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

Ladies and gentlemen, welcome to Dubai Islamic Bank First Quarter 2022 Earnings Call. [Operator Instructions] I will now hand over to your host, Janany Vamadeva from Arqaam Capital. Ma'am, please go ahead.

Good afternoon, everyone, and thank you for joining us today. This is Janany Vamadeva on behalf of Arqaam Capital, I'm pleased to welcome you to Dubai Islamic Bank Q1 2022 Earnings Conference Call. I have with me here today from DIB management, Adnan Chilwan, the group's executive officer; John Macedo, the Chief Financial Officer; and Mr. Kashif Moosa, the Head of Investor Relations and Strategic Communications. Without any further ado, I'll now turn the call over to the Head of Investor Relations, Mr. Kashif Moosa. Kashif, over to you.

Thanks, Janany, and welcome, everyone, to the first quarter 2022 results webcast of Dubai Islamic Bank. The session is led by our group CEO, Dr. Adnan Chilwan; accompanied by John Macedo, the Chief Financial Officer and myself. Request everyone to keep the questions coming through the e-mail provided, which is [email protected], and they will then be addressed by Dr. Adnan at the end of the presentation. So with that, let's start. We now move on to Slide 4. . On the slide, as you can see, despite the ongoing conflict prevailing in this international theme, the world remains on positive growth territory, with most pandemic restrictions and lockdowns showing greater relaxation, around across the world as well. So the GCC remains intact and with a better position to sail through the challenging waters of the global tensions looking to benefit from the higher oil prices as well. The steep rise in the oil prices have seen improvements in the credit outlook of some of the countries in the GCC and is expected to provide a stronger credit growth and attractive equity markets in GCC region. And at the recent wave of IPOs in the UAE is bound to increase the market activities as well, generating some additional credit pickup in the retail sector. In addition, the rise in global rates and supported by the drive and technology adoption will be positive for GCC banking sector as it sees improved earnings and reduced loss surplus in the coming quarters. We now move on to Slide 5. The recovery of UAE was supported with the successful World Expo 2020, which recorded a huge number of visitors during the 6-month long event, and welcomed 192 countries with hospitality, retail, tourism, aviation in many other industries also benefiting from the expo. Further supporting the continued economic momentum of Dubai is the increasing trade volumes seen on the DSM, which rose by nearly 50% to AED 21 billion in the first quarter of this year from AED 14 million last year, reflecting a stronger global investor confidence and the economic rebound of Dubai. The UAE PMI continued to show strong readings post the pandemic recovery indicating robust expansion activities across the key sectors, such as travel and tourism. And moreover, the recent announcement of expansion residencies and visa options will benefit to us, visitors as well as residents and will further continue to strengthen UAE's position. as an ideal destination to live, work and invest. So with that preamble, I will now hand over to Dr. Adnan, Group Chief Executive Officer, to take you through the first quarter of 2022 results. Dr. Adnan?

Thank you, Kashif. Good afternoon, ladies and gentlemen. I start the presentation with a quick page turn, followed by some questions and then the last 5 minutes of the hour would be to wrap up the session. Moving to Slide 7, which summarizes the key highlights for Q1 2022. Despite the ongoing international conflicts, the UAE continues to remain resilient, with GDP growth forecasted to be higher when compared to 2021. With all the challenges we have seen a successful Expo 2020, which witnessed a huge turnout by international investors with numerous interactions between businesses and government leaders of the world. Looking into the DIB, I'm delighted to say that the bank has started the year with a very solid set of results with positive momentum across all key areas. Our balance sheet has expanded on the back of strong growth in new volumes as well as bookings. P&L shows significant improvement with the bank achieving a remarkable 58% year-on-year growth in net profit, and we'll see key drivers of that in the following slides. Impairment has been contained, with a drop of nearly 40-odd percent year-on-year, and we are now seeing improvements in our asset quality ratio with a downward trend of our nonperforming financing following the stabilization over the previous quarter. On Slide 8, this is a summary slide which captures the financial performance. As you look at the results, one thing that stands out is DIB remaining fully aligned with the improving economic outlook of the UAE. The numbers are following upward trajectory where you can see net financing and Sukuk investments have grown well above 3% over year-end 2021, while deposits have remained stable and overall balance sheet growth continues. So clearly positive trend can be seen across virtually all our major indicators. On the P&L front, a huge jump in the net profit of around 58%. Now this has been supported by top line growth of 6%, and lower impairment charges clearly indicating a strong recovery in the post-COVID scenario. These massively improved results have primarily impacted the key ratios, now whether that would be liquidity, capitalization or return backlog. While cost-to-income ratio has risen somewhat, primarily due to inflationary trends and related adjustments in personnel, it clearly remains within our guidance. And I will touch upon the cost-to-income ratio on subsequent slides and the reasons that have resulted in a slight increase in the cost-to-income ratio, albeit in line with our overall guidance. On Slide 9, a look at the operating performance of the bank, a few graphs on this slide. As mentioned in the previous slide, our profitability metrics has demonstrated healthy increases as a result of the expansion of our balance sheet and rising revenues, with steady growth in business activities over the past few months and a more improved operating environment compared to where we used to be same time last year. As also mentioned at the beginning of the year, our OpEx will slightly increase as we embark on our 5-year growth strategy. And as you would recollect, our growth strategy has fundamental 2 pillars, one was strengthened the group and the second was grow the group. And under strengthen the group, we did speak at the beginning of the year about leading a robust foundation. And that led -- what actually means is we have entered and embarked upon a transformation program, which looks at focusing on a more stronger technology environment, [reval] of the core banking systems, which also then necessitates that we relook at our processes and make sure that they are robust enough to measure the size of the organization. So in essence, what the cost-to-income ratio then reflects is a slight increase. And I did mention that this is in line with the guidance that we had given at the beginning of the year. Going forward, obviously, we would see this cost-to-income ratio come down with revenue rising and cost remaining pretty much at the same level. On Slide 10, a look at deployment of our funds. Core earning assets have continued to grow at a healthy pace. The strong AED 16 billion of gross new financing was more than 40% up compared to the same period last year. Within our businesses, corporate banking has continued to dominate with nearly $12 billion of underwriting whilst being ably supported by retail portfolio growth which saw underwriting close to around AED 4 billion in terms of gross new financing. Portfolio distribution has remained more or less similar to year-end levels with commercial real estate declining to around 22%. The Sukuk portfolio, which remains a highly profitable one, also supported the earning asset growth with roughly a 6% upside to reach around AED 44 billion. Deep diving into some of our businesses. On Slide 11, we start with Consumer Banking. We saw a strong revenue trend in our consumer portfolio growing by 13% year-on-year to reach to AED 985 million for the quarter. This was supported by healthy increases in fees and commissions as well as funded income. Our mortgage business continues to grow well and we underwrote more than AED 1.1 billion in new home financing during the quarter. These levels are even higher than the prependemic areas. Yields grew by a decent 11 bps year-on-year to reach at 5.71%, indicating sustained improvement in margins within the consumer business. Now despite the current and anticipated interest rate hikes, the CASA book has remained stable in this quarter within the Consumer Bank. On Slide 12, a look at our corporate banking business. This portfolio is up by 3% year-to-date to end at around AED 146 billion from AED 145 billion at the beginning of the year, and the portfolio remains very well diversified. The pie is the center of the slide actually shows you the kind of sectors that we've been exposed to in terms of our corporate banking book. Gross new corporate financing for -- of nearly AED 12 billion during the quarter was significantly up by more than 60% year-on-year compared to the same period in 2021, of which AED 7.5 billion of gross new corporate financing has been done in first quarter. Revenue trends continue to be on an upward trajectory, reaching more than around AED 800 million during the first quarter, up by around 1% year-on-year. During the quarter, the bank became an official member of UAE Trade Connect as it moves into a safe and secure trading platform supporting a more digitized trade finance ecosystem. On Slide 13, a look at our Treasury business. The Sukuk investment book, including financial institutions is a key focus of the bank, which now stands at around AED 47 billion. The Sukuk portfolio yields also remained healthy and are about 4%. The next section is an important one, slide 14 shows our asset quality. And with a clear plan, we can now see that the anticipated results are showing. Following increases in this ratio since the pendamic, we are now seeing a downward trend of our nonperforming financing. We saw an improvement of around 10 basis points during the quarter to settle at 6.7% from 6.8% at the beginning of the year. Cost of risk is down significantly by around 30 basis points to reach 69 bps from 99 bps in 2021. Lower provisions at the start of the first quarter of around AED 417 million compared to AED 751 million in 2021, a decline of more than 44% compared to the same period, are clear indicators that COVID behind us and that has allowed the bank to arrest the nonperforming financing growth. Our overall coverage, which is the total coverage, remains above 100% and which is something that we will aim to strengthen as we move into the remaining quarters of 2022. Key to note is that absolute nonperforming financing has come down and the quarter saw no new corporate nonperforming financing, a strong indicator of improved economic space. On Slide 15, more detailed look into the asset quality. DIB's core nonperforming financing, and this is the pie chart -- on the top towards the right, continues to stabilize and it stands at 5.5% as of Q1 2022. And that was the exact percentage in 2021. We ended the year at 5.5%, DIB's core nonperforming financing. And as you recollect, that trend was on the increase starting at 4.8% in Q1 2021 and 5.4% in the 9 months Q3 2021, ending the year 2021 at 5.5%. And this quarter, we see that ratio is stable, which means that we have now arrested the core NPF ratios of the bank. So good progress also made on the recoveries in NMC as well as the Noor- POCI as outstanding NPF on both these areas has continued to reduce. Slide 16 looks at asset quality by stages. Overall, the bank portfolio has stabilized post-pandemic exposures, and there is adequate ECL coverage across all the 3 stages, with stable macroeconomic conditions in the UAE indicating that the improvements will continue in the next 3 quarters. Slide 17 looks at our funding sources and sources of liquidity. While customer deposits have shown a marginal decline, liquidity remains healthy across all our key ratios. Significant to note is that CASA has actually seen a 3.2% jump year-to-date, rising to nearly AED 93 billion, quite an achievement given the current interest rate trend and outlook. CASA now forms around 45% of the overall deposit book. Slide 18, a look at our capitalization levels. The levels remained robust with CET1 at 12.8%, around 40 basis point increase year-to-date. And CAR, the total capital adequacy ratio, is at 17.5%. Again, 40 basis points year-to-date increase, both well above the minimum regulatory requirement. Strengthening capital position continues to provide strong growth impetus. Always the key catalyst along with liquidity to DIB's market defined performance that we've witnessed in the last so many years. Slide 19 is a new slide as we embark on a bank-wide ESG strategy, it's important that we give you some color as to our ESG ambitions. Sustainability is at the core of our strategy values as well as corporate purpose. Now it is on very high priority, and the bank remains fully committed to the economic growth and prosperity of the UAE, while aligning itself to international frameworks and global targets within this area. Based on detailed materiality exercise with the stakeholders, we have identified 5 key pillars and related commitments within the ESG phase, which is what you can see on the slide in the 5 boxes. We remain focused towards becoming a leader in the ESG space and in supporting the green and sustainability agenda of the UAE in years to come. Also at the beginning of the year, we have launched our inaugural DIB sustainability report, which outlines some of our achievements within the ESG space over the past few years. On Slide 20, we are briefly looking at our digital strategy, and that continues to support our growth. Healthy and sustained growth across all our key digital metrics, most of the increases in the metrics are attributed to the ongoing marketing campaigns that we are doing across our Internet banking and our mobile banking applications. customer migration to digital channels as these are becoming more and more convenient. On Slide 22 would be the summary highlights, and this would be my last slide before I take questions. This actually talks about everything that I just mentioned in terms of our robust balance sheet expansion, and that has come both across our businesses, wholesale and consumer, we have seen better credit underwriting, new gross financing. And I've already mentioned to you, close to around AED 16 billion of gross financing has been underwritten across our businesses. And as a result of that, we've seen a 6% increase in our Sukuk book as well, as well as a 2% increase in our overall financing. So when you consolidate that, we have seen around -- roughly around 3% increase in our financing and Sukuk book. Our margins continue to improve. Our asset quality metrics is on a recovery track. Low cost of risk of less than around 30 basis points when compared to first quarter of 2021 shows improving credit quality. So overall, our outlook remains favorable within the UAE, with continued high oil prices and rising rates. The target metrics of 2022, which is a guidance that we have given to you at the beginning of the year is in the box below. And that actually shows you how we span across all the metrics. Growth of anticipated growth of around 5% for the year. We've already seen 3% in the first quarter. Nonperforming financing, we looked at ending the year at 6.5%. We've seen some positive movement there. We are already at 6.7%. So we anticipate that we will be ending the year at the guidance that we provided. Our real-estate concentration in terms of our loan book, we want to end the year at 20% and we are making good progress there. Return on assets and return on equity are a reflection of the strong quarter results. We bettered the annual guidance of 1.7%. ROA stands at 1.9 mill and ROE is already high at 16.2%. So you see both these ratios improving going forward. Our cost-to-income ratio at 28.3% is in line with the overall guidance, and that's the overall guidance for the year. We are anticipating that we would be ending the year -- again, 3 quarters to go, but we would probably be ending the year with better than guidance at 28%. Our total coverage ratio stands at 103%, and we are on track to meet year-end guidance and our net profit margin is in line with guidance. All these key metrics that you're seeing here are definitely better than where we ended 2021. So a great start to the year 2022. With that, I'll take some questions, and then use the last 5 minutes of the hour to wrap up everything that I said.

Thank you, Dr. Chilwan. Gentleman, ladies the line is open for questions, and we will be shifting the through the -- as we go through the email as you can see

[Operator Instructions]

So the first set of questions is from Janany from Arqaam. The first question is around what was the driver behind the NIM expansion in Q1 2022? And also the unchanged guidance for full year 2020 estimate despite the rate expectations, what is the outlook for cost of risk in the coming quarters given the trends? And also on the -- also on almost NPL formation, and can we expect that NPL formation trend to continue in the quarter? If you have any [indiscernible] further questions?

Thank you, Janany, for your question. I'll start with the first question, the driver behind NIM expansion. Of course, the interest we've witnessed and interest rate hike, at least one in the first quarter, and our asset yields are reflective of that interest rate hike. -- but believe -- but also 1 has to understand that, that would also impact our liability book. What -- how we manage the NIM expansion in Q1 is that we have -- as you can see that our liability book or our deposits have reduced from the same time in first quarter of 2021, and that was a very cautious strategy of the bank to let go of certain high-cost deposits that we used to hold on our book. . Our CASA book has improved, and that adds to our net interest margin. So 3 factors there, 3 variables. One, the increase in asset prices. The increase in asset yields on the asset side of our balance sheet. The volume reduction on the liability side of our balance sheet when compared to the first quarter 2021; and the composition and the change in our CASA mix has allowed us to maintain our net interest margin or, in fact, expand our net interest margin in line with our guidance. The guidance for 2022 remains because, obviously, of course, there are anticipated rate hikes. We will benefit from that on our asset side. But also in order to support our growth, we will have to mobilize additional deposits and that would also mean that there would be a cost that we would be bearing on the liability side. The guidance that we have given of 2.7% was taking into account the interest rate hikes, if you remember, on both sides of the balance sheet. So at this stage, I think it is too early to start looking at a change in interest -- net interest margins, and we would want to stick to the net interest margin guidance, or in fact, any other guidance that we have given at the beginning of the year. As you recollect, we look at guidance in the second quarter, in the first half of each year. And if need be, we will look back realizing the guidance and during that time. In terms of outlook of cost of risk, we anticipate that the remaining quarters of in 2022, we would have a similar cost of risk. As you remember, our annualized cost of risk, we would like to be at around 80-odd percent, 80 to 90 bps, and that is the guidance that we had given at the beginning of the year. We today are at roughly around 70-odd bps. But as we go forward, we will continue to make sure that the coverage ratio -- cash coverage improves, and then that would mean that our general provisioning or our ECL in Stage 1 and Stage 2 will have to improve. And that would then mean that we will probably land at a cost to risk -- cost of risk of around 80 to 90 basis points, which is in line with the guidance that we have given at the beginning of the year. Can we expect NPL commission trend to continue? While we have seen no new NPL formation. And I am very optimistic that we will see this trend continue in the remaining 3 quarters. We have seen no new NPL formation in quarter 4 of 2021, and that trend has continued in the first quarter of 2022 as well. So we are very optimistic that we will see similar positive trends in the remaining parts of 2022. Do we have any -- there is another question that you've asked in big cost of risk benefit from any recoveries? No, the cost of risk has not benefited from any significant recoveries. There has been very slight recoveries in cost of risk. But it's just generally the improving market outlook that we are seeing within the UAE as well as the region. Your last question is on debts. Is there any debt deferral outstanding? No. There is no debt deferral outstanding as of 31st December 2021, we have retired the debt program.

[Operator Instructions]

So some questions from Lea at Bloomberg. The first question is around loan and public sector is grew in first quarter. How do you foresee the trend for the rest of the year? As you see the risk of government repayment for the remaining of 2022, and also, we expect to continue growing in the corporate sector?

Thank you, Lea, for your question. Well, like you said, in the first quarter, we've seen strong public sector growth. We've also seen growth within our private sectors. Overall, our corporate banking book has grown and so has our consumer banking book. So it's just not one business in the bank that is growing. We expect to see a very strong pipeline in the remaining quarters. So from where we sit, we are looking at some strong pipeline across our businesses. We expect our consumer banking book to grow. We expect our corporate banking group to grow. We also expect our fixed income book to grow. . So we are anticipating that we will grow from hereon in line with what we've been doing in the first quarter. Of course, there's always a risk of repayments across all types of clients, not just the government. With the rising oil prices, the government revenues are maximized, so they will always see a risk of government prepaying certain facilities, which is something that we saw in 2021, And that despite the kind of underwriting that we did in 2021 did not reflect in the portfolio. In the first quarter, we have also seen some repayments, but despite that, we have seen healthy growth in our portfolio. So we anticipate that there will be repayments in the remaining part of 2022, but not to the levels that we have witnessed in 2021. And that then means that you will see healthy portfolio growth across all our businesses for the remaining part of 2021.

Second question from Lea. Are we expecting [indiscernible]? And how much do you expect margins to widen? What is the expected direction of cost of fund ending of the year? And will excess government liquidity flow into low cost deposits for the bank?

Well, of course, there would be anything between 5 to 7 rate hikes from now until the remaining part of 2022, but that's yet to be seen whether these hikes are a 25 bps hike or a 50 bps hike, it's something that would be seen in months and quarters to follow. Rate hikes would definitely be a advantageous to the bank. We would make better returns on our asset side and yields would improve, but so would the cost of funding on the liability side, because in a rising interest rate scenario, you also have to reset your -- the rates that you pay on your deposits. . Our strategy would be to try and maintain the CASA mix because that adds to our net interest margin, and that is how we've improved our NIM in the first quarter. like I mentioned on the previous question, the NIMs have expanded because of 3 variables. One is better asset yields on the asset side, lower volumes and a reduction in the liability book on the liability side, as well as the composition of our CASA mix. As we go into 2022 and the remaining quarters with anticipated rate hikes, we also expect that our deposit book will need to grow in order to support our growth. That would mean that we will have to pay rates on our deposit side also and reset our liability yields. So at this stage, what we are doing is we are maintaining our net interest margin of 2.7% at least for one more quarter. And depending on what rate hikes would -- we would see, we would definitely relook at our NIMs or any other guidance probably in the first half of 2022.

[Operator Instructions]

Thank you. Okay. So a few questions from Rahul of Citi. The first question is, are there any loan scale under deferral or all impaired loans on COVID have already been moved to NPLs by now and restricting the hikes? The second is around are you seeing higher competition from assets and deposits to offset the upset the affect of rate hike? And third is on the standard of the NMC exposure.

Thank you, Rahul, for your questions. I have already answered partly. With respect to the deferrals and test, we don't have anything outstanding. In terms of impaired loans from COVID, we have categorized the test into group 1 and group 2. If you recollect that is there on the financial -- within the financial statement. We've not seen any impaired loans from debt moving into NPLs, and the rest remains regularized. Your second question around higher competition for assets and deposits. Definitely, we have seen competition. We saw competition in 2021, as well as we are seeing competition in the first quarter of 2022 on both sides, assets as well as deposits. But despite that, we have continued to demonstrate growth in terms of assets and we funded that growth. We had adequate liquidity to fund that growth, so we did not have to tap accessory deposits, we managed our balance sheet very efficiently. But going forward, as we continue to grow in line with our guidance or even maybe better than guidance, because we are already at 3% when compared to 5% guidance, you will expect that we will have to mobilize deposits, which is something that comes naturally to us. And that would then mean that both sides of our balance sheet will increase, and we would take advantage of rising interest rates on the asset side and also then have to pay better rates on the deposit side in line with the interest rate environment. In terms of NMC exposure, we continue to get -- bring the outstanding down. And as you can see, and the idea of that is to improve our coverage. We do not anticipate any reversals of those provisions at this stage because we want to enhance that coverage. I think both the numerator is decreasing because the repayments that we have been witnessing with our intense cash flows is bringing the outstanding exposure down. And the provision that we have made on NMC continues to be at the same levels. We have made sure that we have 50% provision on NMC, and that is enough for us at this stage. So we do not anticipate any reversal on NMC provisions at this stage.

[Operator Instructions]

Thank you. So a question from Zohaib from Al Ramz. What is the rationale for the large increase in payable on sequential basis?

It's just a result of the initial public offering of DEWA, which the bank participated in. So that has to be shown within the payables. You can see that on both sides of our balance sheet, both on the assets and liabilities. So since the end of the quarter, that has already been reset.

[Operator Instructions]

So a few questions from Shabbir from EFG. What were the drivers of OpEx? It was up 14% year-on-year, well ahead of revenue growth and asset growth. How do you position yourself to benefit from the IPO in Dubai and in the UAE? And what were the drivers of your fee income this quarter?

Shabbir Thank you for your questions. OpEx, if you recollect when we gave guidance at the beginning of the year, we did mention that our cost-to-income ratio would be at around 28%. Now cost-to-income ratio has 2 variable revenues as well as costs, and costs are driven fundamentally by OpEx -- so we were anticipating that in line with our next 5-year medium-term strategy, We were -- we had alluded to the fact that we -- our strategy sits on 2 pillars: one is strengthen the group and second grow the group. And I've mentioned that in one of the previous questions, that strengthen the group meant that we had to have a and robust foundation. Now that means we are resetting certain things within the bank. We are going digital. We are making sure that we have embarked on some transformation programs that revolve around technology and people. We are strengthening our support functions in order to reflect the bigger size of the bank, and that would be our control functions, compliance, risk, audit, all of that would definitely have a an immediate impact on OpEx, but we don't expect OpEx to go up significantly from here, you will see this trend continuing. And with better revenue forecast, which is what we were anticipating for the entire year of 2022, we expect that our cost-to-income ratio will be in line with our guidance. And in fact, we are optimistic that it would be better than the guidance that we have given. So while a year-on-year 14% increase looks significant, this would probably stabilize going forward in the remaining part of 2022. How well are we positioned to benefit from the IPOs, where we benefited from the IPO, and being a leading bank within the country, we always play a major part within IPOs not just the recent IPOs, but historically, across all the IPOs that have been introduced in the UAE, we have played a very significant part given that we have a very diversified customer base. So we play a very major part within the financing of the IPO and leveraging of the IPO. And we anticipate that as more and more IPOs will come in, we'll play significant part in one capacity, or the other Probably in some IPOs will be on the structuring side, and some IPOs will be joint lead coordinators, in some IPOs, we'll be issuing bank, reissuing bank. So we would continue to benefit from the IPOs within the UAE. And the drivers of our fee income are just better underwriting, better volumes of business are resulting in better fee income. So nothing out of the ordinary. Nothing out of -- this is all business as usual. We will continue to focus on our fee income as we continue to grow. We will continue to focus on our fee income and our fee income will grow as well.

[Operator Instructions]

Okay. So a few questions from Chiro from SICO. In the previous conference call, you had guided OpEx to rise in full year 2022. As expected, it rose in the first quarter 2022. How much more can it rise from here?

Thank you, Chiro. Your -- you have correctly pointed out what I mentioned on my previous call, and I did mention this on this call as well to Janany and to Shabbir. I had target in OpEx rise and that was clearly because I alluded to the fact that we are embarking on our transformation journey in order to have a robust foundation that supports our strategy of strengthening the group. So we have definitely seen that rise, which was something we anticipated something I mentioned. Do we expect this rise to continue? No. We expect that our OpEx is going to be at similar levels. We don't anticipate any more significant increases in OpEx. But what we do anticipate is improving cost-to-income ratio because revenue will continue to go up from where we sit, and that's just a function of better volumes, better underwriting, interest rate environment and all of the key parameters that I've been mentioning. So correctly pointed out. And when we would see this translate to higher revenues? We are already starting to see fruits of that. But definitely, you will see better results in the remaining part of 2022 as well as going into 2022.

Second question of Chiro is around the high liquidity in the system. Do you expect it to remain a headwind to your NIM expansion plans?

Well, of course, with the rising interest rates, rising interest rates could always play headwinds to NIM expansion. But if we do what we've done well in Q1, which means to have a better composition of our liability book, we have enhanced our CASA ratios to 45%. That adds to our NIM expansion. Our asset yields get reset immediately with the interest rate hike, so that would also allow us to expand our NIM. At this stage, what we are doing is we are not getting ahead of ourselves. We do not know how many interest rate hikes are there for the remaining part of 2022. So our guidance -- interest rate guidance of 2.7% remains for now, at least for the second quarter. And probably at the end of the first half, we would have a better position and a better understanding of where our NIM guidance should be and should it go up or should it remain at the existing levels. You have a question on credit risk reserve. Let me use the opportunity, John, maybe you want to answer this?

Yes. Thank you. Thank you, Doctor. Chiro, your question is we ask you for an understanding around the regulatory credit risk reserve and can it be used in the case of a default. So just as a brief background to the nature of this reserve, if you recall, before IFRS 9 came into play, the Central Bank of the UAE had a general provision requirement on performing loans. So what today we call Stage 1 and Stage 2 loans, they except that requirement in place and opt banks to align themselves both to IFRS 9 as well as that general provision requirement. So it doesn't relate -- it does not relate to bad loans or stage 3 loans, it relates to performing loans. And what banks are asked to do is to measure the requirement from Central Bank against the IFRS 9 models. And if there is a difference to raise it as an appropriation from retained earnings as a credit risk reserve. So the simple answer is no. It's not the intention of any default, it's there as a Central Bank UAE requirement around performing loans.

And if I may just add to what John has mentioned, the credit risk reserve will always keep changing, it can go up or down depending on what your models necessitate you to have in terms of ECL provisioning. And for as long as the Central Bank requirement of 1.5% remains, the difference between the modeling function and the 1.5% is what we would have to be raised as a credit risk reserve. So in the past, this risk reserve used to be at a different amount and over time, it has changed. Today, it stands at around AED 330 million. And that is sufficient enough to make sure that we tick both boxes, the box of the Central Bank acquiring the 1.5% as well as what the models warrant the bank to be at.

[Operator Instructions]

So some questions from Aybek from HSBC. Do you think strong oil prices will lead to repayments of corporate loans in 2022, '23 as well? And what does the demand for loans look like from government? How do you expect rising inflation to impact business outlook, operating costs, NPLs, loan demand, et cetera? And what level of CET1 ratio do you aim in the medium term? And where do you think ROEs would normalize as we continue and the economy continues with [indiscernible] ?

Thank you, Aybek. A few questions on the slide, some of which have already been answered. So I'll just brush through them very quickly. Do I think strong oil prices may lead to repayment? Absolutely, that's always -- that is something that can happen. Oil prices are at record high when compared to the last couple of years at $105 to the barrel. So we expect that we can anticipate seeing some corporate loans within the industry to be repaid. We have seen partly some repayments happened in the first quarter despite that we continue to grow. But I don't anticipate the kind of repayment that DIB has witnessed in 2021 for DIB to happen in 2022. Demand for loans, again, this is -- with the oil prices and better revenues for the government and the government being flushed with liquidity, again, the demand for loans would is expected to be muted in -- across some borrowers. But despite that, we anticipate that there would be demand for loans within some areas within the public sector as well as the private sector, but more importantly, on the consumer banking side as well. So demand for loans will continue, and that's why we have given our guidance of around 5% for the full year. And you've seen that we've done well. We've done close to around 3% already in the first quarter. For now, we are holding this guidance. Keeping in mind that we expect and anticipate that there might be a few repayments. So the overall annual guidance of 5% remains for now. How do we expect rising inflation to impact business output -- outlook, operating cost, NPL loan demand? Well, with rising inflation, one should expect that operating costs would rise. We had anticipated that our operating costs have risen partly because of inflation, but more importantly, because of the transformation programs that we are running to maintain a robust foundation. And I've already mentioned to both Janany and Shabbir as well as Chiro on the previous questions that our operating costs were anticipated, and we do not expect these operating costs to significantly increase. In terms of NPLs, I think a good story for us. We've seen a downward trajectory start from -- first, stabilization in the last quarter of 2021, stabilization continues in 2022 and now we've seen our numerator also go down on our nonperforming loans. So I think overall, this is a good area for us. The current CET1 levels are levels that we are comfortable with. Anything about 17.5% is good. We currently are at close to those levels, and we are well about the minimum regulatory requirement in terms of CAR as well as in terms of CET1. CET1 ratio at around 12.8% is about the 10%, 10.5% that the regulator expects us to be at. And we are comfortable in terms of these levels because it allows us the ability to grow as well. In terms of ROE and normalized ROEs, we are above the guidance that we have given at the beginning of the year, we gave guidance of around 13%. We are close to around 16%, 16.5%. Our normalized ROE for the remaining part of this year would be close to the level at what we are now. We can anticipate some improvement in ROE going forward as well in the remaining part of this year. But clearly, that's a good achievement for us, and we would want to continue to sustain that throughout 2022.

Everyone, let's do -- sort of save some time because there are a lot of questions flowing through, and we will not need to answer all of them. We just look at the ones that are not answered. So just bear with us. Thanks.

[Operator Instructions]

So we see a lot of questions, Ambreen, Aybek, Karan Rasolok odeh, many of them have been answered. Anything else that we'll take offline anyway, which is right. Chander has a few questions, Chander Kumar from Al Ramz. The first one is around the -- can we expect further improvement in treasury portfolio yield? And what's the weighted average maturity of the fixed income portfolio?

Thank you, Chander, for your question. Like Kashif said, some of the questions from Karan, [indiscernible], Aybek , Ambreen have been asked, so we'll try and skip those answers. But Chander, the treasury portfolio yields, do you expect that the bank will have improvement, the improvement here? Yes, absolutely. We expect that our treasury portfolio units will improve because the new issuances that we are participating in or the secondary market buys that we are doing are at better yields. So definitely, you will see the treasury portfolio is improving. The weighted average maturity of the portfolio is somewhere around 4.5 years, thereabouts. In terms of our shares in NMC exit instruments. No, we have not benefited from any because we did not participate in any of those exit instruments. I think this brings me to the last 3 or 4 minutes of the hour. And please, ladies and gentlemen, allow me to summarize this. Of course, I can see many questions coming in through and we won't have time to answer all of those. So please reach out to our Investor Relations team, and we would get in touch with you one-on-one to answer any unanswered questions. But the last 3 or 4 minutes, I am going to conclude this call by just highlighting certainty achievements of the bank. Clearly, the first quarter 2022 performance has proven that the bank has remained on target to achieve the guidance that we had given at the beginning of the year. And this is the guidance that we gave across the key -- 8 key metrics. All the drivers are remaining positive, now whether it is earning asset growth, strong margins. And given the interest rate expectations and trend, higher oil prices also leading to improved economic conditions and improve asset quality, resulting in a lower cost of risk. Technology for us, I've already mentioned, will remain a key component of all our business decisions, with both front and back-end systems witnessing critical improvements, modifications update and even replacements where required, and this is what I have encapsulated within our transformation program. Customer engagement, we'll see a massive facelift with digital and other tech-based channels leading the way. New customer and business segments, including the Gen Y, Gen Z and Alpha in retail plus SME in business banking will be actively targeted. Within the corporate banking area, we will also see major focus on trade and transactional banking to capture businesses within the UAE. So overall, Q1 has been a great start for us we have seen improvement in our overall net profitability, but that is supported, and very heartening to see that our top line in terms of our gross revenues have seen a 6% increase, and that has also translated into a net operating profit increase better than what we had witnessed in the first quarter. With arresting the nonperforming financing and we've seen a downward trajectory in our numerator, we anticipate that we are on target to see the remaining part of 2022 better than definitely where we ended 2021 across all our key metrics, whether it is our cost-to-income ratio, whether it is our net interest margin, whether it is our return on equity, return on assets or growth in general, we anticipate that we will meet the guidance that we have given for 2022, and in certain cases, also exceed the guidance for 2022. With that, thank you for listening in. If there are any more questions, please feel free to reach out to our Investor Relations team. And hopefully, with the world opening up, we will definitely see you face-to-face in some part of the world when we do some [indiscernible] roadshows or even the [indiscernible] roadshows in the future.

Thank you, Doctor. Thank you, everyone, and look forward to seeing you in the next [indiscernible]. Thank you. Bye-bye.

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