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

Ladies and gentlemen, welcome to the Dubai Islamic Bank Second Quarter Earnings Conference Call and Audio Webcast. [Operator Instructions] I will now hand over to your Janany Vamadeva from Arqaam Capital. Ms. Vamadeva, please go ahead.

Thank you, George. Good afternoon, 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 Q2 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 Strategy and Investor Relations; and Mr. Kashif Moosa, the Head of Investor Relations and Strategic Communication. 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 greetings, everyone, and hope you and your families are safe in these times. Welcome to another results announcement and webcast by DIB. The session is led, as always, by Dr. Adnan Chilwan, the Group CEO, who is accompanied by Salman Liaqat, the Chief of Strategy and IR, and myself. Request you all to keep your questions coming through the e-mail link provided, and we will then take them up once the presentation is concluded. So with that, let's start the session. Moving now to Slide 4. This slide basically highlights how the leadership of UAE, in its typical proactive nature, has acted pointedly and decisively, creating a new flexible government structure that can keep pace with the global trends and the current dynamic environment. And this new governance structure, which is built around agility and responsiveness, promises sustainability and development, not just in these testing times but also in the postpandemic scenario when the normalcy resumes. A thing that stands out from the various actions taken by the leadership primarily is accelerating decision-making and seizing future opportunities clearly from -- which form the basis of the recent changes. For example, the agenda has already seen concrete support to manage the current and post-COVID setting through the announcement of more than AED 6 billion stimulus package to combat the slowdown. Irrespective and despite the ongoing pandemic, Dubai continues to be a safe haven for international travelers and businesses and tourism. Just earlier this month, the WTTC has given the Emirate a Safe Travels stamp, and this sort of validates the stringent hygiene and safety protocols that the city has put in place during the coronavirus pandemic. And further to that, Dubai itself has launched the Dubai Assured stamp for tourism and retail establishments that comply with health and safety protocols. So the Dubai Assured is a program to certify and recognize hotels or retail establishments, F&B outlets, attractions that have implemented all public health protocols for prevention and management of COVID-19. So basically, again, all of the above effectively show that government is not just fully aware and cognizant of what is required to revive the economy, but to -- also is aware how to put it on a recovery path. And is very then able to take the necessary steps and actions to implement the critical measures through both reforms and funding. So given these significant and rapid developments, DIB or [ BC ] has also realigned its strategy to address the challenges in today's marketplace. With that, I will pass now on to Dr. Adnan, Group CEO, to take you through the specifics of the strategic realignment in the last few months and the resulting performance of the bank. Dr. Adnan, please?

Thank you, Kashif. I think before I go and dive into the financial highlights for the quarter as well as the first half of 2020, it's important to kind of just throw some color on what we've been doing so far, in essence, what we call as strategy realignment in these testing unprecedented times. If you turn to Page 6, we've got 4 quadrants here, which roughly talk about or summarize what we've been doing. First and foremost is preserving quality of assets. Now what we've been doing is we've been closely monitoring the quality of assets and maintaining healthy nonperforming financing, which obviously we will see a few slides from now, which currently stands at around 4.5%. Now in order to do that, the bank has been implementing stringent underwriting standards for new credit, which has also allowed us to ensure that the robustness of our portfolio is maintained. From left to right, if you see the second quadrant, you're talking about focusing on low-risk assets as well as sectors. This predominantly means that in the first half of 2020, we have been focusing on sovereign-backed transactions. And typically, these would be quasi-government or government-related entities, and that is done in order to ensure that the risk profile is appropriately managed whilst we've also been protecting the franchise. Now this typically would mean and entail that we've been cushioning our balance sheet by building provisions, growing in low-risk sectors as well as maintaining liquidity and capitalization. Now clearly, the aim is to protect the franchise in these times and ensure that long-term sustainability of the business as well as returns to stakeholders are maintained. The last quadrant on this slide talks about maximizing integration synergies. And as you are now aware, we've entered into an actual execution phase between the 2 banks. And if all things go well, we are on track to complete the integration by the end of 2020, and that one should then anticipate further synergies that would materialize from the acquisition. Obviously, we have started to see these synergies kick in. But as we progress towards the latter part of the year and as the integration efforts mature, we would try and unlock further synergies, which is always something that we had planned at the beginning of the year. On Page 7, very quickly, a cluttered slide. But if you just focus on the first half of that slide, we're talking about some strategic highlights. A key point to note is that during these unprecedented times, we've made sure that business continuity was maintained with minimal disruptions to operations. Now clearly, not forgetting the fact that health and safety measures were rolled out at a very early stage, and the network was rationalized in order to make sure that we continue to operate given the very tough times that the economy was going through. Moving on. When we look at some environmental constraints that were due to the lockdown and due to the pandemic, digital banking took center stage, and we've seen a surge in our digital banking-related activities, i.e. close to around 20% growth in just Internet banking or online banking as well as thereabout a 30% growth in mobile banking transactions. Importantly, the balance sheet has been robust in the first half of 2020. We've now inched closer to the AED 300 billion balance sheet mark. Clearly, numbers don't drive us, but I think it goes to say that the bank is now larger than ever before and everything that we've been doing so far has been managed very seamlessly. The last point I would want to make before we dive into the financial highlights is that we've also managed to make sure that we've arranged more than close to around AED 19 billion of sukuk and syndicated transactions. Now these span across sovereigns, financial institutions as well as large corporate. So we've been in the thick of things within the first half of 2020 from capital-markets-activity standpoint. And I think the league tables then show that we rank very high up there when compared to some of the peers, both regionally as well as internationally. Moving on to Page 9. Something you are familiar with. It's the financial performance of the bank in a nutshell. You can see that the balance sheet, I've already mentioned to you, has gone up by around 27%. Now in the first quarter, the balance sheet was up when compared to December 2019, and that was on account of the integration or the acquisition of Noor Bank. But since then, what has happened is the second quarter of 2020, we have significantly grown that balance sheet, and you will see in subsequent lines of how the balance sheet and various components of the balance sheet have grown. But as a starting point, we've recorded a 27% increase in the balance sheet size, and we are close to around AED 300 billion, AED 295 billion, to be precise. And you can see that we've posted a very strong growth in financing as well as in sukuk combined together. We stand at around AED 237 billion. Second quarter has been a very strong quarter for us in terms of underwriting. Again, no undue risk taken. I've already alluded very subtly to our credit underwriting standards. We stand at AED 237 billion when compared to AED 184 billion in the beginning of the year. What we've done wonderfully well is that we've managed to mobilize adequate deposits and also use our excess liquidity and certain relaxation that have happened in the form of cash risk reserves with the UAE Central Bank as well as the test-related funding. All of that put together, it's -- happy to say that we've managed to mobilize adequate deposits to fund this kind of growth. You can also see that our own sukuk instruments have increased. We've done a capital markets activity last month, and that has taken our financing -- sukuk financing instruments to about AED 18 billion. So overall, the bank has posted a strong growth, and hence, the balance sheet today stands at more than -- in fact, 27% more than what it used to be. In terms of income statement, no surprises there. Obviously, the top line is under pressure. And it is on account of the interest rate environment that we are in. When you compare the first half of 2019 with the first half of 2020, we've recorded a slight reduction in the total income. I would say that in today's environment, this is still a very positive signal from the bank that despite a very challenging environment, the bank has won, grown to also make sure that its income and the components of income are still major contributors. Net operating revenue. Now again, this is a combination of how we've managed both the revenue lines as well as the cost of funding lines. You can see that there is a slight inch up when compared to the first half of 2019. Needless to say, the numbers that you are seeing here are all consolidated now, and that is what we are going to be reporting going forward. You can see that the operating expenses are slightly higher than where we were in the first half of 2019. Now obviously, this is on account of the acquisition of Noor Bank. So you are seeing in full baked numbers. And as we progress through the remaining part of 2020, we will see that the further rationalization of expenses would be done. So if you look at quarter-on-quarter, we've already managed to rationalize the expenses significantly. And in the remaining latter part of 2020, you would see further synergies being unlocked. Now profit before impairment and charges is slightly down. Now it's a combination of the top 3 lines that we've been talking about. Clearly, revenues have been at similar levels to 2019, and expenses have slightly gone up, given that the base has now increased and we've acquired Noor Bank. But the resulting profit before impairment is 7% less than what it used to be, still very good in today's time. And then, finally, what we are doing is we are offsetting it against the extraordinary impairments and overlays that we've been taking in the first 2 quarters of 2020. So you can see that we reported a profit of about AED 2.1 billion, which is 23% from -- less than 2019 first half. But I think what is heartening to see in this is that the bank has made adequate level of provisioning and ECLs as well as overlays to the tune of AED 2.1 billion. So that actually tells you the strength of the bank and the strength of the overall P&L, which has allowed us to do this kind of -- or maintain these kind of buffers within the bank going forward in this very highly uncertain time that has been a result of the pandemic. The next table on your right are some key ratios. We go into greater details on subsequent slides, but it's important very quickly to talk about a few of them. The net financing-to-deposit ratio, you can see is at 97%. If you recall at the beginning of the year, we were at 92%. And I always mentioned that we would want to inch up as closer to 95%, 96% because that would mean that we are efficiently managing our balance sheet. And I think in the first 6 months, we've done exactly that. We stand strong on the capital adequacy ratio. This is despite the credit underwriting that we have done. Our CET ratio remains strong, around 230 basis points more than where we should be in terms of the minimum CET1 requirement. Our nonperforming loan at 4.5% is still very acceptable to us. As you know, in these testing times, certain assets deteriorating, what we've done well is that we have managed to keep it at 4.5%. Now obviously, this is a combination of the numerator increasing as well as our denominator increasing significantly. In terms of ROEs and ROAs, we are at around 16% and 1.94%, respectively, but that is expected. Given that the net profit has reduced by around 23%, it's just a reflection of the market today. And as we would continue to increase our P&L going forward in subsequent quarters, you will see that the ROEs will kind of normalize themselves in line with where our guidance used to be. Clearly, a very challenging milestone given that when we had locked ourselves with the guidance for the year, it was on account of not knowing what is going to happen in subsequent quarters, and then we've been surprised with the pandemic. But hence, we are at these levels. Clearly, at 16% ROEs and 1.94% ROAs, we are on the very high side of the range when compared to the market. Our net profit margin is, again, a reflection of the reality today. At 2.82%, we are off from our guidance, but clearly, again, one of the highest net profit margins within the country. It's a reflection of a declining interest rate scenario. Our cost-to-income ratio, no surprises there. We were anticipating that with the acquisition of new bank, we will be close toward the 30% number in the short term. And it's now our objective to bring this number down as synergies start unlocking themselves and revenues. Obviously, this is a resultant of a numerator and a denominator, the numerator being revenues, which have been muted in the first half; and the denominator being costs, which have increased. I think this ratio will start coming down to our normalcy levels as we progress in subsequent quarters. Now that we've grown the base, revenues have started to kick in and also obviously cost synergies are starting to show. So one should expect that we should be going down with the cost-to-income ratio. Moving on. On Page 10, we can see the operating performance. I've covered most of this in brief on the preceding slide, but you can see that our first half net operating revenues were at -- stand at around AED 4.7 billion, and our first half net profit stand at around AED 2.1 billion. In terms of profit-bearing assets and strong and sustained margins, you can see that while our base has grown significantly in terms of profit-bearing assets, the margins have slightly come down for the reasons I've mentioned on the preceding slide. I think we will not go through the cost-to-income ratio, ROEs or ROAs. We've already covered that. But it's important to understand that despite a subdued macroeconomic environment, our profitability in today's time, in my opinion, has been robust. Cost-to-income ratio is something that would start inching down, which would be very positive once synergies start to kick in. And finally, the dilution of margins that we have been talking about is just because of an interest rate environment that we are in. On Page 11, let's very quickly look at the financing and where is this growth coming from. You can see that almost all our businesses are inching up in the right direction, strong growth within our wholesale bank, followed very closely by our consumer bank, which has grown by close to about 5%. And our wholesale bank has grown in double digits in the first half of 2020. In terms of our breakdown of financing portfolio, again, no significant change there. Our real estate, which had slightly gone up to around 20%, 21% at the end of last year, we brought that down to around 19%, clearly shows you that with the base increase, i.e., the strong growth in financing that we have reported, we have not grown the real estate segment. And this is just wholesale banking and healthy growth that we have seen in other sectors, predominantly government, GREs, quasi-GREs and so on and so forth. On Page 12, you can see basically a little deep dive into the consumer banking portfolio. This portfolio has now become bigger than what it used to be at the beginning of the year courtesy the acquisition of Noor Bank as well as just general growth that we have seen in our consumer banking in the first half of 2020. We stand today at a portfolio of around AED 52 billion, and you can see how that has been now divided between the home finance as well as personal finance, followed by auto finance and a very small cards business. But overall, the consumer bank continues to be a net lender to the overall bank. You can see a substantial increase in the consumer banking deposits. And when I say deposits, I just purely mean liabilities. This would be current accounts, savings accounts, fixed deposits and so on and so forth. You can see that the bank has close to around AED 90 billion liabilities in the consumer bank versus a financing of about AED 52 billion. So close to about 40 billion net lender to the pool. And you can also see an inch-up in the current and savings account, which is, I think, very, very positive for the bank. And you will see that on subsequent slides, the CASA ratio of the bank has improved significantly in the first half of 2020. In terms of revenues, again, no surprises there. It's just a reflection of the interest rate environment. So the yields have slightly come down, and this is again in line with the overall yields of the bank coming down. But in essence, when you look at the fees and commissions contribution from the consumer bank as well as the net funded income contribution from the consumer bank, higher in 2020 when compared to the first half of 2019. So that's a positive. Moving on, Slide 13. The corporate banking, a deep dive in that business. A very large book for the bank. Significant increase in this book courtesy the acquisition of Noor Bank, but more importantly, the very strong growth posted in the second quarter. So whilst the Noor Bank numbers have been added to the corporate bank in the first quarter, I think let's not take anything away from the team's performance in the second quarter because they have significantly enhanced the contribution to the total assets and the total financing of the bank. It stands today at AED 152 billion. You can see a very colorful pie in front of you, which shows you the kind of diversification we've been doing throughout the last so many years when we've embarked on a strategy to grow this book. The corporate bank is obviously a net borrower when compared to the other functions in the bank or the other businesses in the bank. It funds about AED 111 billion of deposits itself, but then borrows from the central pool of the bank. In terms of income and revenues in the corporate bank, a slight decline there because one should expect that to happen in a declining interest rate scenario. The corporate book is predominantly variable in nature, so it has been repriced downward. So even though the book has significantly increased, there is pressure on the corporate margins, and that is what is pulling down the bank's margins, which is again a reflection of where we are. So you can see around 130 basis points reduction in the corporate banking margins, and that is purely on account of interest rate and nothing else. However, if you look at the CASA, the current and the savings account, you can see a significant contribution by the corporate bank just like the consumer bank. And you can see that the CASA accounts have jumped up by around 80% in the first half of 2020. Now these 2 businesses put together have allowed us to maintain or in fact, improve the CASA balances or the CASA percentage for the bank. And you will see on a slide -- a subsequent slide from now, you will see that the CASA balances for the bank are close to around 41% of the bank's overall deposits. But moving on, treasury. A very quick look, a growing book, a very important business for us. It's a business that not only contributes to the P&L of the bank in terms of its yields or in terms of its contributions in fees and commission, but most importantly is a catalyst for us to generate liquidity as well. And I think a strong treasury book, a strong fixed income book allows us to generate short-term liquidity through repo transactions, which does not put pressure on us to go to the market and mobilize expensive deposits. And I think through a combination of various initiatives that we have done in the first half of 2020, the result is we've been able to manage our balance sheet quite well and inch up that finance-to-deposit ratio close to around 97%, which means we were not under pressure to borrow expensive deposits from the market because, mind you, liquidity is finite and limited, and we do not want to be paying premium rates to kind of mobilize deposits in order to support our financing. So I think a very important business for us. And you can see that the yields are no different on the consumer bank or from the corporate bank, i.e., they have gone down. And again, it's a reflection of where the rates are. But overall, the book has contributed in terms of total income. You can see that this has gone up from around AED 539 million to around AED 675 million. Before I move on to the next page, an important point to note here is the breakdown of our treasury book. You can see that it's a well-diversified book. And again, it's a reflection of the issuers in the market. So I think we always make sure that we invest in rated papers or if unrated, we make sure that those investments are limited as well. On Page 15, a very, very important slide, and I'm sure you will have a lot of questions on asset quality. You can see that the absolute amount has gone up from about 7 -- from about AED 6.3 billion in -- at the end of 2019 to around AED 9.5 billion. Now just a general deep dive into this AED 9.5 billion. You would recall that in the first quarter, around AED 1.2 billion was on account of the POCI assets that we had acquired, and this is nothing but the nonperforming financing book of Noor Bank coming into DIB's balance sheet in the form of purchased or originated credit-impaired assets or what we call as POCI. So that was that AED 1.2 billion increase, and the remaining increase from AED 6.3 billion plus AED 1.2 billion, minus AED 9.5 billion is just a classification of certain accounts that we have done in quarter 2 from Stage 2 to Stage 3. That was a reason of why this absolute amount had increased. Clearly, that was -- we are following a prudent strategy and making sure that we continue to classify accounts wherever appropriate, irrespective of positive developments happening with those accounts within the restructuring efforts that are being talked about or that are being discussed. I think it's important for us to call a spade a spade and classify accounts where appropriate. Now in the bigger scheme of things, you can see that the ratio has gone up from 3.9% to 4.5%. Now clearly, there is a denominator effect there. The denominator has grown by circa AED 20-odd billion, so that is ensuring that the ratio does not look overwhelming. At 4.5%, we are well below the industry averages or some of our other peers that you may compare us to. Now the coverage ratio in terms of cash coverage, let me explain that the coverage has gone down from 100% to 81%. And it's important to understand that we've not reversed any provisions and enhanced our P&L. This is only on account of the reclassification of certain large accounts that we have done from Stage 2 to Stage 3, so the denominator of Stage 3 loans have increased and obviously, we are accurately providing -- provided in quarter 1 for those loans, and we've not made additional provisions for those because that is not required. But it's just that classification has increased the denominator. And hence, you see that the cash coverage ratio has gone down from 101% to 81%, not necessarily it means that we have reversed provisions and enhanced P&L. So that is important for you to understand. Where do we take the cash coverage ratio from here? Obviously, if everything remains as it is, we will continue to make required provisions and we should see an improvement in cash coverage ratio. But we are 6 months to the end of the year, and I think let's take 1 quarter at a time. As of now, we are comfortable with where the coverage ratio is. Even though it looks a 20 basis points reduction within the ratio, it's only on account of the denominator increasing and provision levels for those specific accounts remaining where they are. On Page 16, a little deep dive into further asset quality. It's a slide we have introduced from a couple of quarters. You can see that our ECL coverage across various stages. I've just explained to you Stage 3 in particular, which is why the NPL ratio is at 4.5% and the subsequent cash coverage ratio. But look at ECL coverage for Stage 1 and Stage 2, you can see that we have maintained the -- despite the growing -- despite the growth in the denominator for both Stage 1 and Stage 2, you can see that our coverage has increased from where we were at the end of last year. Clearly, for Stage 3, I've already explained to you, it's just a function of the denominator increasing and the provision levels, which were adequate at the end of quarter 1, have been maintained in quarter 2 as well. In terms of expected credit losses, you can see that we have a total of close to around AED 7-odd billion. Clear -- this is in addition or besides the POCI that we have. So if you add up all the 3 together, Stage 1, Stage 2, Stage 3 and then the POCI, you should reach at AED 9.5 billion. But clearly, Stage 1, Stage 2 and Stage 3 add up to around AED 7 billion or thereabouts. On Page 17, you can see basically how the bank has funded its growth, predominantly in the form of deposits. I've already mentioned to you, we have inched up deliberately the advance-to-deposit ratio from 92% to 97%. You can see the LCR coverage or the liquidity coverage ratio or the LCR ratio stands at 89%. As you know, the regulator has relaxed the LCR given the COVID and the pandemic. So it is now -- the requirement is 70% and not 100% anymore for the foreseeable future. We are at 89%, which is above the 70% mark that we should be. Should the LCR ratio be revised upwards and the regulator reinstate the 100% LCR levels, we would be very comfortably back to those levels. So the point I'm trying to make is that we are taking advantage of the relaxed LCR because we can do so. And if the regulator goes back to 100%, then we should be seeing ourselves go up above 100%, and we manage our liquidity appropriately. And I say that with a lot of confidence given that you have seen historically that when the LDR -- LCR ratio used to be at 100%, we used to operate at above 100%. So that should give you comfort that the bank has historically been very strong when it comes to liquidity. In terms of deposits, predominantly, our balance sheet is funded by deposits. You can see that majority of our deposits come from, I think, a combination of wholesale and consumer bank, which is always good to maintain that kind of split, very well diversified. Not very large concentration risk there, but heartening to see, when compared to December 2019, the CASA accounts have gone up and now contribute around 41% as opposed to around 33%, 34% at the end of 2019. Now everything that I have said this far is a part of a deliberate strategy that we have always articulated and alluded to on various calls. Almost all the webcasts that we've been doing, we've been saying that we endeavor to make sure that CASA balances and composition improves. We endeavor to make sure that ADR ratio inches up to 95%. We endeavor to make sure that we continue to have robust balance sheet, and by that, I mean, asset quality. We continue to make sure that we grow in the right segments and maintain our yields. So nothing of this should be coming as a surprise to the investor community. I think the bank has historically proven time and again that it has managed key components of its balance sheet by a very well-crafted strategy. And I think the first half of 2020, again, is a testament to that fact. Capitalization on Page 18. You can see we've already touched upon very, very briefly. We have adequate capital levels, both in terms of total CAR as well as common equity. And you can see that despite this very strong growth that we have posted, our capital levels remain intact. On Page 20, the strategic focus of the bank continues to remain the same. Again, I think -- at the end of quarter 1, everybody asked me if I wanted to revise my guidance. And at that stage, also with the information that I had and the pipeline that I anticipated, I said that maybe it's too early to revise our guidance. And now I think you can see the reason why we have managed to post some strong growth in terms of 29% versus where the guidance was. Again, I know there'll be a leading question asking if we are going to revise our guidance upwards. I'm not -- I think for this year, the guidance should be immaterial and irrelevant for everyone. Given that we are in uncertain times, I think we are going to take 1 quarter at a time and post the results in front of you. So we are not going to get rid of this page. We will continue showing it to you and you can do your own extrapolations and you can do your own analysis. But as far as I am concerned, we would not be revising our guidance upwards or downwards. We want to make sure that wherever there is a room for improvement, we would kind of put our best foot forward, which is what we've been doing, not 1 quarter, 2 quarters, but over the last 7 or 8 years since the leadership of the bank has changed. But very quickly, we have already seen where we are vis-à-vis all these numbers, so I'm not going to go into greater details. On Page #21, time lines. Happy to tell you that we are making progress. This far, everything is on track. So we should be looking at integrating the institution by the end of 2020. With that, I am going to open the floor for questions. But I would leave 2 or 3 minutes at the end of the hour to kind of wrap up everything and put together a brief summary for you. It is important so that people are not derailed and continue to focus on the positives of the bank and not be inundated by things that are irrelevant today. So opening the floor for questions. Please feel free, and you can ask me whatever you feel like.

Thank you, Dr. Adnan. Everyone, we've opened the floor to questions now, as Doctor said. And we just go through the questions that have already started coming in and answer them in order. And we'll try not to repeat the answers and pick up the ones that are new so that -- for everyone's benefit. Thank you.

Ladies and gentlemen, we will now start the Q&A session. [Operator Instructions]

So we'll start with a string of questions from Janany from Arqaam Capital. The first question is on the cash coverage, which has come down to 80% in quarter 2. Would you still increase it to your target of 100% in 2020? And has the COVID-19 overlay has been maintained at AED 600 million from quarter 1? How do you expect the impact for cost of risk for -- in half 2, second half?

Thank you, Janany, for your question. Obviously reading the question, it's very obvious that it has been drafted prior to my explanation. But I will, for the sake of everyone, because I think you asked some very inherent and important questions, which allows us to set context for everybody else, even though I have repeated -- even though I have already answered these questions, I will repeat it here. So cash coverage has dropped to 80%. I've already mentioned to you the reason for that. We have actually reclassified a couple of accounts from Stage 2 to Stage 3. But whilst they were in Stage 2, we had already made the required level of provisions for those accounts in quarter 1. So the denominator in quarter 2, the Stage 3 denominator has increased and the relevant provisions for those accounts were not necessitated, and hence, you see that ratio drop from about 100% to 80%. Now where would we target that for the end of 2020? If you ask me, I still want to be close to 100% as I can, but that is something that we would look at quarter-on-quarter. I think what is important to understand is that the accounts that move from Stage 1 to Stage 3, or Stage 2 to Stage 3 how comfortable are we on those accounts vis-à-vis specific cash provision? And I can tell you that the accounts that today are within Stage 3 are adequately provided for. And let's not forget that for certain accounts, we also have the benefit of the total collateral and the securities. So overall, I think, yes, absolutely. Optically, it looks that we have gone down from 100% to 80%, and one might assume that we have probably reversed or released provisions, but that is not the case. Clearly, the denominator in Stage 3 has increased, but give it some time and let's revisit this towards the end of the year and see how we build the required coverage for the Stage 3 accounts.

Question number two from Janany. What is the Stage 3 share of deferral exposure?

Janany, under the deferral program, I think there is relaxation and relief that whatever is being deferred need not be changed in terms of classification from Stage 1 or Stage 2 to Stage 3. So to answer your question, there is no deferral exposure within Stage 3. The accounts in Stage 3 are purely having an asset quality issue and not a deferral-related issue or -- because the deferral-related issues should be looked up -- looked at as a cash flow-related issue, a temporary relief that has been given to customers that are looking for it. And those accounts continue to be within Stage 1 or Stage 2, in line with the guidance from the regulator. We don't anticipate any accounts moving post the deferral period to move from Stage 1 or Stage 2 into Stage 3. So that should give you comfort that Stage 3 accounts are purely impaired-asset-quality-related issues rather than deferral issues that have been passed within Stage 3.

The third question is on the cost synergies that have kicked in, in quarter 2. Can you throw some color on it? And can we take the quarter 2 run rate for the second half as well?

Well, I would kind of wait and see quarter-on-quarter. Rationalization is an inherent part of our strategy. We endeavor to make sure that we bring about synergies as much as we can. I would not like to give a number that would then we would be pinned by that. But you can see that stage -- that in quarter 2, we have unlocked synergies. I would anticipate the synergies to be similar or even more in quarter -- in the remaining part of 2020. But throwing a percentage is something that we should not be doing at this stage. But I think you are heading in the right direction, if I may say.

The last question from Janany is on any update on the FOL actuation, if you could share that with us.

I think we've always been very opportunistic when it comes to foreign ownership limit execution. We have the required level of approvals. Now it's just to kind of execute it. We would wait for the right time that would enhance -- that would give the benefit to all existing shareholders as well as give people an opportunity, the shareholders or the potential investors that sit on the sideline. I know that there is pressure on us for them to come in. This is something that we've been hearing over the last so many years. I think we made the most positive step in the right direction. Give us some time, I think we don't want to get ahead of ourselves. We will announce the effective date when we think that the market is ready for it and everybody stands to benefit from that change.

Question from Elena from Al Ramz. The first question is around loan and deposit growth, which has remained strong in year-to-date so far, both are close to 30% apiece. What are the drivers? And what can we expect in the next 2 quarters?

Absolutely, Maria. The loan and deposits have grown close to 30% apiece, and that should be -- that should be looked at very positively, which means that it's just not one side of the balance sheet. We are making sure that whilst we grow our assets or financing, we have adequately matched that with a relevant increase in liabilities or deposits. What are the key drivers? I think a combination of 2 things. One is obviously the acquisition that we've done in the first quarter of 2020. But more importantly, a very strong second quarter in terms of loan growth. And how have we done that is, like we said, we've focused on prudent credit underwriting. There is a demand for credit in the market. There is a lot of demand for credit in the market. However, one has to be very selective, which is what we've done without compromising our credit underwriting standards. We have ensured that we have not taken undue risk by going into segments that can be risky. We've also made sure that whatever lending that we are doing are at acceptable net interest margins to the bank. So what we've been doing is over the last 2 quarters, we've been focusing on very selective and risk-free financing, and that comes typically to government, where government is an obligor. We've not gone into sectors such as aviation or real estate or retail or the private sector. We've been very, very selective. And I think as a result, one can say that we have been underwriting very low-risk assets, and we've done that well. What would be -- what should you expect over the next 2 quarters? I think it's going to be a function of, one, the capacity that we have. I think the first half of 2020, we've managed to kind of post this strong growth because of the capacity that we have. And that capacity, if you remember, was preemptively created in prior quarters. And I alluded to this and articulated a very detailed strategy saying that we've created the capacity. Now we are going to deploy that capacity. And when I say capacity, I mean both capital as well as liquidity. And this is a strategy, though it sounds overly simplistic, it is not. It is very, very challenging, especially when you have an unknown warrior in the form of pandemic, so articulating a strategy and then executing it are 2 different things. And I think very happy to say that in the first 6 months, we managed to do that well. What should one expect? I think if there is good quality credit growth that is available for us in the remaining part of 2020, you will see us underwriting that, provided that we have the required capital and the required liquidity. So I think let's not get ahead of ourselves. I don't want to throw numbers. We gave guidance at the beginning of the year. We've already achieved that guidance, and I'm not going to revise that guidance upwards or downwards.