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

Good afternoon, ladies and gentlemen, and a warm welcome to all our valued investors. Thank you for joining Bank ABC's Financial Year 2025 Earnings Investors Call hosted by the acting Group CEO, Mr. Brendon Hopkins. Mr. Hopkins will begin the session with a presentation outlining our key strategic and financial achievements for the 12-month period ended December 31, 2025. He will be joined by Mr. Suresh Padmanabhan, the Head of Group Finance, who will provide a deeper dive into the group's financial performance for the year. Following their presentation, I will moderate made the Q&A session. You are welcome to submit your questions through the Questions feature, and we will do our best to answer as many as possible, including those received ahead of the call. Before we begin, let's take a moment to watch a short video highlighting the bank's strategic progress and financial performance for the 2025. [Presentation]

Over to you, Brendon.

Thank you, Abdelkhalig. Good afternoon, and welcome to our investor call on our 2025 results. My presentation today will cover the first five items on our agenda, the key highlights through to our dividend recommendation. And I'll then hand over to the Group Head of Finance, Suresh, to explain our detailed financial performance. And then we'll take questions before we conclude. Let me begin with a summary of the group's key financial highlights for 2025. And to set the context, 2025 was a year continuing global and regional geopolitical uncertainty. Trade tariffs, interest rate movements, regional instability, asset price volatility all play their part in creating a challenging external operating environment. Despite this external backdrop, Bank ABC's diversified franchise and business model underpinned a resilient set of results. We achieved strong revenue momentum, reaching another record level of over $1.4 billion, a headline growth of 5% year-on-year. And on a constant currency basis, this would have been 7% year-on-year after the Brazilian real and EGP depreciation is factored in. On the balance sheet, total assets reached record levels of $50 billion, while our capital and liquidity ratios remain strong with excellent buffers above the regulatory minimum. Headline net profit reached $257 million, an additional $54 million in the fourth quarter but a moderation of 10% year-on-year. Part of this was due to currency movements. On a constant FX basis, the net profit would have been $266 million, moderated by $0.07. And other factors that affected the fourth quarter were higher provision in tax charges, which Suresh will explain later in his part of the presentation. This translated into a headline ROE of 6% and an underlying ROE of 6.2% constant FX. So overall, Bank ABC has delivered another resilient financial performance during 2025. Most pleasingly, our top line revenue growth has remained strong with a 5% increase headline and 7% increase underlying. And this gives us confidence on the strength of our business as we look forward to 2026. We'll come back to the financial results after covering the usual update on our strategy and industry position. As in our earlier investor calls during 2025, I'll give an update on our strategic road map to be MENA's International Bank of the Future. The road map has three key pillars: accelerating our core businesses, maximizing the value of our digital units and strengthening our operating model. And just to cover some of the major highlights. On our first pillar, accelerating growth on our core businesses. As I already mentioned, we had an excellent year of top line revenue growth with revenues up 5% year-on-year, 7% underlying. Almost all of our business lines and units saw year-on-year growth with positive revenue post jaws. In our Wholesale Bank, we saw excellent performance in our core trade and transaction banking volumes and revenues. Another key highlight was in our syndications team, which saw volumes grow from $2.5 billion to $4 billion. Our Retail Banking continued to flourish with another key highlight being the rollout of our new digital app in Egypt. And in Banco ABC Brazil, we also saw excellent growth in our corporate and middle market business with overall 7% revenue growth year-on-year headline and 12% growth on a constant currency basis. Turning to our second pillar, maximizing the value of our digital units, ila and AFS. On ila, the customer base continues to expand with new products and features boosting deposits and revenue. We successfully completed ila Bank's core banking migration to Temenos, which marks a major step forward in our core banking capabilities. The ila Bank carve-out process continues, where we're creating a separate fully licensed digital bank, which will enhance ila's agility and position it for its accelerated growth trajectory in Bahrain and across the region. Our fintech payments company, AFS, continued its build-out of its expansion strategy. A particular achievement was the successful launch of merchant acquiring services in the UAE. And this is another great revenue accelerator, successfully taking forward AFS' future growth strategy. On the third pillar, strengthening our operating model, there are also a number of achievements. We've established a portfolio management function which is aimed at enhancing the risk-adjusted return on capital, or RAROC, of our Wholesale Banking business. We launched new core values to emphasize the need for focus on five areas: our clients, innovation, teamwork, collaboration, integrity and empowerment of our staff. And this is aimed at truly embedding a purpose-driven culture and conduct across the group. Our performance management focus has been sharpened with a new strategic KPIs framework, which runs across the group's units and which all key leaders are being measured upon. We also redesigned our digital and IT operating model and launched new data management capabilities, paving the way for our focus on advanced data analytics and artificial intelligence, which is also being rolled across our operations. In summary, we had strong successes in our strategy execution in 2025, which also position us well for our further continuing momentum in 2026. Turning to the topic of sustainability. This remains a key priority for the group. We're embedding sustainable practices across Bank ABC's value chain, which will reduce our environmental impacts, keep us fit for future purpose and is aimed at delivering long-term value for all our stakeholders. During 2025, we continued to make excellent progress on our 3-year environmental reduction plans for operations. We embedded ESG risk assessments in credit approval process and refined our ESG standards. We significantly took forward measurement of Scope 3 finance emissions, which will be a critical element of our overall emissions reporting. We had many trading programs for our client-facing teams and action plans to improve our diversity, equity and inclusion KPIs. And of course, we maintained a strong focus to meet all of the increasing ESG regulatory and disclosure requirements across the group's many locations. Detailed progress on this journey can, of course, be viewed in our second annual GSDR, Group Sustainability Disclosures Report, which is also on our website. As for our industry position, Bank ABC's brand and reputation continues to strengthen year after year. By the end of 2025, by the end of the year, the group gained another 35, that's 35, prestigious awards across multiple categories, reflecting the depth and breadth of our capabilities. On the Retail Banking front, our digital mobile-only ila Bank continued to make its mark. ila achieved an important milestone being named the Best Mobile Banking App in the Middle East by Global Finance, in addition to securing all 10 national awards. ila also received the titles, MENA's Retail Bank of the Year from MEED and Best Digital Bank for Consumers from the Euromoney Awards for Excellence. Our Islamic finance arm, Bank ABC Islamic, continue to receive multiple awards and accolades for its successful sukuk and Islamic deal execution. Meanwhile, Wholesale Banking earned several major awards for excellence, such as MENA's Cash Management Bank of the Year by MEED and the Middle East Best Cross-Border Payments Solution. Even more notably, Bank ABC was named Transaction Bank of the Year to the Middle East by the Banker Magazine, a part of the FT Group, which attests to the remarkable digital transformation of our global transaction banking business, which is increasingly recognized by industry leaders. Moving on to another extremely important point for our investors is, of course, our dividend recommendation for the year 2025. This will be presented to our coming AGM on March 26. In line with the resilient net profit performance for 2025, we're recommending maintaining the same level of dividends as for 2024. This equates to a proposed cash dividend of $85.5 million or $0.0275 per share. The recommendation equates to a higher payout ratio, 33% of net profits, compared with 30% last year. And this translates into a dividend yield of almost 9% based on the current ABC share price. This approach to dividend distribution linked to profit growth ensures the group retains its balance sheet capacity for future growth and also ensures we maintain our strong capital ratios. So that concludes my summary on strategy and industry positioning. I'll now hand over to Suresh, who will take us through the group's financial performance in greater detail.

Thank you, Brendon, for that comprehensive overview. I will now expand a little bit on the factors that explain our performance in 2025. Total operating income reached a record level for the group at $1.4 billion, a 5% headline growth year-on-year, benefiting from strong core business growth, a stable funding base despite a globally challenging environment. Likewise, the net operating profit also grew by 5% to a record level at $596 million. However, net profit performance was somewhat moderated due to higher provisions and tax charges. Absorbing these, the net profit for the year reached $257 million, a 10% moderation compared to last year and translating into a return on equity of 6% for 2025. Our focus on balance sheet strength and prioritizing healthy balance sheet metrics is demonstrated with our capital ratios well above regulatory minimum levels. Our Tier 1 ratio was 16% at the end of 2025, with the majority of which comprising core equity Tier 1 at 13.7%. Moving on to more details on revenues. On a headline basis, the TOI reached $1.4 billion, which was 5% higher over last year. Adjusting for the currency depreciation, particularly Brazilian real, 7%; and the Egyptian pound, 14%, depreciation, the underlying TOI on a constant currency basis would have grown by 7% year-on-year. The numbers on a constant currency basis demonstrate that the group's underlying core business growth is resilient across the franchise and the revenue base remains well diversified. Our international Wholesale Banking and the group Treasury businesses together contributed 30%, Banco ABC Brazil contributed 34%, MENA subsidiaries contributed 19% and 17% was from other source of income, which also includes our digital units, ila and Arab Financial Services. Moving on to our efficiency metrics. The bank continues to maintain its strong focus on managing costs while prioritizing necessary investments. On a headline basis, the cost-to-income ratio stood at 57.7%, similar to 2024. However, on a constant currency basis, the ratio improved slightly by 40 basis points to reach 57.3%. When we exclude digital investments, both revenues and their heavier investment costs, the group cost-to-income ratio will be 53.1%. Whilst delivering record levels of revenues and asset growth, it is important to recognize that the business growth is being prudently managed through our robust risk appetite and risk frameworks. Our cost of risk remained steady at 77 basis points on a headline basis at comparable levels to last year. Our nonperforming loan and provision coverage ratios continue to be at healthy levels, demonstrating healthy portfolio and robust credit risk management practices. However, ECL charge for the year was impacted by a one-off credit event related to a customer in the United States. Adjusting for this, on an underlying basis, the cost of risk for the portfolio stood at 49 basis points. We recognize there are ongoing market uncertainties intensified by volatile trade tariff policies, and therefore, we remain vigilant on the credit outlook going into 2026. Second item that moderated our net profit performance was the introduction of domestic minimum top-up taxes regulation, elevating our tax charges in Bahrain and Brazil. Following the implementation of this new tax regulation, our tax charge reached $105 million compared to $72 million in 2024. This translates to an increase in effective tax rate for the group to 24% compared to 17% in 2024. Absorbing the impact of increased provisions and higher tax charge, the net profit for 2025 reached $257 million, moderating by 10% as compared to last year. Now let us take a closer look at quarter 4 of 2025, the 3 months performance for the period October to December 2025, which followed similar trends and the matters that were explained previously. Total operating income witnessed a strong growth of $40 million, driven by business growth across our core markets. Net operating profit reached $158 million, an increase of $26 million, with faster revenue growth compared to cost growth resulting in positive revenue jaws. These were moderated by ECL charge for the 3 months at $61 million, which was $23 million higher compared to Q4 last year, mainly due to the one-off loss event relating to customer credit in the United States. Tax charges, as explained previously, increased following the new tax regulation to reach $24 million, an increase of $14 million over last year. Taking all these into account, the quarterly net profit moderated to $53 million as compared to $70 million last year. However, as explained, on a full year basis, the net profit moderated by 10% headline and 7% on a constant currency basis. Another prominent item for the quarter was the sharp growth in other comprehensive income, which reached a positive $30 million for the quarter as compared to a negative $48 million in Q4 of 2024. This was due to the strengthening of Brazilian real in Q4 2025 as compared to a weakness towards end of 2024, which subsequently reversed in 2025. Reflecting on the balance sheet. The bank reached a record level of total assets at $50 billion. The shape of the balance sheet shows it is well diversified and liquid. We continue to actively manage our book with more than 60% of our total assets maturing within 12 months. Loans grew 11% during 2025, reflecting strong growth in core businesses across our franchise as well as foreign currency appreciation, mainly BRL, towards end of 2025. Loan-to-deposit ratio stood at a healthy 77%. As for our balance sheet health, our emphasis on maintaining a strong balance sheet metric is demonstrated with robust capital and liquidity ratios well positioned to supporting future business growth. All ratios are well above regulatory minimum levels with the total capital adequacy ratio at 17% and the Tier 1 ratio to 16%, which comprised the core equity Tier 1 predominantly at 13.7%. Risk-weighted assets grew to $30.8 billion an increase of 8% year-on-year. Finally, from an overall liquidity and funding perspective, our liquidity coverage ratio and the net stable funding ratios are at healthy levels. LCR was at 237% and NSFR was at 127%. With that, I hand over to you, Brendon, for your final thoughts.

Thank you, Suresh. So in summary, 2025 financial performance was excellent in many ways and resilient overall. Headline revenue exceeded $1.4 billion, another record level at 5% year-on-year headline and 7% on a constant currency basis. The underlying cost-to-income ratio improved, indicating our cost discipline whilst we're still investing for our future strategy. The cost of risk remains steady with healthy coverage ratios and adjusted cost of risk at around 50 basis points, although the headline levels were impacted as explained. And with some additional tax charges in Q4, our net profit was moderated by 10% on a headline basis to $257 million and 7% on a constant currency basis. And this translated to an ROE headline of 6% and underlying ROE of 6.2%. The group's balance sheet is robust with total assets at record levels of $50 billion while our capital and liquidity ratios remained at strong levels. And as I mentioned in my opening remarks, we're particularly pleased with the top line revenue growth, 5% headline, 7% underlying. We're also extremely pleased with the many awards and business milestones that were achieved during the year, which demonstrate continuing delivery of our strategy road map. These are all the factors that will build momentum for another strong year into 2026. So I'll now hand back to Abdelkhalig, who will be moderating our Q&A session.

Thank you, Brendon, for the informative presentation and for Suresh as well. And congratulations to Bank ABC team across 15 countries on the delivery of these resilient results. We will now be answering the questions that we have received so far. We have a few ones. I'll start reading the questions in order. One of the questions that we received, Brendon, is addressed to you. What are the drivers behind the 2025 record revenues?

Very good question. Yes. The bank has had another resilient year in 2025. As I mentioned, our group revenues reached record levels up 5%. Key drivers behind the growth, I'll pick out a couple. As I think I explained partially in the presentation, we saw very good growth across most of our business lines and units. We saw excellent growth in transaction banking volumes. We saw our syndication volumes up. We saw growth in our units across MENA and we saw growth in our Brazilian operation. As I think I mentioned, the revenues were around 7% up year-on-year, 12% underlying. So good, strong growth in our core businesses. And on top of that, we also witnessed another year of accelerated growth in our digital units. And again, the strategy there is for accelerated growth in customers and transaction volumes, which leads to good strong revenue growth. So those also helps the top line. So overall, the strong performance across our markets and our units gives us confidence on the revenue momentum, and that's helping us as we head into 2026.

Thank you, Brendon. We have another question, an interesting one. How will the retirement of the group CEO impact the group?

Well, we obviously express our great thanks to our previous CEO, who is with the group for over 4 decades, 44 years. 44 years of service to Bank ABC, and it's natural for him to want to seek to retire after such a long period of time. The Board has put in its interim leadership arrangements with myself and is advancing its plans for permanent succession in line with the group's framework. But rest assured that myself and the rest of the group's leadership team, including Suresh, and yourself, AK, and the group ManComm, we're all still in place. We're very familiar with the group's strategy and financial performance objectives. Obviously, we've developed these plans and budgets over many years. And the group will continue to perform, and the transition is expected to be smooth as we focus on delivering another strong year in 2026.

Thank you, Brendon. We have a question addressed to Suresh in relation to a point that he touched on in the presentation. What is the impact of the new corporate tax regulation in Bahrain on the bottom line of the bank?

Right. So we have been consistently, in each the earnings call, we have been touching upon the new tax regulation that has been introduced, the domestic minimum top-up tax. The impact of that -- in particular, it impacted two units in the group, Bahrain and Brazil, both. This got introduced in 2025. Overall, you can see that the tax charge went up by about $33 million and the effective tax rate went up. This is a combination of both growth in profits before tax in these jurisdictions as well as this tax newly introduced in 2025. Bahrain added -- roughly, I will say that this growth is split between Bahrain and Brazil.

Thank you so much, Suresh. We have a couple of questions. One of the questions is addressed to Brendon. What are your expectations on the performance of the Bank ABC Group for 2026?

Yes. This is a question we get asked quite often, obviously. As I've mentioned before on these calls, we don't give specific forward guidance on net profit or ROE targets. Our business growth trends of '25 were resilient particularly given the uncertain macroeconomic environment and, as we've already noted, the factors around our top line growth, et cetera, which should build momentum as we move into '26. We've got a strong business pipeline in our core business units, and we see good business opportunities across our Wholesale business, our Treasury business, our Retail, Brazil and our digital units. So we anticipate that the revenue momentum will continue. And we'll continue to ensure controlled discipline of our operating expenses, and we'll seek to control and contain the cost of risk. So going into '26, we anticipate another good year of revenue growth. We've absorbed the higher tax and the one-off ECL charges that we talked about. And we expect 2026 to be back to another good year-on-year growth of net profit and an improvement in ROE.

Thank you, Brendon. We have received a couple of questions. I'll group them in order. One of the questions relating to the -- I think it was Page 12 of Suresh's presentation. What contribution did ila Bank make to Bank ABC's consolidated financial results in 2025?

Yes. So ila Bank has been steadily growing, exceeding all the targets what we have set for the business. Brendon explained it in terms of our strategic progress, the customer numbers, the deposits, the new products rollout, the new core banking that has been launched, everything consistently growing well, exceeding our plans. The revenues have been growing steady year-on-year. Detailed financial statements of ila will be published shortly. They do publish on a half yearly basis. Half year was published and the full year will be published shortly. But overall, at this stage, I can tell you that in my presentation, I said the other businesses for the group, which included the digital businesses, contributed about 17% of the total revenue for the group. And ila is included there.

Thank you, Suresh. We have two questions. They are similar, so I'll group them together. They relate to the expected credit loss that we have in Q4. One of our investors, they're looking for an elaboration on that and what are the plans to address similar events in the future. And again, following the same question, how did we deal with that from an accounting perspective?

Okay. Well, we don't -- as is normal banking practice, we don't comment on individual customer situations. But what I can say is that we obviously follow robust credit management and underwriting procedures. We have and experienced Credit Committee that looks at all large positions of the bank in significant detail. So we don't expect these situations to happen very often. When they do happen, we will take an appropriate and usually a pretty conservative approach to provisioning on these situations. And I would give some guidance that in this particular situation, we've taken significantly all of the impact into 2025. And we expect 2026 to be a more normalized year from an ECL perspective.

Thank you, Brendon. Thank you, Suresh. I think it is now time to conclude our session. Thank you all once again for all the investors who dialed in and joined us in this session. And of course, for any further questions or any clarifications that you need from us, please reach out to the Group Corporate Communications and our Investor Relations team. At any point of time, we will be more than happy to answer your questions. Thank you.