Dubai Islamic Bank P.J.S.C. (DIB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Dubai Islamic Bank Q1 2020 Financial Results Conference Call and Audio Webcast. As a reminder, please ask your questions by submitting them via e-mail to webcast at dib.ae. I will now hand over to your host, Janany Vamadeva from Arqaam Capital. Please go ahead.

Thank you, Ted. Good morning, everyone, and thank you for joining us today. This is Janany Vamadeva, and on behalf of Arqaam Capital, I'm pleased to welcome you to Dubai Islamic Bank's Q1 2020 Earnings Conference Call. I have with me here today from DIB management, Dr. Adnan Chilwan, the Group Chief Executive Officer; Mr. Salman Liaqat, the Chief of Strategy and Investor Relations; and Mr. Kashif Moosa, the Head of Investor Relations and Strategic Communications. Without any further delay, I'll now turn the call over to the Head of Investor Relations, Mr. Kashif Moosa. Kashif, over to you.

Thank you, Janany, and welcome, everyone, to Dubai Islamic Bank's First quarter 2020 Results webcast. As always, the session is led by Dr. Adnan Chilwan, the Group CEO; accompanied by Salman Liaqat, Chief of Strategy and IR and; myself Kashif Moosa. Given the current environment, we will focus on the critical elements of the bank's performance and strategy in this session to keep it as efficient and optimized as possible. You can continue to send your questions through the link, given the webcast in link, which will be taken up by the CEO at the end of the presentation. And with that, I will request Dr. Adnan to take you all through the results and the plans for the year. Dr. Adnan, please.

Thank you, Kashif. Good morning, everyone. I hope everybody is well and in good health. First and foremost, a big thank you to the leadership and residence of the nation. I think it's very important to acknowledge that all of us unite to tackle one of the most significant events that humanity is experiencing in over a century. And I'm also grateful for the effort that my team in DIB has put this far, specifically in the last couple of months, to ensure that there is business continuity as we pass through this very testing phase. In the presentation on Slide 4, I think it just summarizes the UAE's leading position in undertaking significant economic measures to curb the impact of COVID-19. I'll start off by saying that the Central Bank of the UAE has, as all you know, extended significant support to the banking sector, and that support is in the tune of approximately $70 billion through various relief and stimulus measures. Now this is obviously for both financial institutions as well as their clients. As we move on, what is quite remarkable, though, is that the UAE has been taking a leading role in the GCC, when it comes to crisis management as well as policy implementation. In addition to all of this, obviously, banks have themselves rolled out a host of relief measures, some of which you are aware. And Dubai Islamic Bank has also participated in putting various relief measures for both individuals as well as corporate customers. If we move to Slide 5, a rather cluttered slide, but I think what we tried to do is put it in the form of 4 quadrants, which necessarily talks about, one, the safety and well-being of our customers as well as our staff being our key priority. And we've taken several measures to ensure that there is no compromise on this front whatsoever. Importantly, I think business continuity plans were triggered immediately. And we had activated several urgent initiatives that would safeguard the premises, the staff, customer touch points, and last but not least, our customers. Now this is being led and monitored by a crisis management team. It's important for you to understand that this has been a very, very thought-through effort where the crisis management team has ensured minimal disruptions in the business and that uninterrupted services have been provided across all our network and channels, without compromising safety and security. Moving on, Slide 6. I want to assure to the market that given the economic headwinds that we foresee, the bank is prepared and well positioned and ready to take necessary hard decisions which may impact performance and profitability in the short term in order to protect the long-term interest of the bank and its stakeholders. With that opening remarks to my financial performance, I would like to take your attention to Slide 7 where, in a nutshell, what we've done before I start talking about key components of the balance sheet and the income statement, which I'm sure you've been busy analyzing as soon as the results have come out, what is important to acknowledge is that we've adopted a conservative approach where specific coverage on legacy accounts have improved. We've raised required provision levels which are clearly showing symptoms of lower expected recoveries. Now this adoption of a highly conservative approach to provisioning in Q1 has ensured optimal coverage and protection against any impact on asset quality that is arising out of the current environment. So that's just a preamble to what has happened during the first quarter. It's important to acknowledge that each and everything that has happened in Q1 has been a deliberate and conscious effort on part of the bank to make sure that the bank remains robust and its balance sheet can withstand pressures that we feel can be witnessed through the COVID-19 situation or the economic headwinds that one can expect given the pandemic is far from over. In the balance sheet, you can see that we've had a good quarter. Now this is obviously coming on the back of a consolidation of Noor Bank. Our balance sheet has grown by 19%, and that can be seen in various lines, from the customer deposits growing by 22% and the net financing and Sukuk book growing by around 17%. The equity position of the bank has also improved and it is now changed to around AED 38.2 billion, 10% up from where it used to be at the end of last year. The income statement, in my preface, I've already mentioned to you that we've adopted a very conservative approach. I would like to call it a cautiously balanced approach that we've taken in Q1. And clearly, I think we wanted to make sure that the bank is well equipped to manage any unforeseen economic headwinds that can be witnessed in maybe the next few quarters. Despite that, it's very important to see that our total income and our net operating revenues have gone up by close to around 5%. Our operating expenses have increased, and that was something we had already expected and advised the market that once we take over the bank and complete the acquisition, there will be a line-by-line consolidation, and that would appear starting from first quarter 2020. Now obviously, our key objectives around this would be to try and rationalize the expenses sooner than later which is exactly what we've started to do and bring about synergies that would allow us to reduce these operating expenses and thereby also improve the cost-to-income ratio. Now the extraordinary impairment, expected credit losses and overlay that you see, which is close to circa AED 1.5 billion, was something that we had alluded to in the beginning of the year when we said that whatever negative goodwill that would arise out of the acquisition, would be used and not be -- would not be used to enhance the P&L, but in fact, we used to make provisions and build cushions wherever possible. That is exactly what we've done. We've now informed the market or disclosed that it has been a gain on bargain purchase of about close to AED 1 billion. But you can then see that we've offset that consciously by making an extraordinary impairment, the normal expected credit losses as well as taken a management overlay, all totaling to about AED 1.5 billion, thereby reaching to a net profit of AED 1.11 billion, which is 18% down when compared to the first quarter of 2019. Now obviously, there are more than one reasons why this net profit is down. One, clearly, because we've taken this extraordinary charge on our P&L in order to make sure that we enhance the ECL coverage that we have. We continue to make provisions within Stage 1 and Stage 2. We come out with management overlay, all of which equals to AED 1.5 billion. But more importantly, if you look at Q1 2019 versus Q1 2020, I think you will recognize that despite a lower interest rate scenario where the interest rates have gone down between these 2 comparative periods, the bank has still made a better total income and net operating revenue. So I think there is -- there are more challenges, and there have seen challenges more than one despite that the bank's net profit, which currently stands at AED 1.11 billion should be taken as a very key achievement in this very, very testing time. Next to the balance sheet and the income statement, our financial highlights and key ratios, we will touch upon them in greater detail, but I think what is very, very quick to analyze here is that advanced deposit ratio remained healthy at 90%. Despite the acquisition, there has not been any dilutive impact on our capital -- CET1 ratio, which is something that I had mentioned to you given that we had done pro forma financial statements. We knew that we should not be expecting any dilution within our CET1 ratios or our capital adequacy ratios despite these are net of the dividends that we've already declared and paid off in the market. Our nonperforming financing was expected to increase in the short run, and this is something that we had mentioned to you in the previous calls where we said that after we have consolidated both the entities, there would be a slight increase in the nonperforming loans, and that is witnessed now where 40 basis points have increased. Also it is important to acknowledge that this 4.3% over the consolidated balance sheet is not reflecting any growth in that balance sheet. So if you just add the 2 balance sheets of Noor Bank and DIB as of December 31 and then bring about nonperforming loans, you will reach with a percentage of 4.3%. So in terms of growth, we've consciously had a muted quarter 1 and as the denominator would change, going forward, you would see this percentage coming down. But at 4.3%, this was something that we had expected. Our full year guidance is at 4%, and we will ensure that we come close to that guidance towards the end of the year. The ROEs and ROAs, again, something that I have alluded to in my previous webcast. This is expected in the short term as the basis and the denominators increase, you will expect ROEs and ROAs going down slightly. So no surprise there. We have the rest of the year to make sure that we come in line with the guidance that we had given for ROEs and ROAs. Net profit margin, again, something that we expected. We wanted to be within this range between 3% to 3.15%, and this is something that has been demonstrated and validated in the first quarter. The cost-to-income ratio, again, I refer to my previous webcast, where I had said that in the short term, there would be a slight increase in the cost-to-income ratio of the bank, clearly because synergies have not kicked in yet, but the cost -- the line-by-line costs have been added on. And here, we see the effect of both the Noor Bank as well as Dubai Islamic Bank costs put together, whereas income has not gone up significantly, which is expected in quarters to come. So I think overall, I -- before I move to Slide 8, my summary of this slide is that despite the economic headwinds, despite the pandemic, despite the low interest rate scenario, we've made sure that we've gone ahead and reported very good results for the first quarter. You can witness if you add back the extraordinary items that we have taken, you can then witness that we have had a positive quarter in terms of net profit. I would let you do your own calculations. But if you add back the one-offs that we've done, you can see that the group has posted a positive net profit. But these cautious and conscious steps that we've taken to kind of build capacity for the future have made us announce results of AED 1.1 billion profit, which is 18% less than Q1 2020. On Slide 8. Clearly, there is still significant uncertainty in respect to when COVID-19 is likely to get over substantially. Now this will also impact recovery of various economies, whether they are developed or emerging. Now considering that market will resume to normal in Q2 or Q3, we are likely to have improvement in results. And hence, these key performance ratios will go up in the right direction, something that I have mentioned in my preceding slides. I've already mentioned to you the decline in ROAs and ROEs are on account of 2 things. One, conservative provisioning within the quarter 1 2020. Now clearly, this is less likely to repeat in the remaining quarters. Hence, both these ratios will likely improve. And while these ratios may also look subdued for now, it was expected, given that the balance sheet has been consolidated and the denominator has increased as well as the numerator has decreased with these extraordinary items that we have taken. Now as synergies kick in, in the course of the year, this will positively impact the ratios and all of these ratios should start to look better than what we have reported in quarter 1 2020. Page 9. We look at the deployment of our financing book. Now this is a consolidated book. You can see that close to around AED 180 billion of financing. So clearly, DIB's position of around AED 150 billion, AED 151 billion has now changed, and the consolidated position will be reflected going forward, starting from quarter 1 2020, as we had mentioned to you in the previous webcast. And if you just look at way that book is distributed, clearly, corporate bank, around AED 125 billion. That is up from a base of about around AED 105 billion. Now mind you that base that you see used to be base as of December 2019, which was DIB on a stand-alone basis but now this is a consolidated base. So you see all those numbers going up. The consumer book has now become AED 52 billion. The real estate book, I think it will be heartening to -- for everyone to see that despite the consolidation, the real estate book is where it was at the end of 2019, which means that the consolidation has not impacted or increased the real estate book, which is very important for people to acknowledge. The fixed income book has increased given that Noor Bank had a small fixed income book. So that has come in and net of -- the net of the position of DIB, the book stands today at around AED 36 billion. Interbank placements and CDs have increased. Clearly, that shows you the liquidity that has come in and that has been deployed within the interbank market. Also heartening to see for everyone else is that the investment in equities and properties has not increased significantly. So overall, the acquisition has really panned out well for DIB because it has resulted in extraordinary gain, which has allowed the bank to take the required level of cushions. And also as we consolidate both the balance sheets, you can see that our core businesses have increased under the consolidated position. In terms of breakdown by portfolio, you can see again that the real estate portfolio, when compared to March '20 and December 2019, has not moved as well as all the other portfolios remain where they are. That shows you that the book at Noor Bank was adequately diversified and not skewed to any business segment. And that was just exactly what DIB had done over the years. This is something that I alluded to. I told you that based on the pro forma balance sheet that we have seen even before we went ahead with the acquisition, nothing should significantly change, whether it is in terms of capital or in terms of portfolio concentrations. And that is exactly -- this slide just validates that statement. The only thing this far that has changed is the asset quality, which was expected, and that should be improving as we go forward. On Page 10, we are going to look at the Consumer Banking segment in a greater detail now that the book has become a little bigger and how is that cut across the various products. You can see once again that not much difference from what DIB stand-alone book used to be. When we consolidate both the books, you can see that around 40% is in personal finance, around 40% is in home finance. And importantly, the auto finance book at Noor Bank was very, very small, thereby bringing in our total consolidated auto finance book at around 17% and cards at around 3%. The consumer finance book stands at around AED 52 billion, and the gross -- new gross financing that we've done in the first quarter is around AED 4 billion. Now clearly, I think yields in the short term are under pressure when obviously the lower interest rate scenario will put pressure on yields when compared to Q1 2019. But you can see that when you look at the total income or the total revenue when compared to 2019 and 2020 first quarter, you can see that there is an increase in revenues from AED 870 million to about AED 1,048 million. Before I move on to the next slide, you can see that the consumer bank continues to be a net lender to the central pool of the bank. Even with the acquisition of Noor Bank, that position has not changed. What has changed for our benefit is that the current and savings account ratio now for the bank has gone up. So when you will look at the current and savings account across the key banking -- across the key businesses, you will see that they have enhanced across the consumer bank and the corporate bank, thereby enhancing the total CASA mix of the bank from 33% to close to around 37%. So that was, again, one advantage that we had foreseen when we were looking at acquiring Noor Bank because their low-cost deposits would obviously benefit DIB, and that has exactly happened in terms of the total CASA mix improving from 33% to around 37% on a bank-wide basis. On Page 11, we can look at the diversity of our corporate banking business. You can also see that the corporate book now stands at around AED 133 billion. Now this is significant. And the book is clearly on the back of the diversity that you see across all segments. Now in this book of AED 133 billion, we have also obviously included the real estate book, which is exactly what we used to do in the past. The net operating revenues of the corporate bank have been aligned to Q1. Now corporate bank is a business that has been most impacted by the decline in the interest rate over the last 3 or 4 quarters. Despite that, to maintain a total revenue of around AED 934 million has been an achievement when compared to 2019 because the landscape is completely different. Yields have gone down, obviously, for the reasons I've already mentioned. But if you look at the net funded income, that has improved, which means that we've managed cost of deposits on the corporate banking side pretty well. The corporate bank continues to be a net borrower. And that position has slightly improved, clearly because we've not underwritten a lot of business in the first quarter of 2020. That was very conscious given that we had to complete the acquisition and make sure that we understand the economic headwinds that are ahead of us. But I expect denominator to increase in the next couple of quarters. The CASA book, you can see, has improved even in the corporate bank. So I think what we've done well, even after the consolidation, is that we maintained a very well-diversified corporate banking portfolio. On Page 12, we'll very quickly look at treasury. The treasury book today stands at around AED 39 billion. This is obviously gross when you add both the banks together. The net operating revenue coming out of treasury has seen an increase from AED 244 million to around AED 318 million. As expected, the yields in treasury no different from the yields in corporate bank and the yields in consumer bank because generally, the yields have gone down given that repricing has happened and the interest rate -- 3 interest rate cycles have been baked into. Now moving on Page 13, a very important slide. It talks to you about our asset quality, and I've, over the next slide also, given you some granular details on staging. This is something that we've introduced, and we will continue to show the market going forward. Even though this is all clearly mentioned in the financial statements, I think over the last so many quarters, investors have been asking us questions over this webcast on Stage 1, Stage 2 and Stage 3. So it was important that we include a slide on that, which is the next slide. However, before we go there, let's very quickly look at the overall position of the bank in terms of nonperforming loans. That has gone up by 40 basis points. Again, this is a result of 2 components. One, the denominator has not increased within the quarter. So if we look at the consolidated balance sheet and add the 2 numbers together and then take the numerator and add them together, we were expecting that there would be an increase in the asset -- nonperforming financing in the short term, which is what is demonstrated here at 4.3%. But as the denominator is forecasted to increase over the next couple of quarters, we expect this number to come down, which is something that we had anticipated, and hence, given a full year guidance of around 4% for 2020. The overall coverage on a collateral basis stands at 138%, so that has improved. And the cash coverage has remained at the levels of 2020 despite putting the 2 balance sheets together. The cost of risk, despite putting the 2 balance sheets together, we are at cost of risk of around 87 basis points. Now clearly, this cost of risk is excluding the extraordinary items that we've taken, and that was only to make sure that you can compare apples and apples because putting the extraordinary item would have just exacerbated this cost of risk, and clearly, in subsequent quarters, then you would see a dip. So it was the only way that we could demonstrate this was that we show an apple-to-apple comparison. So the cost of risk on an annualized basis remains at around 87 basis points which is in line with something that we had mentioned. We wanted to be -- on overall basis, be at 80 -- 70 to 80 basis points. So we've got the remaining of the year to bring that ratio to where it should be. Slide 14 is a new slide, and we should spend some time on it. We will continue monitoring the situation very closely in the coming months, and we'll consider additional ECLs and overlays, if required, especially to the affected industry sectors and customers or customer segments to ensure that shareholder equity is protected and the balance sheet is strengthened. Now a result of everything that we've done in the -- in terms of extraordinary items, a combination of the extraordinary impairment, the ECLs as well as the overlays, you can see that stages have improved, coverage ratios have improved. You can see that the coverage ratio for Stage 1 has gone up and it stands today at 1.05%. The Stage 2 coverage stands at around 11.74%. And the Stage 3 coverage stands at around 68.47%. All of these have obviously improved from where they were at the beginning of the year, and this is despite a consolidated book now. Now importantly, it is important for you to understand that while the coverage ratios have improved, where do our books sit at. I'm sure you will ask me the question, but I am already preempting an answer to this by saying that our Stage 1 book today sits at around 88%, our Stage 2 is around 8%, and our Stage 3 is around 4%. And if you also then look at the cumulative provisions that we have made, majority of our cumulative balances are sitting in Stage 3, and that is exactly what it should be. So when you look a Stage 3 cumulative provisions, we are sitting at 61%, Stage 2 at 21% and Stage 1 at 17%. Now when you use and calculate it, that is how the coverage ratios go up. And as I've already mentioned, Stage 1 coverage has gone up by approximately 1.3x, and Stage 2 has gone up by 1.5x. So I think it's a detailed picture that we have now presented to you even though it is in the financial statements, and I will be happy to take questions on asset quality as we progress through this presentation. On Page 15. Funding sources are looked at very, very quickly. You can see that the advanced deposit ratio of the bank stands at 90%. The combined deposits stand at around AED 200 billion after the acquisition of Noor Bank. Going forward, you are only going to be looking at consolidated numbers, and we have stopped -- I've already mentioned to you in my last webcast that, that was probably the last time you were seeing stand-alone numbers. So everything that we see now is consolidated. Our liquidity coverage ratio remains healthy. It remains at 132%. Given the economic situation and given that we are experiencing a pandemic, like never before, I think liquidity is key. And this slide just demonstrates to you the strong liquidity position of the bank, both in terms of LDR as well as LCR. In terms of customer deposits, you can see that the CASA ratio has improved from 33% at the end of the year to 37% in the first quarter of 2020, and the remaining portions are attributed to the fixed deposits or term deposits. The mix of the book by business has not changed significantly, even though we consolidated both entities, the consumer bank contributes around 44%, and the wholesale bank contributes around 56% of deposits. On Page 16. I had already mentioned this to you in the -- in my previous webcast that even though we are going to consolidate the 2 entities and there would not be an impact, a dilutive impact on capital ratios. You can see that despite the consolidation of both the entities, the capital ratio remains at 16.5% and the CET1 remains at 12%. This is obviously net of the dividends that we've already paid at the beginning of the year. Our equity position today stands at around AED 37.8 billion. Importantly, we have now secured, within the general assembly, the approval to increase the foreign ownership limit from 25% to 40%. We've also received regulatory approval to do the same, and we should be implementing this in the next quarter or thereabout at the right time. The strategic focus of the bank continues to remain as it was at the beginning of the year. We aspire to be a digitally intelligent bank, and that is supported by our care ideology, which is nothing but customer experience and efforts around making sure that the customer gets a wow experience, continue to acquire the right customer, both on the consumer side as well as the wholesale side. A bird in the hand is worth 2 in the bush. So make sure that whatever we have, we continue to retain and we continue to engage with our customers on a very proactive basis. Now 2020, we had set ourselves up for 2020 in giving you guidance. You can see that we had spoken about growth in the range of 8% to 10%. Now obviously, this looks big because of the consolidated balance sheet. Now growth going forward is going to be measured on the consolidated balance sheet. So clearly, while this shows that we've grown significantly, that's only because the financing book has now been consolidated, I think we are going to reset this number to 0 and then start measuring growth going forward and how are we based on balance sheet of Noor Bank and DIB put together as of 1st of January. So then from -- going forward, I just wanted to tell you that growth is at 17%, but we are resetting this to 0 now. Obviously, that's the right way to do to see that has the bank's loan book actually grown once we consolidate both the banks together. Nonperforming financing, I've already mentioned, stand at 4.3%, slightly up than where we were at the end of the year and clearly higher than the guidance. But remember, this is a 2020 guidance. So we've got 3 more quarters to make sure that we come in line with the guidance. I am very confident that we would be meeting almost all the metrics that we have given for you at the beginning of 2020, but I think we've got to closely monitor. It's not going to be an easy ride, the environment is clearly challenging, but that is exactly what we've done in the last so many years. Despite a challenging environment, we've made sure that we've delivered very good results, which is what we've done even in the first quarter of 2020. On Page 19. Very quick time line of Noor Bank. You've seen this time line before. But right now, we are full steam ahead as far as integration is concerned. And over the next 2 quarters, we have to make sure that we achieve all these milestones in making sure that these banks are integrated. Well, the banks are acquired -- the bank is acquired and fully consolidated, but integration is key because coming out of integration is going to be synergies which is important for our P&L to be enhanced going forward. I come to my last slide, which is Slide 20. It's a slide in summary where I have put in front of you some of the key highlights, but despite the current environment, 2020 for us so far has been continued core growth where we've seen not just the total assets increasing by 19% or our financing book increasing by 17% or our deposits increasing by 22% on the back of the consolidation, but despite the pressure on the economy due to COVID-19 as well as the oil prices as well as the interest rate, we've made sure that our total income has gone up by 4%, and our net revenues have gone up by 5%. And we are very confident that the next couple of quarters, with the kind of pipeline that we have, should grow our denominator and make our ratios look better than what they have seen. Even though the ratios in quarter 1 had been good, we anticipate that these will improve from here on. Strong returns despite the consolidation and despite the denominator increasing and despite the extraordinary items that we've taken in quarter 1 for the right reasons. We had promised the market that whatever gains it would be that would not flow into the P&L, but in fact, we would use that to make extraordinary impairments and provisionings where required, and we've done that. That has obviously resulted in dilution of our ROEs at 16% and our ROAs at 2.08%. Mind you, they are not far away from our overall guidance. So I would term that we have still posted strong returns despite the macroeconomic environment. Effective and aligned risk management is the next area that I want to focus your attention on. Obviously, the extraordinary gain and the recurring profits have allowed us to build up Stage 1, Stage 2 and Stage 3 provisions, and I'm sure you have questions on that. So the provisions, extraordinary items as well as the management overlays, which totals to close to around AED 1.5 billion only shows you the robustness and financial position of the bank. And it also demonstrates that the bank is in a very strong position to manage any expected impact emanating out of pandemic or the oil price volatility, also low interest environment. Our normalized profit growth. I think it's important to acknowledge that these one-off items should be stripped off, and I'm sure you're doing that. So when you do that, when you strip off these extraordinary impairments or the ECL overlays or the integration costs, this far, which are close to around AED 1.4 billion, you can then add back and see that the year-on-year profit has actually grown by around 8%. Sufficient liquidity. And I think in any crisis, liquidity is the key, so our customer deposits reaching to around AED 200 billion. The most important thing is that the CASA ratio has been enhanced from around 33% to 37%. And that has also made sure that we've got very strong LCR and NFSR as well as advance to deposit ratio sits at around 90%. Our capitalization remains robust despite the acquisition of Noor, no dilution in CET1 or total CAR, and they stand at 12.1% and 16.5%, respectively. We've been very proactive in the COVID-19 crisis. We've rolled out relief schemes for our customers who are unfortunately affected by COVID. So this is in addition to the government's program or the regulatory program of TESS. We ourselves have made sure that we have supported our customers, both corporate customers as well as our retail customers. And the TESS program that has been put forth by the regulator progresses well at DIB. In terms of business continuity, I think our business continuity was triggered immediately, and we've activated several urgent initiatives to safeguard us as well as our customer touch points. Now clearly, I've also mentioned to you that we have triggered a crisis management team that has ensured minimal disruption. What should we expect from us going forward? Well our franchise with everything that we've done so far in quarter 1, which is completing the acquisition of Noor Bank as well as the resulting gains have been put to use in making sure that we use the strength of our P&L as well as the resulting gain that we've gone from the acquisition, we put that to use, and we've built cushions in order to make sure that we can manage uncertainties going forward. So I feel that we are very strongly positioned. Now with the denominator increasing or supposed to increase in the subsequent quarters, ratios will start to increase and go up. And as we go towards the end of the year, as the synergies will start to kick in with the integration being on track, we feel that we would definitely have our key performance indicators and our targets being met as well as our profitability being enhanced on here on. So with that, I think I have given you a very detailed color of where the bank is, how our quarter 1 has been very positive, despite sometimes headlines do not give you the relevant details, I'm sure you will do your own analysis. But for us, quarter 1 has been as expected. We've made sure that we use the strength of our P&L and gains to kind of put the bank in the right track to meet economic headwinds. I am now happy to take -- open the floor and take any questions that you may have for me.

Thank you, Dr. Adnan, and thank you, everyone. And now we're ready to take the questions on that are coming through the link. We will try and sort of club the answers then just to make it as efficient as possible. Thank you.

[Operator Instructions]

Okay. So we have the first question from Mahmoud from Ghobash. The first question he has is around the expectation of cost-to-income ratio, and does the guidance still hold for the year? The second is around the provisions taken and the extraordinary provisions for COVID versus the extraordinary impairments. So he just wants to understand what is the nature of those COVID provisions? And also what is the exposure to SME? And does this segment account for a larger proportion of the overall provisions?

Thank you, Mahmoud, for your question. The cost-to-income ratio at the end of last year was around 27%, which you've correctly mentioned. And if you actually look at the cost-to-income ratio after the consolidation of Noor Bank, it's not far off. So 27% versus close to around 29%. So we are not really far off from where we were at the end of last year. Having said that, that ratio does not have, obviously, a revenue impact that we feel we will have going forward given that the base would increase and revenues will start kicking in. And also, it does not have the impact of the cost synergies. So clearly, right now, your question is what are our expectations to make it at 27%. We are going to put in all efforts to make sure that integration happens sooner than later and synergies come out in the beginning of the first half of 2020 versus the second half of 2020. And I think it's a challenge given the pandemic and the COVID situation. It's always challenging to try and integrate institutions, but our time lines are not changing as far as integration is concerned. We definitely want to complete the integration before the end of the year. And I think that would be the right time for us to kind of give you a flavor of whether we'll be close to this 27%. But I'm very optimistic that we will be very close to the cost-to-income ratio, clearly because both the numerator as well as denominator will have an impact on the cost-to-income ratio. Your second question about the nature of the AED 600 million COVID extraordinary impairment and AED 818 million extraordinary impairment. I think I've already mentioned that we've taken -- between those 2 items, we've taken close to about AED 1.5 billion. And the reason for doing that was two: one was we did not want to enhance our P&L by taking the gain coming out of the acquisition because that would be a very short-term strategy if we wanted to enhance our P&L. And I had already committed to the investor community that, that is not the intention of the bank; secondly, by doing so, we have enhanced our ECL coverages. And I can tell you that the majority of that -- close to around 60% of this number of AED 1.5 billion has been across Stage 1 and Stage 2. That actually tells you the cautious looking strategy that we have in cushion available for the bank, just in case the pandemic throws away economic headwinds that would expose the bank. So I think what we've done is we've made sure that we have enhanced our coverage. And most of the provisioning that we have done, the extraordinary provisioning that we have done, close to around 60% is within Stage 1 and Stage 2. Your last question on exposure to SMEs. The bank has very significant exposure to SMEs. Now when you consolidate both the institutions together, we would be probably less than 0.5%. So honestly, even after the acquisition and the consolidation, our exposure to SME is very, very little. And the provisioning does not even account for anything within the quarter 1 2020.

So there's a question from [ Anastasios ] from Al Faisal International for Investment. It's a question on the Tier 1 Sukuk, which is coming due in June -- Jan 2021, can you tell us how do you plan to refinance it?

No, I think it is too early for us to even comment on the perf that is coming up for maturity in June 2021. Obviously, closer to that date, we will take a call. There are a lot of options available to the bank. You can see that the bank is adequately capitalized. We will take the call closer to that date after -- in coordination with the regulator as well. So I think let's not get ahead of ourselves.

Just as a reminder for any further questions, please send these to [email protected].

So there's a question from Alok from Ghobash. Would you please highlight the Noor Bank's integration costs and synergy targets and time line for each?

Yes, I've already mentioned, basically, we are planning to integrate the institution by the end of the year, just before the end of the year. And I think that's the point in where you should see all the synergies kicking in. Obviously, it's a journey. As we move in through the quarters, you will see parts of those synergies kicking in. Right now in quarter 1, obviously, costs work a little differently. So as you consolidate, you take all the costs at once, and that's why you've seen the cost-to-income ratio go up. But as we progress forward, you will see the synergies will start to kick in, and they would enhance the P&L of the bank. So synergies do not happen overnight. We expect that by the time we integrate the institutions, which is in quarter 4 2020, we should see substantial synergies kicking in.

Another question from Alok is around the Central Bank guidelines regarding NMC provisions and COVID impact.

No. I think around -- guidelines by Central Bank around provisioning specifically for COVID, I think whether there is COVID or no COVID, banks work on ECL modeling, which is expected credit losses as opposed to incurred losses. And that is clearly a forward-looking view that every individual bank should take. That is exactly what DIB has done in the first quarter. And the strength of our normal P&L as well as the acquisition from Noor Bank has allowed us to make these extraordinary impairments and ECL overlays to the extent of AED 1.5 billion, and that shows you our forward-looking modeling. It shows you that the overlays and the extraordinary cushions that we are trying to build in can meet any expected or unexpected situation that can arise out of economic headwinds. Now whether they are going to be for specific accounts, which we don't mention because, obviously, each and every account goes through a process. But let's just give you comfort that we are very comfortable given the kind of provisioning and impairments that we have raised and enhance our ECL coverage. I also told you that majority of the AED 1.5 billion is between Stage 1 and Stage 2. So that gives you comfort that the bank is adequately cushioned to kind of manage any economic headwinds. Let's not get into specific accounts because each account has its own process. Some of the name that -- one of the names that you have mentioned now is within early stages of administration, which, in my opinion, is the most positive thing to do, so that there are independent administrators that look at recoveries for every institution. Let media and analysts not get ahead of ourselves by starting to put in numbers as to x percentage needs to be written off or needs to be provided for very early days in the process. I think the bank has done the right thing in announcing its exposure. And the bank has done its right thing in making sure that quarter 1, the normal P&L as well as the extraordinary gains are used towards building extraordinary items and cushions by making expected loss coverages. So I think that is where we should focus on and not take anything away from the great work that has been put in the first quarter.

The next question is around, do you have all the regulatory approvals for increasing the FOL to 40%? And when you -- would you kindly repeat when by what time do you expect it to be implemented?

I think one, we've got approvals in place from the General Assembly as well as a few regulatory approvals already are in place. We are still waiting for a couple of things before we will be able to implement that. We are targeting to implement this in the second quarter. We will obviously look at where the markets are. And there is clearly demand for our script and a lot of, I would say, positive pressure for us to increase the FOL given that we are always very close to the maximum allowable limit. So I think that's a positive. The shareholders have approved it. We are just making sure that we get all the relevant regulatory approval before we make an announcement of when would we be implementing it.

All right. So question from Janany from Arqaam. The first question is around the 40% increase in OpEx, driven by Noor consolidation, are there any one-offs? And what sort of cost synergies and integration costs are expected from Noor? And could you share the time line?

I think I've already mentioned the time line we should be expecting synergies to come out by the time we integrate the 2 institutions, and it's a phased integration. We plan to complete the integration by the last quarter of 2020. Obviously, COVID does not help the situation given that everybody is working from home, but we'll try and make sure that we meet those deadlines. As of now, we have continued to meet every key milestone within that integration. The increase in OpEx, obviously, you're comparing 2 periods, this is because of the Noor consolidation and the fact that obviously the revenues have not kicked in the way we had anticipated them to kick in, in the first quarter, given the COVID and pandemic situation and obviously, the lower interest rate scenarios when you compare it period-to-period, but we expect, like I've mentioned, cost synergies to come out towards the completion of this integration, and that will enhance our P&L.

The second question is around the fee income, which she said it was a bit soft in quarter 1 despite consolidation from Noor. Was it driven by COVID impact towards the end of Q1? Or is there any other factor?

No, I think it's obviously a combination of: One, COVID, the pandemic is not helping anyone. And a lot of uncertainty around the kind of headwinds that we are facing. So I think Q1 fee income is just a reflection of -- business was not as regular in terms of the physical operations of the bank or all the banks for that matter, and that is just the result of the COVID impact. We anticipate that as the lockdown has started to soften and activity is coming back to normalcy, we expect not just the fee income, but also just the general pipeline of financing to grow going forward.

Third is around the TESS program. Have you already tapped your TESS? And would you be able to share how much you have access? And what percent of your book has requested for payment holiday so far?

No. Yes, we have that tapped into the TESS program, details of which need not be shared. But what percentage of our book has requested? Clearly, the TESS is for the private sector as well as for individuals. And whichever customer is impacted by the COVID-19 situation is eligible for TESS. We are looking at it on a case-by-case basis. But in a nutshell, yes, we have tapped the TESS program, and we continue to support both the economy as well as our customers within who qualify for TESS.

The fourth is again an update on the time line on FOL effectuation.

Yes, I've already mentioned that you should expect this -- once we have the remaining regulatory approvals -- we've received a few regulatory approvals. But when we have the remaining regulatory approvals in place, we should probably be executing this sooner than later, given that there has been so much demand for our script. So I should be confident of doing this in quarter 2 of 2020.

And the last one is on the current guidance and how comfortable we are given the current environment?

Well, I think it's very early. As you know, Janany, once we give ourselves guidance at the beginning of the year, we stick to that guidance at least until mid-year. So we will revisit the guidance. There's so much uncertainty around us right now. I think it is -- it would not be appropriate for us to revise the guidance upwards or downwards or even confirm the guidance. The guidance is where it is right now. We've also measured ourselves vis-à-vis the guidance. But I can tell you that quarter 2, in terms of pipeline of business, is looking -- for us looking more better than quarter 1. So I think let's take quarter-by-quarter at one time. Quarter 1 has panned out very well for us. There have been no surprises for us. The only surprise was COVID-19. And that made sure -- we made sure that the bank is in a very good, strong position to manage the economic headwinds coming out of COVID-19.

There are a lot of repeated questions. So we just only -- because we're already running out of time, so we'll take up 1 more set of questions and then call it from there. And then we can take the questions offline and on e-mail or on this conference call with the Investor Relations team. There's a question from Jaap from Arqaam. Why are you continuing to stick with the 2020 guidance? And when do you -- when would you expect an update on your ECL model based on the new macro environment?

No, Jaap, thank you for your question. It allows me to clarify. We are not sticking to our 2020 guidance, neither are we increasing or decreasing it. I think what we are saying is that the guidance is where it is. We will definitely visit our guidance, which we've always been doing at the end of quarter 2. I think given that there is not adequate visibility around what sort of economic downturn we are facing with this pandemic and what sort of economic headwinds we are facing, I think it would be -- we would be getting ahead of ourselves if we would be revising our guidance because any number would be very relative at this point in time. So I think what we have done is we are trying to steer everybody's view towards quarter 1, which is a quarter we have already ended and demonstrated. And I think as we go forward and as we see how the COVID situation regularizes itself and what kind of economic downturn we are looking at and how quickly can the economy bounce back is when we feel the right time to revise our guidance.

Another question from Jaap is on what would you expect to update -- when would you expect to update your ECL models based on the new macro environment?

Well, I think, obviously, the ECL modeling that we have done so far is we have changed our weighted probabilities within the ECL modeling, we've also taken -- looked at sector overlays. Now those are 2 things that are forward-looking, and we can change weightages and update our computations and make the model throw out a number. But macroeconomic indicators need to be updated by the regulators. And when the macroeconomic indicators would be updated, that would also be taken into the modeling, and then we will see. But at this stage, you would agree, Jaap, that we have taken adequate cushions and built adequate cushions and made Stage 1 and Stage 2 provisioning wherever we can. And the AED 1.5 billion that is flowing out of our P&L is allowing us to create those cushions that we have done in quarter 1.

Okay. So that brings us to the end of the session because there are too many questions. I would suggest that those who -- which have been unanswered and get in touch with the Investor Relations team, and we will try and do a call to answer those as well. At the end, I would request Dr. Adnan to just give a summary of the entire session, and then we will call it today.

Thank you, Kashif. I think it's important that we very quickly summarize. Let's make no mistake that we are in unprecedented times. And this time is obviously going to create a lot of economic headwinds. And we need to find the best way to maneuver and steer the bank from unforeseen contingencies that may arise because of these economic headwinds. I think quarter 1, the bank has posted good results, and that has allowed us to make sure that we have adequate cushions in-built to go into this very, very uncertain period. Now obviously, I say the bank has done well is because despite the current environment, we have -- our core growth has continued in terms of income and revenues. We have still posted strong results in terms of ROEs and ROAS. We have completed the acquisition and are moving towards integration of Noor Bank. This integration is going to create synergies, which would allow us to enhance our P&L going forward. In the first quarter, we've made sure that our risk management is aligned and effective. The gain that came out of Noor Bank has been used along with our normal P&L has been used to make extraordinary impairments and build ECL as well as management overlays. This has been used to make sure that Stage 1, Stage 2, Stage 3 coverages have been enhanced. When you take a step back and look at normalized profit growth, you can see that the bank has actually posted a normalized profit growth despite this this very tough macro environment, thereby taking away extraordinary items. Capitalization remains robust. Liquidity is sufficient. And clearly, I think we need to now focus on making sure that the bank continues to put its best foot forward in managing expectations from the market, shareholders, investors and make sure that quarter 2 is no different from quarter 1 in terms of results. With that, I would like to thank everybody who has participated in this call. I'm sure that you still have a lot of questions. We would be happy to take this offline, please do get in touch with our Investor Relations team, and we will take questions as and when they come even on an off-line basis. Thank you, and please stay safe.

Thank you, Dr. Adnan, and thank you, everyone, for joining us on this call. We will be in touch going forward. Stay safe, and see you guys soon. Thanks.