On innovation, we revamped our AI system, “Fatema”, which will drive staff efficiency and productivity. And we've also progressed the group's new IT and digital operating model, which will enhance our IT resources. Also to empower our people, we've launched several learning and development programs such as the mentorship program, some new training courses, programs for graduate training and post-graduate studies. But all of this is underpinning Bank ABC's strong emphasis on innovation and staff engagement, which we believe are key to our Bank of the Future vision. Turning to sustainability. We made considerable progress on our strategy and execution plans. We launched a 3-year environmental reduction plan and are progressing on embedding ESG risk in the credit approval process. New group ESG standards have been developed, and more resources have been hired across the group. We also focus on measuring our Scope 3 finance emissions and continue with training programs for client-facing teams as well as implementing actions to improve KPIs on our DEI, diversity, equity inclusion. And on ESG disclosures, we will shortly be issuing our second annual group sustainability disclosures report, so watch this space. Turning now to industry awards. Bank ABC continues to enhance its brand and reputation as an industry leader. And so far, 2025 has brought exceptional recognition with over 20 excellent awards. In a major milestone, Bank ABC was named MENA Cash Management Bank of the Year by MEED. This underscores the strength of our new cash management platform, which is redefining our wholesale bank clients experience. Our growing leadership in sustainable finance and digital innovation earned us the Best Bank for Sustainable Finance and the Best Digital Bank in Bahrain from Euromoney. We were awarded 6 titles by Global Finance and Treasury and Cash Management; a Best Cross-Border Payment Solution in the Middle East as well as in Africa; a Best Bank for Long-term Liquidity in Africa and Best Bank for Cash Management in Bahrain and Tunisia. Moving on to our Islamic finance capabilities. Bank ABC Islamic won the Best Sukuk House in Bahrain at the Euromoney Islamic finance awards, and this continues to demonstrate ABC Islamic's innovation in career compliance solutions, such as Sukuk's and ESG structures. And finally, on awards, it goes without saying that our digital mobile-only bank, ila, continued to make its mark in the region and beyond. ila was named MENA Retail Bank of the Year by MEED and also awarded the Best Digital Bank for Consumers by Euromoney and these esteemed awards continue to reflect ila's remarkable evolution. In a few short years, ila has gone from a start-up digital disruptor to now being a leading retail mobile bank, which is recognized in Bahrain and across the region. Overall, this remarkable industry recognition continues to enhance our position as MENA's leading international bank of the future. So that concludes the view on our strategy, sustainability and awards. Just to give you some more now a bit more detail on the financial results. Our performance has been resilient with good underlying growth for the first half. The total operating income at $672 million, as on -- on a headline basis is around the same level as the first half last year. But on a constant currency basis, which factors in some depreciation of the Brazilian real and the Egyptian pound in particular, the underlying income would have been 6% higher. So we are continuing to see good broad-based underlying growth in our businesses on a local currency basis across our core markets. Our focus on our balance sheet strength continues with the capital ratios at strong levels. Tier 1 ratio, for example, at 14.8%. And the overall net profits improving by 1% headline to reach $152 million, which would have been 9% growth on a constant currency basis and translates into an annualized ROE of 7.3%. Just giving you a little bit more on the revenues. On a headline basis, broadly constant, as I mentioned, adjusting for the FX depreciation, 11% BRL and 18% EGP, this would have been $713 million on a constant currency basis, which gives the 6% year-on-year underlying calculation. The core business growth on a local currency basis was resilient and diversified and the mix continues to be broadly stable. International Wholesale and Group Treasury together, about 34%. Banco ABC Brazil also around -- sorry 32%; and MENA subsidiaries 20% and the other income, which includes ila and AFS at around 16%. Moving on to efficiency metrics. Cost income ratio, we continue to maintain a broadly stable level as we seek to manage costs effectively, while prioritizing investment into digital capabilities in our units in particular. On a headline basis, the CI ratio stood at 57.7%. And again, we need to adjust this for constant FX to give the proper comparison. The ratio was also flat -- was almost flat, sorry, at 56.7%. Excluding digital, which we normally give, the ratio upticked slightly to 52.9%. But again, when we -- if we were to adjust this on a constant FX basis, it would be about flat. On cost of risk, the business growth is also being prudently managed by robust risk appetite and risk frameworks. The cost of risk showed an improving trend for this half at 46 basis points on a headline basis. Our NPL ratio improved 50 basis points to 3.2%, and the coverage ratio was up 3% to 96%. So our credit risk management remains robust and effective with very few new problems affecting our book. And this is pleasingly not withstanding some considerable uncertainties in the region, which also likely to be exacerbated by U.S. trade and tariff policies as they develop. But our portfolio is diversified and we're going to remain vigilant on credit outlook and our underwriting standards in the second half of the year. On the balance sheet, we seek to continue to maintain strong levels. Our capital and liquidity levels are robust, supporting our future business growth. On capital, the total CAR is at 15.9%. The Tier 1 ratio at 14.8% and the core equity Tier 1 at 13%. Funding and liquidity also remains well diversified. Total assets reached another record level of $48 billion as we continue to actively manage our balance sheet with more than 60% of total assets, 61%, maturing within 12 months. Our loans were up by 12% since the year-end on a headline basis, and these comprise more than 40% total assets with a loan-to-deposit ratio of 86%. And finally, our LCR and NSFR continue to be at healthy levels of 177% and 121%, respectively. So in summary, we're extremely pleased with a resilient first half performance, demonstrating that our strategy is successfully being executed. Our underlying net profits on a constant currency basis showed a robust growth of 9% year-on-year, reaching $152 million on a headline basis by giving an annualized ROE of 7.3%. Looking ahead to the second half of 2025, we've got a strong balance sheet position. We expect business momentum to continue, and we're targeting another strong year of growth for the group. So I'll now hand back to Fatema, who will be moderating the Q&A session.

Thank you very much, Brendon, for the informative presentation. And congratulations to the Bank ABC team across our network on the delivery of these outstanding results. Moving on to the Q&A. We'll start with the first question that was inquiring about the bank's resilient performance. And the question is inquiring about the drivers behind our H1 resilient revenue?

Resilient H1 revenue, thank you, Fatema. Yes. So as we talked about, we did have a resilient performance. I did talk about the headline basis being broadly stable at around $672 million and the FX devaluation in BRL and EGP having some impact to this. So we saw depreciation levels of 11% and 18%, respectively. So it is important to factor that into a comparison of underlying business performance and growth, because on a constant currency basis, the underlying revenue would have been better at $713 million, which would have been a 6% growth. And this currency translation effect is obviously dampening that view. We do see a few factors driving the performance. We're still seeing good growth in the core business with a good deal pipeline across the franchise, being underpinned by new to bank client acquisition and the headline loan volume, demonstrating our earning assets is up 12% from year-end levels. On top of this, our digital units, ila and AFS, both continued to have good strong revenue performance, which gives us confidence that the strategy is working, and they will deliver value over the longer term. And generally, across all of our markets, we're also seeing some broad-based growth and revenue performance. So we are, I think, in a very good position for the second half as long as we see this deal pipeline and momentum continue.

Thank you, Brendon. Next question is about the FX depreciation and acquiring about the impact of the FX depreciation on the bank and whether it's going to affect the bank's future growth capacity?

Okay. Okay. Well, I've already said some words on this. Why don't I let Suresh have a go from a -- more from a finance and accounting sort of perspective?

Right. The nature of the group being present in emerging markets, and operating in the local businesses means naturally, the group is exposed to the local currency fluctuations against the U.S. dollar, which is the home currency of the group. However, we also need to recognize that the group will benefit from the local market dynamics such as the interest rates, the growth rates, the higher margins, the cost dynamics, they're all typically different compared to the U.S. dollar markets. In our case, particularly Brazil and Egypt are two units, which have been relatively most exposed to FX fluctuations in the recent times. Both units have strong underlying growth in the local currency and positively contribute to the group's performance. As far as the future growth capacity is concerned, FX fluctuations have a very limited bearing to growth in local markets, which are predominantly in local currency, therefore, not particularly impacted by the FX volatility. As compared to last year, half 1 of 2024, BRL depreciated by approximately 11% and Egyptian pound depreciated by 18% in half 1, 2025, which impacted the U.S. dollar profits of the group reducing the strong underlying growth delivered in the local currency. This is from a P&L point of view, similar to that on the other comprehensive income, the half 1 '25 showed a slightly different dynamic because BRL compared to the year-end of last year, strengthened during half 1 2025, which meant that it showed a benefit in half 1, which was reversing some of the negative impact recognized earlier in the year.

Thank you. Yes. Thanks, Suresh. And the third question is forward-looking. The question goes as what are the expectations of the -- on the performance of the bank for the rest of the year 2025?

Okay. I'll take that one. So trends from the first half, I think, are robust, and they're trending quite well given the uncertain macroeconomic environment. So the remainder of '25, our expectations are positive for some of the good trends in the first half to continue. We have good business pipeline in our core business units, Wholesale Treasury, Retail and BA. And our digital units are also performing well, as I mentioned earlier. ECL charge and cost of risk was also benign in the first half, reflecting a very good credit risk management and experience, as I mentioned earlier. So overall, we anticipate the revenue momentum continuing. It does depend a little bit on how we see bookings in the second half, but we also will control our operating expenses and expect to see cost of risk under control. So we're cautiously optimistic for another year of solid revenues, a good net profits and ROE performance. We don't announce, as you'll be aware from previous calls, we don't give a formal net profit or ROE target, but we are confident that strategy is on track and will lead us to higher profits and better returns over time. This will also allow us to keep increasing our dividends to shareholders as profits hopefully increase.

Thank you, Brendon. There are a number of questions that came through the Q&A feature. I'll start with the first. The question reads as despite no change in Stage 3 gross loans, the ECL allowance rose by 14.5%. What could be the underlying reasons for this increase in provisioning?

So the -- obviously, the bank ECL -- ECL numbers and the balance sheet side of that is subject to a number of movements in and out as well as recoveries that are coming back into the book. So I think that is a function of the way the book has been performing. As we said, we had a good experience in the first half. We haven't seen any significant new problem accounts coming into the first half. And that is also one of the reasons why the ECL charges is much lower year-on-year. I think there may be another question on that front that we've seen come in. So hopefully, that gives you a flavor of what we're seeing on ECL from both the balance sheet and the P&L perspective. We have had a good first half. It does reflect the bank's strong credit and underwriting policies and effective risk management as well as, as I said, a good benign performance on the names we're underwriting in the first half.

Thank you, Brendon. The following question is inquiring about the net loans increasing by 11.7% and ECL allowances rising proportionately. What does this indicate about the bank's balance between growth and prudence?

I think I've already answered that in relation to the ECL point, pretty much. We -- and part of the increase on the loan performance because again, part of that was -- is currency, as we mentioned, on a headline basis, the growth would be slightly lower. So we are maintaining robust underwriting standards. We are -- that's been a long-standing feature of the bank's credit underwriting. And with a fair wind, we'll have a good credit experience in the second half.

Thank you, Brendon. Next question is about profit for the period remaining unchanged year-on-year. How can the bank enhance bottom line growth given the current pressure on income and driving costs?

Yes. So I think as I've highlighted in a number of aspects of the presentation and hopefully shareholders and investors will have a better perspective. Although on a headline basis, we saw 1% net profit growth and a flat -- flattish revenue performance. This was largely due to the impact of currencies. And in a more stable currency environment, we would have seen a good uplift year-on-year would have been much stronger. As I mentioned, the 6% on the revenue and on the profits of 9%. So being in some of these markets, as Suresh is also talking about, we do see a bit of currency fluctuation. If currencies remain stable, then we should see a better year-on-year performance on a headline basis. We think the strategy is working. We're seeing the good core business growth in our markets. We are in a -- also another factor being in a slightly declining interest rate environment takes another bit of revenues out of the equation. So again, if we can show good underlying revenue growth year-on-year, stable currencies or stable-ish currencies, then we'll see a much better headline performance, and you will see the dollar equivalent performance of the bank improving.

Thanks, Brendon. And the next question is inquiring about the credit loss expense dropping by 32.4%. Does this reflect genuine improvement in asset quality, or could it be due to changes in provisioning methodology?

So another question on ECL. I've had a lot on the ECL, which is one of the changes year-on-year. And the question is right in saying it's about 32% better as we already highlighted in the presentation. And I think I've said a number of times that a good benign performance, good underwriting policies, that's what's led to the improvement. There's nothing in particular in the -- in a changing methodology here, which has led to that improvement.

And the next question, I believe you've covered this in your earlier responses, but I'll just read it out if that there are any points to add. The question is inquiring about the bank's future strategy and expansion and growth?

Okay. So as outlined in the presentation, the strategy remains unchanged, and we've covered this consistently over the -- a number of these presentations. We believe the strategy still will lead to good underlying growth of the group, and we'll continue to pursue that strategy with its 3 pillars, accelerating our core businesses, maximizing the value of our digital units and strengthening our operating model. We've run a number of initiatives successfully around that. Hopefully, I've given you a flavor of some of the progress that's been made in the first half. I'm sure we're going to see more progress in the second half of the year. And hopefully, we'll have another strong year of financial performance, which will continue to demonstrate the success of that strategy.

And moving to the last question. It's a pretty long one. But basically, it's inquiring about notable gap in coverage regarding Q2 2025 performance metrics, similar to what has been observed with local and regional correspondent reporting. The second quarter seems to have been overlooked in today's discussion. Could the management please provide some color on Q2 results and key developments during this period? And it's -- just to give a complete picture of the first half performance.

So specifically in the second...

Q2.

Do you have maybe [indiscernible], well, I'll let Suresh for that because we do disclose second quarter in the press release. We do give some detail on that. And historically, we've typically focused on the year-to-date performance in these presentations. If there is a desire for a bit more detail on a quarter-by-quarter analysis, and we can certainly bring that into the presentation on future quarters. Suresh, if you got the Q3 headlines -- Q2 numbers.

Yes, we've got the headlines. I can probably give a heads up on that. But before we look at the Q2 itself, typically, our business is not something which is very seasonal, which goes through seasonality fluctuations quarter-to-quarter. So therefore, we always feel that it is appropriate to cover the year-to-date performance, which in a way, covers all -- both Q1 and Q2 combined. But as you can see in our press release or the financial statements itself, we will see that our Q2 net profit was $76 million, almost same as Q1, and that was 1% higher compared to last year. Similarly, our -- yes, the total operating income was also similar to Q1, in a moment, I'll tell you. Yes, Q2 total operating income was $340 million, which was similar to $332 million that was reported for Q1. So in that sense, Q2 from a financial sense, will be broadly similar to Q1. This year, particularly, it was much more closer to Q1. Other than that, if there are any specific events or things which are useful to understand the Q2 performance. Our presentation will naturally cover that.

Thank you, Suresh. Thank you very much, Brendon. I think we -- with this, we conclude our meeting and session for today. Thank you very much for those who have joined us. We remain very much available to answer any questions. If there are any points that you'd like to have further clarification on, feel free to reach out to our Investor Relations team or the Group Communications team. Thank you very much, and we meet you in the next quarter.

Thank you.