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

Ladies and gentlemen, hello, and welcome to the Dubai Islamic Bank Q1 2021 Earnings Call. [Operator Instructions] I will now hand you over to your host, Janany Vamadeva from Arqaam Capital. Mrs. Vamadeva, please go ahead when you're ready.

Thank you, Maxi. 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 Q1 2021 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 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 thanks again for joining us on our first quarter 2021 results announcements and webcast. The session, as always, is led by Dr. Adnan, the Group CEO; accompanied by Salman Liaqat, the Chief of Strategy and IR; and myself. Request you all to keep your 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 with this session. We move on to Slide #4. Amidst -- you can you can see amidst current underlying economic headwinds, the GCC region has successfully emerged as a winner in terms of crisis management. With governments proactively implementing several critical measures to help curb the impact of the pandemic on the domestic economies. So as a result, the region is set for an economic rebound, which is reinforced by factors such as an expected recovery in global oil prices, widespread vaccination campaigns, which should accelerate the opening of the economies, gradual pickup in travel and tourism sectors with an increasing preference towards vacation that we've seen. And the much anticipated Expo 2020 event, which is further expected to -- further the current positive trend and help boost tourism and hospitality industries. So the macroeconomic environment in UAE starting to show signs of recovery, as evidenced by the expectations of pickup in GDP and the revised IMF forecasts as well. Meanwhile, the local banking sector has also proven to be resilient, amidst the current unprecedented market conditions with total assets growing by 3% year-on-year in 2020 despite the pandemic, while the capitalization remains robust across the sector as well. Moving on to Slide 5. The UAE government has taken a very decisive approach, as you've seen when it comes to distribution and access to vaccinations, which has placed the country as #2 globally in terms of doses administered per capita. This has significantly contributed to the drop in number, maybe diagnosed cases to almost half of the numbers we used to read about just a couple of months ago, I would say, and should further support -- be supporting the growth trajectory of the economy as well. The gradual increase of business and improved consumer sentiment has led to rising confidence in the domestic economy. And 1 clear sign of this is the pickup in the total number of passengers at Dubai airport in addition to the marked improvement in the trading activity in VSM. So with the brief overview that I've just given, I would now request Dr. Adnan, Group CEO, to present and explain the first quarter 2021 results as well as provide insights into the plans for the rest of the year. Dr. Adnan, please.

Thank you, Kashif. Good afternoon, everyone. I'll try and keep my presentation as brief as I can. So that should give you enough time to ask us questions. I take your attention now to Slide 7, where a few key messages. What we've been doing since the start of the year is we've been navigating our business, obviously, amidst extraordinary times. And have geared our strategy towards what I say is more stable and lower risk business model in order to safeguard, obviously, the interest of our shareholders during such times. We've embarked on a strategic shift. Now that would necessarily mean focusing on sovereign and other related sectors, which has enabled us to derisk our balance sheet. This is combined with a sustained and conservative approach to provisioning, which we have taken as early as last quarter of 2020, and we've also done that in the first quarter of 2021, and this should ensure that asset quality remains intact in the periods to follow. Another thing that we've completed successfully is the integration of Noor Bank in record time. And we are now in a position where we've started realizing the promised synergies, and that is something that you would have witnessed in our first quarter results as well. That's resulting in more pronounced efficiencies, a trend that is expected to continue going forward. Last but not least, Expo 2020 is less than 6 months away from us, which should lead to a pickup in the financing pipeline in succeeding quarters. And obviously, this, along with the gradual economic recovery should further support the overall business in future. On Slide 8, we are looking at the digital drive that has supported the new Dubai Islamic Bank's ambition. And our digital aspirations, in my opinion, have fared quite well till now with a notable improvement across the board. As you can see from the graphs left to right, all key digital metrics point towards an upward trajectory with growth in double digits year-on-year, thus supporting our business in terms of new customer acquisitions as well as enhancing various customer journeys. Amidst changing landscape, digital will truly drive the growth of the future in the industry, and we are clearly in a position to capture these opportunities. Needless to say, it's a competitive landscape. And as we speak, there are more digital banks that are being introduced within the UAE. On Slide 9, overall financial performance for the first quarter. In my opinion, it's been a good start to the year when compared to the same period last year, which is witnessed through some key points. You can see that earning assets have grown by around 9%, signifying growth in the core engine of the bank. Operating expenses have reduced by around 27%. This is driven by stringent cost discipline. And obviously, as I've already mentioned, with the successful integration of Noor Bank in record time, we have started to realize substantial integration synergies thus resulting in profound efficiencies. Another point to note is that the profits from the core engine of the bank have remained strong and robust and can be seen with the net profit before impairments, increasing by 1%. This has been achieved despite the lower interest rate environment that we have seen during the first quarter of this year. As a comparison, the interest rate in the first quarter of last year were approximately 160 basis points higher than the current level, which consequentially impacts the top line of the bank. Now consistent increase in the customer base, stable funding and low-cost deposits continue to remain strong with CASA or current and savings account being reported at around 40% of the total liability base. This has obviously helped bring down our cost of funding to historically low levels of around 0.82% in the quarter, which is significantly lower than the position that we had same time last year. Strong liquidity position with finance deposit ratio at around 92% and LCR, liquidity coverage ratio of 127%, is well above the regulatory requirements under the test program. Now also, 1 should note that the bank has continued to maintain a prudent approach to asset quality. And use the opportunity to build provisions during the quarter. Twice as much as what was done during the same period last year, and I say that is on a normalized basis. In addition to this, the bank has been proactive as well in early recognition of potential problematic loans, which in the short term, obviously impacts a slight decline in the coverage ratio. Now as a result of everything that I have said, we have achieved a substantial quarter-on-quarter net profit increase when compared to Q4 2020 and a modest quarter-on-quarter net profit decrease when compared to the same period last year. Now we've realized a net profit, as you can see, of around AED 853 million, which is a significant improvement when compared to the previous quarter. It is, however, worth noting that in order to compare apples for apples, we need to adjust the AED 1 billion gain on bargain purchase that we had reported at the time of acquisition of Noor Bank. So if you strip that out from the profits of the first quarter of 2020, you can see that we have actually done well when compared to where we were in the first quarter of 2020. Now despite growth and extensive provisioning, both capital adequacy ratio as well as CET1 ratios, you can see, have remained well above the regulatory requirement. The CET1 has actually increased in the first quarter, and it stands at around 12.3%. Now while those were key messages on this first slide, I think if you can look at the financial position in greater details, you will see that the assets have reached around AED 292 billion, which is a 6% year-on-year increase, and that is supported by a 4% growth in the deposits. Now though it shows a marginal growth of around 0.2% in the gross earning assets, the gross earning assets are actually increased by AED 11 billion. And would have grown by around 5%, had it not been for some significant and large maturities and repayments that we witnessed in the first quarter of 2021. So I think on the financing and earning assets bit, we did well in underwriting new credit to the extent of around AED 11 billion, but that probably cannot be seen in the quarter end numbers on account of some significant repayments that were done. We've also seen significant improvement in OpEx, which I've already mentioned, and this is on account of the synergies that we have seen from Noor Bank. The decline in the net profit margin is quite normal. And you can see that the net profit margin stands at around 2.53% versus the 2.61%. And that is quite normal given that 2 things have happened. One, we are still within the lower rate environment, as well as our strategic shift to low-risk sectors in terms of underwriting. Moving on, on Slide 10. Operating performance and a glimpse on what we've been doing there, we've managed to cut down our operating expenses, and we've cut them down by about 27% year-on-year. And this is purely predominantly coming out of the integration synergies that we had promised at the time of acquisition of Noor Bank. Now even though there was a drop in the top line, we have still managed to maintain the pre-provision profit levels you can see. And these are quite strong. These are aided obviously by those pronounced efficiencies that I have been mentioning despite the operating environment. In terms of our CASA ratios, you can see that our CASA ratios, which stand at around 40% have allowed us to bring this cost of funding down from levels of 1.41% to around 0.82%. And you will appreciate that, that is a significant decline given the realities in the market today. I've already mentioned that in terms of efficiency ratios, we stacked very high up when compared to our peers, albeit our ROE has come down slightly from 10.4% to 9.6%, but we'll also compare where we are vis-à-vis the year-end guidance that we had given to the market at the beginning of the year or, in fact, the end -- the last call that we did for 2020. On Slide 11, we just look at where we've been deploying our funds, i.e., within earning assets. You can see that both consumer and wholesale portfolio continue to support growth with corporate financing now reaching about AED 137 billion. Now this is primarily driven by a surge in government lending, which we have alluded to earlier, even on my last webcast, and that has been the strategic shift by the bank to focus more on low-risk sectors of the economy. Meanwhile, our consumer portfolio has also grown by around AED 3.3 billion in gross financing. Now clearly, you don't see that when you look at a portfolio and quarter end numbers because those are on account of net add numbers, attrition as well as repayments. But on both sides of our businesses, corporate banking, as well as consumer bank, we have underwritten new credit but clearly, on the corporate side, with large repayment, that has shown that the growth has been moderate and as well as on the consumer side, the normal attrition that we see month-on-month, quarter-on-quarter have also kept the portfolio at a stagnated level. Real estate concentration, you can see has been maintained at -- within the guidance of around 20%. Now this is a deliberate strategy that the bank has been undertaking for the past few years, something that we've been saying time and again. On Slide 12, a little granular look at each of our businesses. We start with Consumer Banking. Our consumer financing book now stands at around AED 52 billion. Now this is supported by key leading products, home finance, personal finance, auto finance, it's worth noticing that we have recorded a large increase in the total credit card spend as well during the period, and that's a 25% increase quarter-on-quarter. So that is a product that is starting to gain some traction. Clearly, personal finance and home finance have been key products that we've been focusing on within our consumer space, followed by auto finance and credit cards. So the portfolio stands at around AED 52 billion, and the average yields of the consumer book still remains strong at nearly 6%. Now that is despite a low rate environment. So the consumer book has always been a premium price book for us, and they allow us to offset the pricing pressures that we witness on the wholesale side. On Slide 13, it's an overview of our corporate book. Now over the past few years, half a decade to be precise, our corporate book has continued to be the driver for growth within our overall financing book, and that is understandable. We continue to make sure that we focus on our corporate banking business. The only change in strategy has been that over the last couple of quarters, from the latter half of 2020, we started to focus on low-risk government/quasi government credit underwriting. And I think that's the right thing to do, i.e., we've not slowed down on our growth ambitions, but we've tried to steer away from high risk, private sector accounts and other large corporates and focus on low-risk account, which is a deliberate strategy that we have adopted. Now the AED 150 billion corporate book, financing book that we are referring to translates to around 13% year-on-year increase. Now that's a higher increase when compared to other businesses. Now this is despite the current exceptional market conditions. Again, once again, this was clearly on the back of a surge in government lending, which reflects the strategic shifts that I have been talking about. We've also seen a 13% increase in our fees and commissions on the corporate side. And you can see that the AED 154 million fees and commissions on the corporate side has been around AED 175 million in the first quarter. So that's a comforting and heartening thing to see that our nonfunded income also grows, and it's just not funded income and the financing book. Clearly, the pricing pressures on the corporate side have been witnessed, and you can see that the yields have come down, and it's just a reflection of the low interest rate environment that we've been witnessing since the beginning of 2020. On Slide 14, overview on treasury. Our treasury book stands at around AED 39 billion, representing -- around 65% of that is represented in the form of lending or treasury or fixed income book to the government sector. So that remains robust. We've seen a substantial improvement in the net operating revenue by around 66% year-on-year. And we stand at around AED 528 million in first quarter of 2021 versus the AED 318 million in the first quarter of 2020. Treasury yields have remained stable, close to around 4% despite the interest rate environment. And predominantly, because these are fixed rate coupons. Obviously, if we participate in any new issuances or we pick up any [ scoops ] on the secondary market, the yields would be lower than what they were at the same time in Q1 2020. Slide 15 is very important because it throws some light on asset quality. In terms of asset quality, our nonperforming financing stands at around 6.2%. Now that translates to an increase of around 50 basis points from year-end 2020, but still considered reasonable during the current challenging time. In terms of absolute amounts, the nonperforming financing has grown by about AED 1 billion and stands at around AED 13 billion. Now this includes the POCI, purchased other credit impaired assets acquired from Noor Bank as well as the specific corporate name within the health care sector that we have mentioned in the past. If we were to remove these 2 factors from the NPF, we would end up with an NPF of around 4.8% versus 6.2%. Now why I'm making that point is because clearly, it shows that other than the acquisition of impaired assets that we have picked up from Noor Bank, or a specific key corporate name. I think the NPF on a stand-alone basis would be at around 4.8% in quarter 1, which is way below where the industry is. Having said that, even at 6.2%, I think we are at an acceptable level when compared to some of our peers. Mind you, the 6.2% is also a reflection of the denominator which has not increased in the first quarter, and that is on account of despite increase in gross financing, the repayments have not increased the denominator to the expected levels that we wanted to. And hence, that also has an impact on the percentage of nonperforming loans. But again, these are not any excuses. These are just the realities. And at 6.2%, I think the bank has been in line with the average NPF or, in fact, below the average NPF within the market. Nevertheless, cost of risk has dropped to around 101 basis points. As you would appreciate that in -- towards the end of 2020, we were at around 1.37% or 137 basis points of cost of risk. So that has clearly come down to 101 bps during the period. Overall coverage ratio, including collateral, remains healthy at around 101%. So our deliberate strategic redirection to lower risk sectors of the economy should largely preserve the quality of our assets going forward, whilst providing more sustainable returns during the current testing time. Slide 16, again, an important slide because it gives you granular details, worth reiterating that we have been taking a very prudent sense when it comes to provisioning. And you've seen that in the last quarter of 2020, and not so much in the first quarter, obviously, because things have started to normalize, but we still continued that prudent approach even in the first quarter of 2021. And from here on, we feel that we would see some stability in the subsequent quarters for everything and all the efforts that we've already put in terms of provisioning in Q4 2020 and Q1 2021. So with the aim of being, obviously, to continue and build sufficient cushion, that will safeguard business in the near term. Now all of this we do because we want to strengthen the foundation for future growth. And once the economy gathers space and markets return to normalcy, we should also be back on track. So let's take a further in-depth look into the asset quality metrics. We can see that the standalone nonperforming financing of DIB stands at a nominal amount of AED 10 billion. Now what I'm doing is from the AED 13 billion that I've alluded to, if you can see the large chunk of that pie, which is burgundy in color, you will see that, that on a stand-alone basis is AED 10 billion. And then if you look at the POCI as well as if you look at the 1 account that we've been mentioning, you can then strip out close to around 120 basis points to reach at close to -- 140 basis points close to reach around 4.8%, which is a stand-alone nonperforming financing that we've seen. So if you go left to right, you can see nominal amounts in the first pie chart and the second pie chart shows you the standalone NPF to give you better color on where the 6.2% is coming from. I've already mentioned that our coverage ratio -- total coverage ratio stands at around 101%. And cash coverage is at around 74%, slightly down from where we were. And the reason for that is not because we are releasing our provisions and enhancing our P&L. But as we take a proactive approach to classifying problematic or future, let me say, potential problematic accounts and making required provisions to the extent of, let's say, 25% bare minimum for these accounts. Obviously, the numerator is increasing as opposed to the level of provision, then hence, that would have a short to medium-term impact on coverage ratios. It's always been our aspiration to grow that coverage ratio, and that's exactly what we are going to do. We are doing that, but sometimes it does not reflect in the pie charts or the quarter end number in terms of percentages. And hence, our cash coverage stands at around 74%. On Slide 18, again, on Slide 17, I'm not going to go into greater details, but you can see the various stagings: Stage 1, Stage 2 and Stage 3. It just gives you more granular understanding of where our staging is. Once again, we continue to build provisions. And you can see the various staging. You can see that Stage 3 accounts have increased on account of already what I've mentioned to you. And our coverage ratio, ECL coverage ratio on Stage 1 stands at roughly around the same levels. Stage 2 slightly gone down, and that's because there has been movement from Stage 2 into Stage 3 accounts. On Page 18, in terms of funding and liquidity, both of these have remained strong and robust for DIB in the first quarter. Our customer deposits have continued to be a prime source of funding accounting for roughly around 73% of the total base. And they've increased around 4% year-to-date, stands at around AED 214 billion versus the AED 206 billion, and I'm only referring to the deposit element of the total liability book. As for the breakdown of this deposit, you can see in the pie chart below, 57% comes from wholesale and the 43% comes from consumer, more importantly is the first pie chart on the bottom left which shows you that CASA accounts are standing at around 40%, slightly down than where we were at the end of 2020, which was at around 43%, but at 40% CASA, allows us to bring our cost of funding down. I've mentioned that to historical low levels of around 0.82% in the first quarter. Advance-to-deposit ratio at 92% shows that the liquidity position of the bank remains healthy. Liquidity coverage ratio stands at around 127%. And even if you look at the net stable funding ratio, that is standing at more than 100%. So overall, the bank is in a very strong position in terms of liquidity as well as the key ratios. Slide 19 gives you a view of our capitalization. Despite a conservative approach to provisioning, given the current testing times, and we've mentioned that, again and again, over the last 15 to 20 minutes, our capitalization levels have remained intact and well above the minimum regulatory requirements, where our capital adequacy ratio stands at around 17.1, while our CET1 ratio has improved by 30 basis points to stand at around 12.3%. Now these ratios are fully loaded, and we are not taking advantage of the low regulatory ratios, given that we are under the test program regime. But we thought that we would make sure we measure our ratios on a fully loaded basis. Because once these capital regulatory requirements from a capital perspective are reset, we should be in a good position. And I think that's why the bank has made sure that the capital ratios continue to be monitored at pre COVID levels as well as pre test levels. On Slide 21, where are we vis-à-vis the guidance that we had given for ourselves at the beginning of the year. You can see that the growth on the financing side is very marginal and that is on account of things that I've already mentioned. Once again, I reiterate that our gross earning assets have grown significantly by around AED 11 billion. So that would have actually meant a growth of around 5%, but it was for the significant and large maturities and repayments that we've seen in the same period that we have ended the first quarter growth at around 0.2%. I've already mentioned where we are vis-à-vis the nonperforming financing. We are at 6.2% versus the 5.5%, which is an annual target. And if the denominator grows the way we anticipate, we will see that the nonperforming loans should be ending at 5.5% if everything remains the same. Real estate concentration, pretty much in line with where we are. And as the denominator would grow and other aspects would -- of our loan book would grow this real estate consolidation would come down below the 20% mark. Our return on assets and return on equity are slightly lower than guidance. But mind you, this is full year guidance, and we are confident that we will be able to meet these expectations in terms of ROEs and ROAs. Our cost-to-income ratio has a good start to the year, which has been supported by synergies coming out of Noor Bank and also a very stringent cost discipline that we've been following, thereby reaching to a cost-to-income ratio of 27.5%. Our total coverage, that should be at around 110% is at 102%, and we would continue to build provisions from here on. And use the strength of our P&L, albeit it may not be at the same levels that you've seen in quarter 1 because we clearly see economic recovery. And we've taken the required level of provisioning to a large extent, in Q4 2020 or the large part of 2020 and also continued slightly in the same direction, if not so, in terms of nominal values. But in similar direction in the first quarter of 2021. The net profit margin is within guidance. And again, it's a reflection of the low rate interest environment that we've been seeing and the sustained pressure. So that brings me to the end of my presentation, and I have, as promised, tried to wrap this up and giving you some very key messages, I will open the floor for questions. But I will use the last 5 minutes of the hour to summarize everything and bring back the attention to key areas and performance of Q1. So happy to take any questions at me. We'll take a momentary pause to try and scan the questions that we have, group them together and then answer them as they come.

Thank you, Dr. Adnan. As always, please send your questions in through the e-mail, and we will take them up momentarily. Thank you.

[Operator Instructions]

So we start with a couple of questions from Janany from Arqaam. First is can you throw some color on NPL formation in quarter 1? And how does that affect the outlook for cost of risk for 2021?

Thank you, Janany. I think first of all, the new NPL formation is on account of a couple of, I would say, individual accounts, not corporate, individual accounts that are backed by adequate level of collaterals. And this is within the real estate space of the bank. Clearly on account of declining cash flows, the customer has been under distress. And whilst we could have properly done this maybe after looking at situation better in Q2 or Q3, I told you we followed a prudent approach and proactively classified these accounts. So first of all, the answer to the first part of your question is that this is coming from real estate on the individual side. In terms of security, the bank is adequately collateralized, more than 100%. And we are just taking appropriate action to make sure we classify this account, which is what we've done in the first quarter. Now how does that affect the outlook on cost of risk? I think we are comfortable with the current levels of cost of risk. Which have come down, like I have mentioned to you, they have come down from around 1.37% at the end of last year to around -- close to around 1% or 100 basis points. So I think these are in the current environment and macroeconomic landscape to be close to around 100 basis points, there about 90 to 100 basis points is what we anticipate our cost of risk to be. So that is a number that we are clearly comfortable with for the large part of 2021. How comfortable are we with the deferral book in terms of potential NPL formation? So in the first quarter, we have seen that there have been no new NPL formation from the book that we have deferred. As you would see that we have classified this on our financial statements as Group 1 and Group 2 under the test program, which is what is required from a regulatory perspective. But we've not seen any early warning signs from Group 2 accounts degenerating. I told you the new NPL formation circa close to AED 1 billion is on account of a few individual real estate accounts or facilities, which have been proactively classified by the bank. Even though we are adequately provided for -- we are adequately covered in terms of collateral. So we are not seeing any early warning signs from the deferral book or any potential NPL formation. And with the macroeconomic backdrop improving, we are confident that our level of provisioning as well as our asset quality should improve. And if anything, you would only see us making additional provisioning on the accounts that have already been classified in the past just to build provision coverage. So in a nutshell, not significant NPL formation from where we sit in the next quarters. And if that changes, we will come back and we will inform all the analysts and the market as well. But going forward, we are comfortable with the cost of risk at around 100 basis points thereabouts. And going forward, you will see us using the strength of our P&L to make as required, provisions on accounts that have already been classified, thereby building some provision coverage, which is always good. Your second question is around OpEx, and it has been slightly up sequentially. I think you're referring to Q4 OpEx versus Q1 OpEx, slightly up. But in our opinion, we are looking at a cost-to-income ratio at the levels that we have been talking about. Mind you, we are a larger bank now. So there will be some OpEx that will need to be taken in terms of our investments in digital, our investments in technology and transformation of technology. So that is understood. But as long as we would maintain the cost-to-income ratio at the levels that we have been seeing in Q1, I think that should be a great achievement. And mind you at levels of around 27.5%, we are 1 of the lowest, if not the lowest within the market in terms of our peer comparison despite not significant increase in the top line. So I think that's a great achievement for the bank.

[Operator Instructions]

Okay. So we have quite a barrage of questions from Edmond. So we're going to take them one by one. The first question is about the government lending, which made up 17% from corporate loans versus 18% prior quarter. So this period related to the previous, how do you see the pipeline in the rest of the year? And should that be sufficient to meet growth targets?

Thank you, Edmond. Let me start by saying that, obviously, we are not only focusing on our corporate banking business to grow our financing book. I think it's important to acknowledge that it's going to be through a combination of our wholesale book as well as a combination of our consumer book. Now on the -- obviously, since you asked the question on the corporate banking side, you have correctly mentioned that the book on the corporate loans made up 17% versus the prior quarter. And that is on account of despite us underwriting on the corporate banking side, which I have mentioned to you. The repayments have kept the concentration at around 17%. So clearly, had the repayment not been there, we would have shown a moderate increase and a significant amount of increase in the financing growth percentages. Is that how do we see the pipeline for the rest of the year, we have a good pipeline for the rest of the year, and we don't want to get ahead of ourselves. We are making sure that our guidance to the market in terms of growth at around 5% would remain for now, and we are very confident that we'll be able to achieve it. And you would have seen that even in the first quarter, had it not been for the repayments that we've spoken about.

Second question from Edmond is on what was the growth sequentially on the retail lending? And can you remind me of the Basel capital weights on mortgages, LTV levels and personal finance?

So we have increased our retail lending by around AED 3 billion in the first quarter, but that does not -- when compared to the first quarter of 2020, it's around AED 3.3 billion. But you don't see that because clearly, the retail book is attriting given the ticket sizes and average tenors. In terms of Basel capital weights on mortgages, they are depending on various LTV levels, but we are -- the weightages that they attract are between 35% to around 50%, again, depending on residential properties versus properties that are ready, under construction and so on and so forth. Your third question is on deferred loan book being relatively stable. Yes, the deferred loan book is relatively stable. We have not seen any early warning signs from the deferred loan book. Some of the deferred loan book has already come out of the deferred pie and become regular. And there have been a few that have gone into the deferred loan book given that the test program has been extended. So yes, that book has been stable. And we do not see any quality deterioration in that book. Some of those customers have proactively approached the bank and have asked for permanent restructuring as opposed to taking advantage of yet another deferral given that the test program has increased.

[Operator Instructions]

So we've got questions from Shabbir from EFG on NIMs, was there any interest in suspense reversal in fourth quarter 2020, which had not recurred or was more muted in first quarter 2021? And are you still comfortable with your NIM guidance for 2021?

No, Shabbir, to answer your question, there was no interest in suspense reversal in Q4. That has not happened in Q1. And yes, we are still comfortable with the NIM guidance that we have given for 2021 despite, obviously, despite the low interest rate environment, but we are comfortable at this stage. In terms of costs, cost management initiatives, other than the cost synergies, no, we've made sure that the costs have remained stagnated within the bank. If you just look at it on a stand-alone basis, but clearly, we have taken advantage of the synergies that we have referred to. And the CET1 at 12.3%, do you think it is sufficient to meet potential changes in Basel capital requirements? Now of course, the Basel capital requirements are expected to be introduced towards the end or maybe in the latter part of 2021. We've done some simulations, and we are confident that at the current CET1 level, we would be able to meet those potential changes. Now mind you, of course, if those changes happen and the CET1 remains at this level, then there would be a little decline in the CET1, but also with the profit, organic profit generation and profit retention, we also expect the CET1 to go up and thereby being able to manage the changes under the Basel capital requirements.

So a couple of questions from Mahmoud Elsafty from Ghobash. First, the question is on the MSCI Foreign Inclusion, can you give an update on that? And the second 1 is on the sectors that are causing more pressure on NPL?

Well, I think update on MSCI Foreign Inclusion, again, we continue to be opportunistic here and look at the right time to enhance our foreign ownership limit. I think you are referring to increase in foreign ownership limit. I know that there is a pressure on us to enhance our foreign ownership limit, given that we are almost close to the maximum allowable foreign investor limit that we currently have. But we are just looking at the right and appropriate time and when we are in the position to do that, we will definitely update the market. In terms of sectors that are causing more pressure on NPL, in the first quarter, we have not seen anything significantly causing pressure. The nonperforming loans in the first quarter that I have alluded to are on account of us being proactive and classifying some potential problematic accounts in the real estate space. Having said that, the bank is adequately covered in terms of its outstanding on these accounts that we have classified. So we don't see any specific NPL -- any specific sector contributing to the NPL other than what we have seen in the large part of 2020. So if you strip out the POCI, that has the financing assets that we have acquired from Noor. And if you strip out the 1 very large account within the health care sector, I think on a stand-alone basis, and I say that again and again, on a stand-alone basis, we are at around 4.8%, which would be accepted at any given point in time, let alone this very testing time that we are going through as a financial services industry.

[Operator Instructions]

Okay. So there's a question from Adil Rashid from Daman Investments. He's asking for the Group 2 coverage with collateral and Stage 2 coverage with collateral?

Adil, thank you for your question. I think you are referring to Group 2 under the test program. And I think you're not referring to the Stage 2 ECLs of the bank. So if your question is the former i.e. Group 2 within the test program. Our total Group 2 -- and these numbers would be available to you in the financial statement, but I'll still mention them to you. So our total exposure in Group 2 under the test program stands at around AED 7.9 billion and roughly around 4.5% of that is covered. So that would just give you an idea of our Group 2 coverage, it stands at around 4.5%.

Yes. So I think we'll take a couple of questions from [ Ambreen ], which is -- and then post that, Dr. Adnan will give his overview of the presentation. The first question is why did management feel the need to switch to a more conservative lending strategy? And do you think the high-risk high-growth strategy had flaws?

No, Ambreen, let me first correct you by saying that we never had a high-risk, high-growth strategy. If you've been following the bank for the last so many years, we've always had a growth strategy that was matched by our ability to support that growth in terms of capacity. So we always said that as long as we can create capacity, i.e., as long as we have adequate capital and adequate liquidity, we would be looking to grow judiciously and it was never a high-risk strategy. Of course, we've grown faster than the market, but we've grown in sectors that have always been very stable. And we have grown by underwriting financing, which was backed by cash flows, by collateral. So at no point in time did the bank look at a high-growth strategy or a high-risk strategy. Having said that, in the last -- in the latter part of 2020 and even in the first quarter of 2021, we have started to focus on even lower risk segments. And are steering away for the time being from private sector clients or from large corporate clients not because that they are high risk, but because we feel that it is important for us to focus on some of the segments that are more low-risk in nature. So just to correct, the bank never embarked on a high-risk, high-growth strategy in the past. Now with that, obviously, I had requested that the last 5 minutes belong to me so that I can summarize the financial performance of the bank in the first quarter. I would like to reiterate the fact that we had a very good start to the year. And I say that because, one, we have -- we've managed to grow our financing book, albeit you cannot see in the quarter end portfolio number. But it's important for us to highlight that we have underwritten our financing both on our consumer side as well as on our corporate side to the extent of around AED 11 billion, that should have translated to close to around 5%. Having said that, we've not seen that reflected in the portfolio on account of large repayments, unexpected repayments on the corporate side and the natural attrition and repayments on the consumer side. So that's the first point I want to talk about in terms of earning assets. And why is it a good start to the year in terms of earning assets because same period last year, we've grown our book by around 9%. So 9% year-on-year increase in the earning assets on -- should be looked at on 1 side. And also, in terms of pure growth of financing in the first quarter, very good underwriting. However, offset by some large repayments. That's the first point. The second point is the cost-to-income ratio of the bank, which is very important when you try to extrapolate net profit. And the cost-to-income ratio standing at around 27.5%, 140 basis points from where we were at the end of last year. I think it's an achievement in itself. And that is supported by the various synergies that we've been seeing. The third point that I would like to make is that the core engine of the bank having grown by around 9% year-on-year has resulted in the net profit before impairment increasing. Now this is despite us seeing pricing pressures on -- pricing pressures in the current environment and pressure on our yields, thereby affecting our net interest margins. We still have maintained our profits from the core engine and before impairments, and that -- those have increased by 1%. Now obviously, when you compare where the cost of funding was in 2020, we brought that cost of funding down. We made sure that we've maintained our net interest margins to these levels that has allowed us to -- and obviously, increasing the earning assets by around 9% year-on-year has allowed us to make sure that our net profit before impairments have increased by 1%. That brings me, obviously, to the point of where our net profit for the quarter is. Net profit for the quarter is down, and that is on account of things I have already mentioned. It's on account of the proactive and early recognition of some problematic accounts that we have decided to classify, which in the short term, obviously declines -- or there is a slight decline in our coverage ratio. So overall, having adequate capital levels, having adequate liquidity levels in terms of both LCR, ADR as well NSFR in being able to maintain the net interest margins where we are. And the ability to grow our financing book, the way we've grown, even in the first quarter, not reflected in the portfolio numbers for obvious reasons. If we continue to do what we've been doing in the first quarter, with the economic recovery that we anticipate from here on, and the slowdown in the kind of provisioning levels that we have been witnessing in Q4 2020 as well as in Q1 2021, we should be expecting better results quarter-on-quarter from here on. So with that, I've come to the end of my webcast. I'm sure that there are even more questions, and I'm sorry, I could not attend to all but I would encourage you to contact us via our investment -- our Investor Relations portal and get in touch with the team, and we'll be happy to answer any queries that you may have.

Okay. With that, thank you, everybody, for joining us on this webcast, and we look forward to seeing you again in the next call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.