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

Ladies and gentlemen, welcome to the Dubai Islamic Bank Q3 2020 Financial Results Conference Call and Audio Webcast. [Operator Instructions] I will now hand over to your host, Janany Vamadeva from Arqaam Capital. Please go ahead.

Thank you, sir. 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 Q3 2020 Earnings Conference Call. I have with me here today from DIB management Dr. Adnan Chilwan, the Group Chief Executive Officer; Mr. Salman Liaqat, 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 greetings, everyone, and thank you for joining us on our third quarter results announcement and webcast. The session, as always, is led by Dr. Adnan, the group CEO; accompanied by Salman Liaqat, Chief of Strategy and IR; and myself. I request you all to keep the questions coming through the e-mail ID provided, and we will then take them up once the presentation is concluded. So with that, let's start the session. So we move on to Slide 4. And here, as we see, the economic fundamentals of UAE continue to remain healthy. The government is clearly committed to navigate these headwinds progressing towards emerging as an even stronger player in the coming days. With significant hydrocarbon reserves and home to one of the largest sovereign funds globally, the UAE remains resilient to withstand global systemic shocks and market volatility. The country also enjoyed a stable government with robust international relations with global economy and sustained strong confidence from international investor community. On to the COVID crisis. Now responding to that, we've seen a proactive and robust fiscal policy support schemes by the regulators in the form of total stimulus from Dubai Government alone, now more than AED 6 billion. This, combined with AED 100-odd-billion under the TESS Program from the UAE Central Bank has supported around 300,000 customers and 10,000 SMEs and about 1,500 sector company -- companies. Moving to Slide 5. Reference the gradual reopening of the economic sector, there has been a significant focus on reinforcing stricter precautionary safety measures. Authorities have been continuously reiterating to public the importance of adhering to those safety guidelines with zero tolerance on approach towards the violators. We've also witnessed the steady return to travel with Emirates Airlines now flying to more than 100 destinations compared to around 60 in July and virtually 0 during the lockdown. On the real estate front, there has been an increase in demand from end users and first-time buyers from purchasing villas and townhouses. And driven -- this is primarily driven by the low interest rate environment, reduced loan-to-value and the need for larger living space during the pandemic times as part of the work-from-home scenario. With these brief update, I will now request Dr. Adnan, group CEO, to take us through the earnings review of the bank. Dr. Adnan, please?

Thank you, Kashif. Good afternoon, everyone. I draw your attention on Page 7 where, in a nutshell, we would focus on some key strategic business highlights for the first 9 months ending September 2020, and then move on to look at the balance sheet and the profit and loss in slightly greater detail. If you can probably witness till now, we've shown and demonstrated robust balance sheet growth. And by that I mean our new financing from the beginning of the year till date has moved up by about AED 42 billion, both across predominantly corporate banking, followed by the consumer business. In terms of our TESS program, we continue to extend customer support, and you can see we have given release measures close to around AED 8 billion across both these businesses. We've seen some strong recovery in the home finance market, and we've captured part of that strong recovery. This is in terms of monthly bookings. We've seen a significant uptick. In fact, even higher than the 2019 levels by around 10% to 15%. Our presence in the Islamic capital market space grows from strength to strength. We've supported close to around $20 billion of transactions, both on the Sukuk as well as the syndicated front. And also in terms of integration with Noor Bank, we are on target to complete this by the Q4 2020, which means before the end of the year, we will see a complete integration of Noor Bank. In terms of our digital banking strategy, it has panned out well. We've seen customers preference to shift from the normal banking channel to digital banking. And the percentages on screen here shows that we've seen an up tick, both in online transactions as well as application downloads followed by application transactions, app transactions, which have increased circa around 30%. On Page 8, it's important that 2020, our strategy has been to preserve long-term value for our customers. And we've done that by making sure our balance sheet has increased by about 29%, close to around 30%. It's become a AED 300 billion bank from where we started at the beginning of the year. And that has been supported by mobilizing of deposits close to around 30%, and those deposits then be deployed within our net financing assets as well as Sukuk assets, which have gone up by around 27%. In terms of income statement, we've announced a group net profit of around AED 3.1 billion. When compared to the same time last year, it's a 22% drop. But what is important to see is that the total revenues of the bank continue to go in the direction that we had anticipated. Clearly, I think that is coming on the back of large transactions and the underwriting that we have done in the first 9 months. So it's very heartening to see that in the current macroeconomic environment, the bank is very close to the levels of group income in terms of where we were in the first 9 months of 2019. And not forgetting the fact that it is the economic backdrop as well as the interest rate environment, same time last year used to be completely different. And in order to post these results -- and, in fact, posting these results in such an environment shows you the strength of the bank. In terms of extraordinary impairment, ECL and overlays, you'll see that we have made much more than what we did in the first 9 months of 2019. We've closed that line at around AED 2.6 billion. That actually shows you that with -- the way the macroeconomic environment and the forecast are, it's very important to make sure that we've got adequate level of provisioning and cushion in built. So overall, I think a strong balance sheet growth. Assets have gone up. We've crossed AED 300 billion mark, and that's up by 29% from the beginning of the year. And our net operating revenues, which is less the cost of funds remained stable at around AED 6.9 billion, slightly higher than the net operating revenue. So that actually tells you in that economic backdrop as well as a lower interest rate environment, we still managed to make sure that net operating revenues are almost at the same levels of 2019. Our operating expenses obviously seem a little higher, and that's because of the acquisition of Noor Bank. But we will continue to rationalize and bring about synergies, which will reflect in the cost-to-income ratio going forward as well. In terms of key ratios, which you will see in details over the next slide, I think the bank continues to be adequately capitalized in terms of total capital adequacy ratio. You can see that we have reported 17.3%. And even our common equity Tier 1 ratio remains to be healthy. Nonperforming loan has gone up from where we were at the beginning of the year, albeit, relatively speaking, when compared to where the averages in the industry are, we are still below -- significantly below the industry averages. ROEs and ROAs are just a function of the returns of the bank, clearly the basis of equity as well as the basis of assets continues to grow. And with the current reported group net profit, the ROEs and ROAs are at 14% and 1.7%, but I must say that these are still at the higher end of the market in today's time. Moving on, on Page 9. Quarter-on-quarter cost-to-income ratio has stabilized. Now even though you see an uptick in the cost-to-income ratio, and I've already explained that it is on account of the acquisition of Noor Bank. On a quarter-on-quarter basis, we have seen that this income has stabilized. And this ratio will obviously continue to improve as the integration synergies materialize as well as revenue starts to go up. We've seen a significant rise in fee income and that's starting to be 19% up from year-on-year, which has allowed us to also support our profitability. The primary contributors obviously to see that commissions have been the enhanced partnerships in the cards business, increase in FX income as well as obviously a consolidated impact of Noor Bank. But in terms of profitability from where we are, first 9 months profit of AED 3.1 billion. Clearly, I think we are seeing some traction in terms of profitability. And hopefully, we'll be able to close the year at a similar level in terms of traction. Our net profit margin has seen some pressure. But again, that is a reflection of where the market is today with a backdrop of 2 things. One is the decline in interest rate environment and our portfolios being repriced. So clearly, this is something that was expected, margins to be under pressure, and we are at 2.7%. I must say, still higher than where the market is generally in terms of NIM as well as in terms of ROEs and ROAs that we've already spoken about. On Page 10, you can see that from the beginning of the year, each of our businesses have gone up in the right direction. And I must say this is not only because of the consolidation of Noor Bank, but also organic growth in DIB businesses. Corporate book has reached AED 143 billion, part of that is because of the acquisition, but more importantly because of the new underwriting that we have done in low risk assets over the first 9 months of 2019 -- 2020. In terms of consumer banking, you can see an uptick, and that is on account of both consolidation of Noor as well as just general organic growth of DIB's consumer bank. We have underwritten new consumer financing to the tune of close to around AED 9.5 billion. Now within this, it also includes the home finance business that I alluded to at the beginning of the presentation. Our real estate concentration has been in line with the guidance. So I think this is something -- it's a conscious strategy that the bank has pursued for the last so many years. And I think it's important to also acknowledge that we have not changed that strategy in the last 5 years or so. Sukuk investments continue to be an important business for us. It takes away our excess liquidity. And you can see that in the first 9 months, we have grown that book by close to around AED 4 billion. Of course, on account of consolidation of Noor Bank as well as organic growth at DIB. On Page 11, we will throw some light on our consumer banking business. Our consumer banking book has grown significantly in the first 9 months, and that is on account of both the consolidation as well as organic growth that we've seen. We have underwritten new financing to the tune of around AED 9.5 billion. And again, the key products on the consumer banking front continue to remain, auto finance, personal finance as well as home finance and our growing card space. In terms of net operating revenues, we've seen an increase of 15% year-on-year, and that is also heartening to see. We are closing the first 9 months with the net operating revenue of around AED 2.9 billion. You can also see that the fees and commission on the consumer side has increased. And -- again, no surprises there. In a declining interest rate environment, there will be pressures on NIM, and that would see the yields declining from 7.11% to 6.34%, even though, I would say that this is on the higher end of the market. In terms of our corporate business on Page 12. Again, that pie continues to have it's player of colors. A very well-diversified portfolio across various sectors. Our gross corporate financing has increased by around 34%. And that is combined number with the Noor Bank consolidation, but more importantly, the kind of credit we've underwritten in the second quarter and the third quarter of the bank -- of 2020. It's very important to also acknowledge that we've maintained our CASA book. Our CASA growth in the corporate bank has increased by around 60% year-to-date, which is very important because it allows us to bring the cost of funding down. And that is something that we anticipated when we acquired Noor Bank, and we've managed to make sure that we continue to keep it at these levels. Our corporate banking book has seen more pressure on the net interest margins. The margins have gone down from 5.2% to 3.7%. Clearly, because majority of the corporate book is variable. And in a declining interest rate scenario, this book would be repriced, and we are seeing the new pricing effect larger in the corporate book than in the consumer book. Page 13, the treasury. Basically, we can see that we've booked it as -- gross financing and Sukuk investments stand at around AED 40 billion. Significant improvement in our revenues. On the treasury side, you can see that we have recorded total operating net operating revenues of AED 1.2 billion versus AED 730 million same time, again, consolidation impact as well as new businesses that -- or new units that we have seen. Our fees and commissions on the treasury side, I've already alluded to the fact that this was on account of ForEx and derivative income, we have recorded AED 597 million versus AED 321 million, an important area within the bank and an important business for us even in our future strategy. Page 14, asset quality. We've seen, obviously, asset quality challenges, an that is a reflection of where the market is. Even though our asset quality at 4.6% -- 4.8% and 4.6% impaired financing continues to be in line with where the market averages are or, in fact, lower than the market averages. We have reported at around 4.8% nonperforming loans. In terms of our cost of risk, you can see that there's an uptick from 87 basis points to 99 basis points. This is expected given that where the market is today. But as the denominator increases, we will try and take this nonperforming loans down to acceptable levels in line with the future strategy of the bank. We'll continue on asset quality. I think we've now started giving you some insight on our ECL coverage as well as our ECL. You can see that by stages, we have seen our gross exposures go up clearly because of a larger book. Our gross exposure on the Stage 1 continues to grow, which is a good sign, and the ECL coverage has gone up from 78 basis points to 1.01 basis points (sic) [ 1.01% ]. And you can also then see that our gross exposure on Stage 2 as well as Stage 3 has gone up, and this is something that we've already covered on the preceding slide. But it's also important to see that where the coverage ratios are, and you can see that in terms of cash coverage on the previous side, we were at 81%. But what gives us comfort is the total collateral coverage because, obviously, being an Islamic bank, we've got the benefit of collateral. Even at the discounted values today, we are sitting at around 114%. In terms of how are we funding our balance sheet on Page 16. Despite the kind of growth we've seen on the financing side, we have managed to mobilize adequate amounts of deposits. We've seen close to around 30% growth on our financing side, equally matched by our growth on deposits. And you can see that our ADR ratio or finance-to-deposit ratio, despite this kind of growth continues to be at 92%, which shows you the strength of the bank. In terms of business-wide deposits, 58% comes from our wholesale bank. But more importantly, 42% is coming from our consumer bank, very well diversified CD deposits. And our CASA balances have obviously seen a year-to-date growth. And in terms of mix, we are looking at around close to 40% deposits in CASA, which bring our cost of funding down. On Page 17, our capitalization ratios remain healthy. Our total CAR ratio sits at around 17.3%, so going up from where we were at the beginning of the year. And even our CET1, common equity Tier 1 ratio, goes up to around 12.9%. So I think in terms of capitalization, despite the kind of growth that we have seen and the organic underwriting that we have done as well as the inorganic acquisition that we have done, our capital continues to remain intact and can support future growth as well. On Page 18, I've already alluded to the fact that we are on track to integrate both the banks. And this is a Q4 activity. We will continue to make progress, and we are anticipating no delays in the integration process. And you should see an integrated bank and a larger bank during Q4 of 2020 [Audio Gap] [indiscernible] be a digitally intelligent bank. We've seen good traction on our digital initiative. We've seen an uptick within our digital channels and activities on our digital channels. Our ideology continues to remain care, which is customer experience. We'll continue to acquire new customers. We'll continue to retain and continue to engage. The target metrics for 2020, the guidance becomes irrelevant now from where we are sitting, but it was important to also tie in and show you where we are vis-à-vis the guidance that we had given at the beginning of the year. I must say we did not revise our guidance upwards or downwards because we want to take the market to understand where we are vis-à-vis that guidance. You can see growth clearly is 27%, higher than the initial guidance. And that was because of two things. One is we acquired Noor Bank. And the second is we grew our book organically. Our nonperformance loan guidance, understandingly so, from where we are within the environment is standing at 4.8% versus the guidance of 4%. Real estate concentration, we are in line with the guidance. And ROA and ROE has been pressured, obviously, from 2 parts. One is where the income is, and secondly, the base has continued to increase. So clearly, I think we are below our guidance, but I must say, when you compare notes amongst other banks, we are on probably the higher side of the ROAs and ROEs in the market today. Our cost-to-income ratio, it was expected, obviously, that we will see an uptick in the cost-to-income ratio, but we were expecting that the cost-to-income ratio will be between 26% to 27%. I must say even at 29.4%, it is still a healthy cost-to-income ratio. But our expectation to be within 26% to 27% was on account of better revenues, which we have not seen in 2020 to our liking, clearly because of where the interest rate environment is. Our cash coverage ratio is at 81%. We have adequately made provisions on the accounts that require provision. But clearly, I think the denominator has grown significantly because of 1 or 2 accounts, and the level of provision that we are carrying against those accounts in our opinion is adequate. If we bring the level of provision closer to year end, you will see this cash coverage improving. But I've already given you comfort that we have the level of collateral that we have being an Islamic bank, and I think one should look at it on a total collateral basis. Net profit margins, I've already mentioned enough. Clearly, I think the interest rate environment has good pressure on not just DIB, but the industry at large. I think at this stage, I would open the floor for questions and use 5 minutes of the 1 hour towards the end to kind of wrap up, but happy to take questions on any topic that you feel is important.

Thank you, Dr. Adnan. Everyone, please send your questions through. We'll start looking at them and sit through them as we -- in the next half an hour for you then.

[Operator Instructions]

All right, we'll start with the questions now. The first one is from Janany from Arqaam. The first question is around the Stage 2 loans that have been leased during the quarter, while the coverage is lower. Given the current environment and operating earnings capacity, what are your views on taking more provisions?

I think, yes, in terms of absolute amount and percentages, Stage 2 loans has increased and understandably, I think we are looking at a challenged macroeconomic backdrop. So I see no reason why loans increasing in Stage 2 should be seen as an anomaly. This is not specific to DIB only. In terms of coverage specific, I think coverage is a result of the level of provisions that we see we are comfortable with on specific accounts. And at this stage, if you look at the specific provisions, we feel that we are adequately covered on a cash basis given that we have the benefit of collateral. But more importantly, I think what happened is that account going into a particular stage increased the denominator. Now that doesn't mean that we need to have more than 100% cash cover against specific account. We feel that we are comfortably sitting at this stage with the level of coverage. Even though it is at 81%, we should not forget the bank's access to the level of collaterals even at discounted values. Now a forward-looking view for Q4 in terms of provision, again, I can assure you that we will follow models. We've got robust modelings in place. And if the modelings reflect that we require more provision in Stage 1 or Stage 2, we will do so. Today, the provision in Stage 1 and Stage 2 or the ECL in Stage 1 and Stage 2 is a reflection of model that works scientifically. When it comes to Stage 3 accounts, we take a more subjective view on what levels of provisioning we need to give you on Stage 3 accounts. And at this stage, we feel that the level of provision that we made on each and every account in Stage 3 is adequate. Now should that scenario change in Q4, we will meet the level of provisions. And if that results in a better cash coverage then so be it. But at this stage, we are comfortable at the position that we sit in, both in terms of staging, ECL as well as the level of provisioning against the ECL.

The second question is, there seems to be reclassification of loan book from services to GREs during quarter 3, if you could shed some light?

No, I don't think so there's a reclassification of loan book. Clearly, I think the pie has become bigger. And as the pie becomes bigger, the component of that pie would shift depending on the credit underwriting that we've done. So in the first 9 months, we clearly have followed a very prudent strategy and it's a deliberate strategy to make sure that we focus on low-risk credit underwriting. And we have focused on that in the first 9 months. And by low-risk credit underwriting, we are meaning lending to GREs or the sovereign, which is what we have done. And because that portion has increased significantly in the overall size, it seems that there is a ship from services to GRE. But in reality, there is no shift. We've just done more of low-risk underwriting deliberately, and it has a part -- it has been a part of our strategy, which we have meticulously have articulated to the market in the first call itself. If you remember in Q1 2020, we did say that we are going to shift and focus on low-risk credit underwriting, and that is exactly what we've done in the year 2020 this far.

The third question from Janany is on the cost. She says it has increased sequentially unlike in quarter 2 when there was a significant improvement. So what is the update on cost synergies? And can we expect a favorable trend in quarter 4?

No, I think the cost synergies are being unlocked as we speak. I have mentioned this on every call that you will see more and more cost synergies being unlocked. If you look at absolute costs, we have managed to stagnate these costs between quarter 2 and quarter 3. Now again, in terms of cost-to-income ratio, you will see this ratio going down. It should have gone down had the anticipated revenues being better than what they are today. But again, it's a reflection of the market and the lower interest rate environment. In terms of the second component of that equation, which is cost, you managed to stagnant these costs and in fact, we have started to rationalize these costs and we have seen rationalization in Q3. You will see more rationalization in Q4. And as the revenues improve, you can see a better cost-to-income ratio. So yes, it's not in line with where the guidance was at 26% to 27%. But remember, that guidance was given in the first call in January. And the world is completely different than where we were vis-à-vis that guidance. One should not take away the fact from the bank and the bank has been exceptionally well, despite this muted environment and despite this headwinds and the macroeconomic backdrop by underwriting low-risk credit and growing its base, and offsetting the lower interest rate environment by making sure that the base grows in robust asset quality accounts. Now as we progress, I think DIB is better placed to take advantage of a larger base even though the interest rate environment is going to be of new debt, we see that given the larger base and the kind of quality credits we have underwritten and the kind of rejuvenation of our fee and income commission business and some high yield accounts coming in. All of that put together, I think DIB is going to take advantage of the high tide when it is going to be witnessed.

The last question from Janany is on the LCR, which has improved to over 100%. So [indiscernible] time it has gone up, is this an increase related to dividend payment and central bank limitation to paying out -- pay out of a bank that has moved this upwards?

No, the LCR is nothing related to any sort of dividend. I think LCR is a reflection of the kind of liquid deposits that the bank has. And again, it's a spot planning. During the quarter or during the month, the balances go up and down, but this is spot. I think we want to manage the LCR in such a way that we do not end up with excess liquidity that brings a drag on the P&L of the bank. So I think as long as we are comfortable from a liquidity perspective, whether you look at LCR or whether you look at NSFR or whether you look at ADR, the bank has always -- it has always been a strong point for the bank. And we have shown that even in the most toughest of times in order to support our growth, which is faster than the general average in the market, we have been able to mobilize deposits that way. So then, Q3 2020 as well as year-to-date 2020 has been no different in terms of liquidity, and this continues to be a strong point for the bank.

A few question from Elena from Al Ramz Capital. The first question is financing grew by 27%. How much of the growth is attributed to organic? And how much was attributed to the Noor Bank's acquisition?

I think it's important to now understand that with the integration year in it's end, hopefully, by the end of -- before the end of 2020, one has to look at a consolidated bank. I'm trying to analyze how much of this was organic or how much of this was inorganic, in my mind, it's going to be irrelevant. Nevertheless, since Elena is asking us the question, I will say that 50% of the growth is organic and 50% is inorganic. That also shows you the strength of DIB in today's environment, that it is not only growing because of it's inorganic acquisition, but also going out of its organic capabilities. Now you can validate what I'm saying very easily by looking at DIB stand-alone balance sheet at the beginning of the year and then look at the balance sheet in the first quarter, which would tell you what was the inorganic attribution. And then from there on, everything has been organic. So if you work out the map, you see that 50% growth has been organic and 50% inorganic. And I would end by saying that, please, this is going to be irrelevant so please look at the combined bank and the strength of the combined bank, which today stands at AED 300 billion.

Second question from Elena is on general and administrative expenses increasing significantly in quarter-to-quarter -- for the '23 -- third quarter '20. Can you elaborate on this? And do we expect similar pattern in fourth quarter?

So I've already explained it in my previous question. General and administrative expenses have increased clearly because on account of the acquisition that we've done. And again, you would not hear from me going forward in terms of how much of those were organic and how much were inorganic. But importantly, I think we need to make sure that we have adjusted the expense design. We've done that. So if you look at the expenses in Q2 and the expenses in Q3, they are flat, which means that whatever has -- the increase has been account of the acquisition that we've done. And from here on, we are going to endeavor to bring about synergies, unlock synergies and bring the cost-to-income ratio down further, which is what we are doing. And we will do this event in the remaining part of 2020.

Okay. Third question from Elena. Overall, coverage has dropped from 135% in full year '19 to 114% in 9-months. Are you comfortable with these levels?

Yes. We are. I've already mentioned, we are comfortable with these levels. The 114% includes two components, cash coverage of 81%. And we feel that we have made adequate provisions on a cash basis on accounts that require the level of provisioning. And then obviously, the delta then is in the form of collaterals. Even though the values of collaterals have gone down, we are making a hair cut value, discounted value is at 50%. So I think at 114%, we are definitely comfortable. Clearly, they are lower than what they used to be, but we got another quarter. And in Q4, when we name the level of provision is required or build general provision that the coverage ratio should improve from where it is today. So to answer your question in a very simple way, yes, we are comfortable with the level of provisions. And the bank, it will be the first to make -- to go and make additional provisions if it is warranted.

Question from Deepak from [indiscernible] What is the -- what portion of your total loan book has avail-ed the installment deferrals as of third quarter '20 under the UAE government pandemic scheme? And are all of these statement accounts?

It's not [indiscernible] it's Stage 2 and Stage 3. Yes. I think in terms of percentages around -- it's important to understand that TESS program is still valued and the government has made sure that the TESS program in possible future, it continues to remain. In terms of our total book, if you ask, how much of this book, I'm just trying to read the question again, has a [indiscernible] based on deferral? Roughly around 4% of the book has taken an installment deferral. And most of these are within Stage 1.

So a couple of questions from Edmond. The one with the margin [indiscernible] as Dr. doctor has already answered. But there's another question on Group 2, where he say's Group 2 is about 17% of total deferred loans and provision is allocated to this group is relatively -- appears to be low. Also, there's a migration on the overall loan book to Stage 2 at the same time within deferred group. So are you looking to take more provisions?

Thank you, Edmond from Bloomberg. I think what -- in terms of Group 2 loans as a part of -- if I understand it correctly, Group 2, and by Group 2, you are talking about the TESS Program, and they are accounting for 17% of the total loan. But you also should see Group 2 loan within the TESS Program on the overall loan book is close to around 4%. So the level of provisions that we have in the accounts in our opinion are adequate. And why haven't we taken more provisions this quarter to build up for the weaker coverage. And like I mentioned, I think in terms of asset quality from where it is, yes, we have seen some pressures on asset quality. In terms of our cash coverage, when you compare our cash coverage with probably the cash coverage of a conventional bank. In my opinion, we are comparing apples-to-oranges here because a conventional bank might not have the benefit of the collateral, which we use. And I think we should then look at our total coverage, which is what we'll be doing for a year now. So our total coverage at 114% versus some of the conventional bank can be compared like-to-like. Having said that, [indiscernible] is required, certain Stage 3 accounts or in fact, Stage 2 accounts, it requires more provisioning in Q4. We will do the required level of provisioning. So it's not like we've taken some -- we've cut corners and tried to enhance our P&L by making better or by making lesser provisioning. If you look at the total provisions that we've made year-to-date, we have made provisions in excess of about AED 1.8 billion. Now that would signify that we've taken a substantial amount of provisioning. And it is an adequate level of provisioning that was required. So I would like to look at a bigger picture rather than compare us with a conventional bank, like your example, where the quality of credit or the credit underwriting would be completely different. And the level of collateral and the security coverage would be completely different. So I think we need to compare DIB with DIB and understand how we're adequately providing for accounts that require provisions [indiscernible]

[Operator Instructions]

We're just sifting through questions, so bear with us because we have very similar questions and we are looking out for any new ones that are coming through. Thank you. Okay. Question from Alok from Ghobash. He's asking a 9-month 2020 cost income ratio was about 29.4% implied total costs, ex-integration of AED 2 billion plus versus reported cost of AED 2.1 billion. Thereby implying 9 months '20 integrated cost of AED 95 million. Please confirm that this is the correct way to determine year-to-date integration?

Well, I think, Alok, you've got it right. This would be -- the integration cost if you are referencing to the circa between 1 -- AED 2.1 billion and AED 2 billion, which is close to around AED 95 million to AED 100 million. That is absolutely correct. These would be the integration cost that the bank has incurred here today.

Second question from Alok is on, are there any further integration costs that are ready to be incurred during the year?

Not substantially. Integration costs remained to be incurred, Alok, because we are nearing the completion of the integration project. So whatever had to be incurred, it has been incurred. Now Clearly, I will say that once the banks have been integrated, these are consolidated financials. So of course, Noor Bank would be fully integrated. And thereby, their cost base would form a part of DIB cost base, which is -- DIB's cost base has gone up. Our objective would then be to drive and bring about synergies. And we've seen synergies reflect in our cost base so far. But clearly, we've got to work on further synergies and we continue to do so as we progress. And when the cost synergies would kick in completely with also revenues going up, you will see the cost-to-income ratio declining from the 7 -- 29.4%, which is, again, an aspiration that we have put for ourselves at the beginning of the year.

The third question from Alok is on the cost of risk. What is your view as we enter a period where the forbearance period is about to conclude?

Well, I think our cost of risk is close to around 1% or there about something that we are guiding towards the end of the year. It's , again, something that we feel that we are at a comfortable level with those kind of cost of risk, irrespective of whether the forbearance period. And by that, I think you mean by the TESS Program, we are in completion. We are still to hear from the regulator on the status of this TESS Program. But given where we are now, yes, the forbearance period is coming to an end, but we should not see a significant increase or we are not anticipating a significant increase in that cost of risk because of the end of the forbearance period. Because clearly, I've mentioned to you, the people that have taken the TESS Program are mostly in Stage 1, and some of it are in Stage 2. So from that perspective, I don't see a significant increase in the cost of risk, should the TESS Program come to an end.

Okay. We're just sifting through some questions because they're pretty much similar. So we'll keep -- we'll back in a second. So a question from [indiscernible]. When will the macroeconomic variable will be considered in the ECL model? If so, would we see overlay of AED 600 million coming in effect in quarter 4?

Well, the ECL model is being updated as we speak. Clearly, input into that is going to be from not just the macroeconomic indicators, but also the regulators coming and giving us prediction on where the forecast would be. So once the models have been updated, the effect of those variables on the modeling will be -- yet to be seen. But with the various permutations and combinations that we have we have done so far, we don't see our staging changing significantly. And so that should give you comfort. And another thing that gives you comfort with is that we have a overlay, which has been created and it stands at around AED 600 million. What the bank would do with this overlay would be dependent on what results modeling would end up with. And I think it's a Q4 exercise from where we sit and the lens that we use right now, I think we are adequately comfortably placed from the ECL modeling perspective as well as the overlays that we continue to get in. And we don't see significant change in that towards the end of the year.

Second question from [indiscernible] is what percentage increase you see in the Stage 2 and 3 migration after-tax deferrals come in?

I've already answered the question. The answer to not a lot. We don't see any increase in stage -- significant increase in Stage 2 and Stage 3. And the only reason for that is, I said that the people that have that have volunteered and taken the stage -- taken within a different program are predominantly in Stage 1. Some of them are in Stage 2. Let me also tell you that no Stage 3 current loans or no loans in Stage 3 can take benefit of the TESS Program. Do we see any movement from Stage 1 and 2 into Stage 3 once the TESS expires from where we sit right now? The answer to that is no. But again, when the TESS Program, deferral program ends, we will understand the situation a bit better.

Another question from [indiscernible] which sector impacted the increase in risk-weighted assets?

Our risk-weighted assets have not increased significantly because like we said, we've done credit underwriting within lower risk sectors, typically, government sovereign as well as GRE. But whatever increase you are seeing in the risk-weighted assets is on account of the credit underwriting that we've done in this very robust sectors.

We'll just take one more question and then Doctor will take the last 5 minutes for his summary. There's a question from Vijay. Drivers -- what are the drivers of sequential drop in loan book?

Thank you, Vijay. There are quite a few questions from you, but I'm not answering them because they are already answered. But I think one question that possibly is unique is the drivers of sequential drop in loan book. And by that, I think you mean the drop between Q2 number as well as Q3 number. So yes, on an absolute amount, the loan book has gone down a little -- a tad bit a little. But you have to look at the 9 months, and I think we have grown faster than anybody, both on account of inorganic growth as well as our organic growth. And you can split that 50-50 in terms of what kind of percentage is. But the sequential drop on the loan book from Q2 to Q3 is on account of some repayments that were made. And the kind of pipeline that we have for Q4, which did not materialize in Q3 in terms of organic credit underwriting. And I think that's just a reflection of timing. So Q4, we should see the loan book go up, again, slightly. I think that brings me to the end of this Q&A session. It's important that I use the last 5 minutes of the 1 hour to kind of just bring your attention to all that I said so far. Important -- 2020 has been an important year for the bank. Clearly, because we have so far done two things. One is completed the acquisition of Noor Bank, and we are in the process of integrating. And by the end of this year, we will complete. And thus far, on the integration front, we've started to make sure that the synergy of the operations in terms of personnel as well as expenses. And we have seen the fruits of that. So we continue to synergize. And with the integration completing before the end of the year, we would bring about more synergies. Now ideally, those synergies would have reflected better in the cost-to-income ratio. But clearly, I think with the macroeconomic backdrop of lower interest rate environment, the top line has not grown the way we had anticipated at the beginning of the year. Having said that, the second thing that we've done wonderfully well is we have focused on low-risk credit underwriting, which is important because if we make sure that our book increases today, we would bear the fruit in periods to come. So we have not just inorganically increased our book, but also organically done credit underwriting faster than anybody else. And that is going to pay us rich dividends going forward. Now an inflection of the returns on our ROEs and ROAs seem to be unlike what the I used to report in the years gone by. But again, it's an inflection of where the market is. But at ROE of 14% and ROA of 1.7%, I can comfortably say that we are on the higher side when compared to the market. Our cost-to-income ratio, I've already mentioned that at 29.4%, it is slightly off our guidance. But again, it's very elegant compared to the market. Overall, on an absolute amount, the asset quality has seen some pressure. But I can assure you that we have made adequate level of provisions, both when you look at cash as well as take into account collaterals, and I think our coverage ratio continues to be healthy. So going forward, I think in Q4, we are going to make sure that we look at asset quality a little a little closely. And if required, we will build a level of provision as well as making sure that all our ratios remain intact. Last but not least, I think our capital adequacy ratio and our CET1 ratios, which are very important for our growth ambitions continue to remain very healthy. With that, I would come to the end of this call, and would go on the call with you, once again, closer to the beginning of the year when our full year results would have been announced. So far, I see no surprises. So for Q4, we are making traction in every initiative that we have, whether it is our digital initiative or it is our integration initiative that we have taken. So thank you all for listening in. And if you have any more questions, please see free to get in touch with our Investor Relations team, and we'll try and answer them as much as we can.

Thank you, everybody, and see you in the next webcast and in 2021. Thank you. Bye-bye.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.