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

Ladies and gentlemen, welcome to the Dubai Islamic Bank 9 Months 2022 Financial Results Earnings Call. [Operator Instructions] I will now hand over to your host, Janany Vamadeva from Arqaam Capital. Miss, please go ahead.

Thank you, Nadia. Good morning, 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's 9-month 2022 Earnings Conference Call. I have with me here today from DIB management, Dr. Adnan Chilwan, the Group's Chief Executive Officer; Jon Macedo, the Chief Financial Officer; 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.

All right. Thank you, Janany, and welcome, everyone, to the third quarter 2022 results webcast of Dubai Islamic Bank. This session is led by our Group CEO, Dr. Adnan Chilwan; accompanied by John Macedo, the Chief Financial Officer; and myself. I request everyone to keep the questions coming through the e-mail provided at webcast@dib.ae, and they will be addressed by Dr. Adnan at the end of the presentation. So with that, let's start. We move on to Slide 4. As you can see, global growth remains challenged amidst the ongoing international context and soaring inflation exhibited in high energy and oil prices as well as other higher cost of commodities and goods. And clearly, this has impacted IMF's global GDP outlook, and they have downgraded growth expectations for the upcoming year to 2.7% versus the previously 2.9%. Also globally, central banks have been adopting tightening monetary policies over the past several months to curve inflationary pressures. And whilst the global growth is moderating the GCC region is witnessing divergence in growth expectations versus developing economies with GDP expectations reaching 3.6%, which demonstrates strong resilience to the current environment. This growth is supported by higher oil prices and relaxation of pandemic precautions, which have led to key sectors such as travel and tourism bouncing back to the pre-pandemic levels. As a result, the MENA region is expected to report a combined current account surplus of AED 400 billion in 2022, 2023, up from AED 120 billion in 2021. And thanks to primarily to the region's average breakeven oil price of around AED 60 to AED 70 a barrel. The GCC's regions banking sector also remains healthy with strong capitalization on the back of improving profitability and asset quality trends. And the regions banks are expected to benefit from the rising rate environment given their well-structured balance sheet and robust deposit compositions. With that, we now move on to Slide 5 and closer to home. The UAE has been, as you can see, gaining momentum since the beginning of the year and with key performance indicators, such as PMI, expanding sustainably, supporting also at the federal level in terms of the ongoing visa reform program is boarding well for the overall economy as it aims to attract skilled talent in the UAE targeted to boost employment and investment levels over the medium to long term. As for Dubai, during the first half of 2022, tourism exhibited a strong rebound with international visitors reaching 7.1 million representing 183% increase from the 2021 numbers. While profitability also improved drastically with revenues per available room up by 76% higher than the pre-pandemic levels. Since it's bottoming out in 2020, the Dubai real estate market is in now 22 months into a recovery, an expansion phase, which is perpetuating due to the influx of high net worth individuals, golden visa programs and other investor friendly policies. Following also early announcement by Dubai financial markets to diversify the stock market from the financial and real estate sectors, the market witnessed 3 successful IPO listings of government-related entities during the year. And this has further boosted the market capitalization of DSN. And all IPOs saw massive oversubscription, indicating strong confidence and appetite of investors toward Dubai view listings. So with that, I will now hand over to Dr. Adnan Chilwan, the Group Chief Executive, to take you through the 9 months 2022 financial results. Dr. Adnan, please?

Thank you, Kashif. Good afternoon, everyone. I'll take your attention to Slide 7, where we will look at the key highlights of the first 9 months of the year. An overall robust set of results across the bank, particularly around profitability metrics amidst the ongoing current environment. Now this unprecedented rate environment has provided additional tailwind over the reporting period. And the bank has continued to successfully navigate this through exceptional times. In line with the region's operating environment, our core assets, mainly financing and Sukuk investments have seen upward trajectory, growing by a net 3.3% year-to-date. Zooming into our earning assets, our gross underwriting, this is something I'll touch upon in greater detail later, has seen in the first 9 months around AED 43 billion of new bookings. This, however, was offset by repayments in tune of around AED 22 billion and early settlements of around AED 13 billion, resulting in a net growth of USD 8 billion. Hence, whilst the business momentum remains strong even though the net growth may appear to be subdued. Net profits have jumped to AED 4.1 billion in the first 9 months, a notable 34% rise year-on-year, and this obviously has been supported by the rate environment and the bank's franchise strength. Cost-to-income ratio now has further improved by 20 bps quarter-on-quarter to 26.7% at the end of Q3, which is the strongest in the market. So overall, positive set of results, which obviously I'll expand on to in the next few slides. On Slide 8, you can witness that this has been a strong year from a profitability perspective. That said, our net financing and Sukuk Investments, which I have just alluded to on the previous slide, have increased by around 3.3% year-to-date despite higher-than-expected repayments, as I mentioned in my opening remarks. Now obviously, at the end of quarter 2, we had already achieved a net financing and Sukuk investment growth of around 6%. And thereby, we had revised our margin full year guidance, upwards to 7.5%. Q3, we've witnessed very extraordinary early settlements, and that has obviously subdued our growth. Our net financing and Sukuk growth now stands at around 3.3%. We are not revising our guidance downwards. In fact, we are holding on to the guidance and we'll try to come as close to the year-end guidance we've given at the end of Q2. But moving on, the decline in deposits that you can witness in the balance sheet is attributed to the highly competitive interest rate environment that we have seen given the rising rates globally. Now I've already mentioned this on my previous calls, we manage our liquidity very closely and keep a strong balance between required liquidity and its impacts on margins. So a couple of things have happened on this side. One is that we have deliberately let go of expensive deposits, and this is something that I also mentioned on the first call at the beginning of the year. And more importantly, what has happened in quarter 2 and quarter 3 on the deposit side is that some of the early settlements that we've witnessed has come from the deposits that we are holding on account of customers. So both sides of our balance sheet, hence, have gone down. One is the customers that had liquidity with us in the form of term deposits in the rising interest rate environment decided to prepay and early settle day facilities with us. And hence, you can see that the deposit decline on our balance sheet is on account of, one, the cautious strategy that we had in order to make sure that our cost of funding remains low, hence, letting go of a few deposits. And also, on the other hand, the early settlement that we've witnessed is also on account of some of the customers using the deposits that they had on their balance sheet to pay off their financing before time. On the P&L side, the picture is impressive. Our relentless efforts to focus on improving our financial performance has kept the bank strong and profitable. Asset quality and impairments continue to scale lower, and we expect this to further improve as economic conditions return back to normal. As mentioned in the previous webcast as well, the increase in our OpEx is part of the bank's growth strategy. And this is the medium-term growth strategy that we have articulated at the beginning of 2022. It's a 5-year plan, and we are now looking to grow and strengthen the group over the next few years. In this regard, the bank has also been investing and strengthening some key functions within the banks such as compliance, risk, technology, infrastructure and some of the other key areas. Accordingly, profitability has been rising with an impressive 34% year-on-year growth. I look at core ratios; these remain robust with most key metrics meeting our year-end guidance already which we will obviously dwell more into the coming slides. On Slide 9, where we look at the operating performance, heartening to see that our net profit margin continues to be on an upward trajectory, meeting the guidance. And this may be further seen that the upside given the rising global rate environment today. OpEx growth is a part of a deliberate strategy to strengthen and enhance the key functions, and I've already mentioned this on the preceding slide. However, the cost-to-income ratio, which is always a focus remains well within the guidance. In terms of the key efficiency ratios, the other key efficiency ratios, return on assets and return on tangible equity are approaching year-end guidance, and we remain comfortably positioned to our commitment that we made to the shareholders. On Slide 10, deployment of funds. We can see that our core assets now registered at around AED 275 billion, majority of which is coming from both financing as well as the Sukuk books. 84% of our assets are earning in nature. And the pie chart there will also show you that we managed to -- we'll continue to manage our real estate concentration, which now stands at 21%, down from 23% at the end of 2021. A look at some of our key businesses. On Slide 11, we look at our consumer banking business. This portfolio now stands at around AED 53 billion, which is up 4% year-to-date, and it's attributable to a growing mortgage book as well as our personal finance book. In this portfolio, we've booked new business to the tune of around AED 13 billion in the first 9 months versus AED 10 million in the first 9 months of 2021. So you can see that there is an upward trajectory even on our consumer banking business, and there is very good momentum even as we move into the next quarter. Despite the routine repayments in this portfolio of around AED 11 billion, the consumer portfolio has exhibited positive growth for the first 9 months, close to around AED 2 billion. Revenues have also gone up, up by around 11%, and yields have expanded by around 22 basis points in the consumer-banking book to end at around 5.8%, underpinning good profitability. The current and savings accounts and the deposits from current and savings on the consumer side are very stable and sticky, seemingly agnostic to the current rate environment. And this is a result of our consumer banking acquisition strategy that we have on the payroll side, where we continue to attract the payroll of a lot of corporates, and that allows us to maintain healthy as well as sticky CASA balances across the consumer-banking book. On Slide 12, we look at our corporate banking business. The portfolio sits at around AED 144 billion and remains very well diversified, which you can see from the color of the pie in the middle of the chart. The gross corporate new financing close to around AED 20 billion was underwritten in the first 9 months. This is again an indicator of our growing business volumes. Yet this has been offset by strong routine repayments as well as some early settlements, both of which are to the tune of AED 22 million. And hence, you can -- one might feel that the corporate banking business have stagnated, but the reality is that in terms of gross underwriting in the first 9 months, we've done very well on the corporate banking side, but the repayments that I've alluded to are on account of the corporate banking business. Revenue trends within the corporate banking continue to be on an upward trajectory, given the floating nature of our book, reaching to more than AED 2.7 billion in revenues during the first 9 months. Government sector continues to contribute strongly now, representing around 18% of the corporate book, and this is up from 12% at the end of 2021. And you would recollect that this is a deliberate strategy on account of the bank to grow within the low-risk asset class within the corporate banking business. Given the rate environment, we are in the CASA deposits were impacted as most of the corporate lines are highly price sensitive and would want to keep their excess liquidity within term deposits. On Slide 13, we look at our treasury business. Treasury has been a key business for the bank, and this now stands at nearly AED 51 billion, up from around AED 44 billion at the end of 2021. Government and FIs constitute to around 80% of the fixed income book and revenues last year were higher, primarily due to the sale of certain parts of the fixed income book in order to manage concentration. But overall, a very well diversified book allows us to also generate liquidity, if required within the repo market. And the overall return on this book is north of around 4%. On Slide 14, we look at asset quality. Our nonperforming finance ratio is continuously on a downward trend and stands at around 6.5%, 30 basis points down from where we started the year. Our nonperforming financing has dropped in absolute numbers to around AED 13.2 billion, and this is down by around 4% from the beginning of the year due to both recoveries on DIPs core book as well as the NMC exposure and the POCI book that we picked up with the acquisition of Noor Bank. Our provision coverage is on an upward trajectory, reaching to around 76% in line with DIB's risk management appetite. Significantly lower impairment charges and these have declined by 33% year-on-year. Our cost of risk is down by a decent 20 bps and is standing at around 79 basis points, down from 99 basis points at the end of 2021. When we dwell into the asset quality, Slide 15, you can see that DIB's core net performing financing or nonperforming loans, portfolio has improved by 3% year-to-date to around AED 11 billion. And that's the core nonperforming financing that I'm talking about. When you look at NMC and the Noor POCI, which constitutes around 17% of that book, that has also declined combined to around 10% year-to-date. And between the 2 of them, they stand at around AED 2.3 billion, down 3% quarter-on-quarter. So clearly, as we make more recoveries on both those books, the NFC exposure as well as the Noor bank POCI, the nonperforming financing ratio also tends to improve. On Slide 16, in terms of asset quality by stages, Stage 2 loans have dropped by 16%, and they stand at around 16.7% versus AED 19.8 billion during the year 2021, depicting improving quality of the book, also down 5% quarter-on-quarter. So when you compare it to quarter-on-quarter, it's down 5%. And when you compare it year-to-date, it's down around 16%. Stage 2 coverage ratio has also increased to close to around 7%, and that is up by around 130 basis points. On Slide 17, a look at funding sources and liquidity. Liquidity of the bank continues to remain strong, and that can be seen with the LCR ratio at around 123%, obviously, allowing the bank to meet its short-term obligations. Overall, we are cognizant of the liquidity situation in the market. However, it is also important to reiterate, I've mentioned this before that we will not retain excess liquidity at the expense of net profit margins. We have historically been extremely liquid, and we have also been able to mobilize deposits at will without paying premium price. And hence, at the beginning of this year, we took a very conscious decision of making sure that whatever concentration that we had on the deposit front; we would not compromise that when compared to where our net profit margins would be or where our cost of funding should be. So I've already explained to you our liquidity situation. But clearly, I think if we have to grow from here on, we are cognizant that we will require to shore up deposits and mobilize them, and we are confident we'll be able to do that. CASA, which is an important component of our liquidity and also in order to bring our cost of funding down stands at around AED 77 billion, accounting for around 42% of the overall deposits. On Slide 18, capitalization. Our capitalization levels, which you can see are quite robust. Our CET1 has improved by 150 basis points from the beginning of the year. It stands at around 13.9%. And also reflected, that increase is reflected in the capital adequacy, the total CAR ratio, which stands at around 18.6%, both well above minimum regulatory requirements. On Slide 19, very quickly. Our digital strategy continues to support DIB's growth. We've seen these metrics continue to grow by double-digit year-to-date. And we can see that when we compare year-on-year in terms of percentage, the contribution of digital to our overall business is much more than year-on-year 2021. We've also introduced within our digital strategy. Also, we had our WhatsApp services and certain services -- banking services available to WhatsApp, so we'll continue to kind of enhance the number of services that we can offer through this channel. In addition to that, our voice-guided technology within our ATMs is now fully functional and that would allow us to also manage banking needs with ease and simplicity. On Slide 20, where we are looking -- where we're talking about sustainability. At DIB, we are very clear about one thing. Sustainability and ESG is not negotiable. So we believe that as the world's first Islamic bank, it is part of our DNA in order to make sure that our ambitions therefore, are taken locally, regionally and globally. We want to set benchmarks in this area, and we clearly want to be market leaders and to own the ESG space. On Slide 22 and this will be the last slide before I take questions. It's pretty much a summary of what I've mentioned. Extraordinary global rate environment, this is putting, obviously, pressure on the cost of funding, but I think we've managed that quite well. And we've taken advantage of rising interest rates on our asset side. Profitability has remained very strong. Asset quality continues to be robust and on an improving trend. And we continue to use the strength of our P&L to build cash coverage and provision wherever required. Our cost of risk has come down and stands at around 79 bps annualized 80 is what we have always guided the market to. Balance sheet has been quite robust and obviously, this cushion with the improving coverage ratio. And in terms of shareholder returns and the ratios, I think it would not be wrong to say that we are one of the strongest in the market. And we will continue to make sure that we deliver on the guidance that we have set for ourselves at the beginning of the year and also revised a few metrics at the end of Quarter 2. So in terms of the target metrics, growth, as you know, we had an annual guidance of around 5%. And having performed in the first 6 months at around 6%, we decided to increase that guidance to 7.5%. But obviously, we were then met by some extraordinary early settlements, and that has dwarfed the growth. And the growth today stands at around 3.3%. But we are not revising this guidance downwards. And we'll try to come as close to 7.5%. We've got a very strong pipeline in Quarter 4 across our loans and our Sukuk businesses. So we will try and come very close to that 7.5%. As you know, our principles are that we give guidance at the beginning of the year and then revise it only once at midterm, which is what we've done. So looking at the Quarter 3 and since our growth seems to be dwarfed with early settlements does not mean that we want to revise this guidance downwards. So we are putting our best foot forward and we'll try to come as close to 7.5%. Our nonperforming loan guidance was 6.5%. We've already achieved that, and we are maintaining that. Our real estate concentration, some who work to be done. We are confident that we'll come close to around 20%, which is the guidance that we've given to the market. Return on assets and return on tangible equity. As you can see, the guidance is 1.9% and 16%, respectively. We are holding that guidance because obviously, one has to look at a full year. In terms of cost-to-income ratio, again, 26.7%, with the kind of robust foundation that we want to build, if we also end up with at this close to around 28% or even remain between 26.7% and 28% that will be a great achievement. Total coverage looks good at 105%, and we are confident we will go close to 110%. And net profit margin, our guidance was 2.9%, and we've already achieved that guidance in the first 9 months. With that, I will open the floor to take questions. I'm sure you have many and then use the last 5 minutes of the hour to kind of summarize everything that I've mentioned this far.

Thank you, doctor. Ladies and gentlemen we're waiting for questions now. So just bear with us, and we will come back to you with the answer as the questions come. Thank you.

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

So first set of questions here from Shabbir from EFG. There appears to be strong repayments in the corporate and real estate segment, what drove the repayments? And what are your expectations for growth for the rest of the year?

Thank you for your question, Shabbir. I think you've asked this question even before I've explained, but I'll just, for the benefit of everyone so that we can summarize this. Yes, the strong repayment that we've seen within the corporate bank predominantly has been driven by the fact that in a rising interest rate environment, when the corporates are flushed with liquidity on one side of their balance sheet and they also have a loan on the other side of their own balance sheet. They decide to use, obviously, their liquidity and pre-settle the loans that they have on their book. So that is part one reason. Second is that some of these corporates are trying to be IPO-ready. And in order to do that, they obviously have to reduce their debt on their balance sheet. And thirdly, the point that I've made is that fortunately in the past, and unfortunately, these deposits that were used to settle these loans were also with us. So hence, the loans have been settled by using the liquidity that used to be with the bank. And that's the reason why our deposit base has also shrunk partly. And partly, it was deliberate on account of the bank to make sure that we do not show up expensive deposits, which were -- which in our opinion, we did not require. And that answers your first and the second question. And clearly, because of that, we've also tried to make sure that the growth that we wanted to manage was funded also partly through the interbank market. So if you actually look at what has happened on our balance sheet, one is pre-settlements of loans, which nobody was expecting. And I've given you 3 reasons why the corporates have done that, rising interest rates, being IPO-ready and having excessive deposits then means that they are going to use those excess deposits in order to settle those loans. And the good thing is that we've not lost these loans to competition. They have been pre-settled in totality. And that has also impacted partly our deposit base on one side of our balance sheet.

The last question from Shabbir, doctor already answered the second question, which was on deposits. The last question is around the credit quality trend, which you're saying look good. What do you expect on these trends given the rising interest rate environment?

Well, at the time of underwriting these loans, we've always maintained a good DSCR coverage. And all the interest rates that we have witnessed so far have not put undue pressure on the ability of the customers to service those installments. Of course, there are customers that have approached the bank just like they would have approached any other financial institution to kind of reset their margin, if possible, and reduce the margin because the composite rate that they are paying, the composite pricing is significantly higher than when these loans were underwritten. But as such, we have not seen any impact on NPL, and I don't foresee any impact on NPL from rising interest rates going forward.

[Operator Instructions]

We have a couple of questions from Rahul from Citi. One is around any early sign of stress in the economy as the higher interest rates begin to pinch customers? And the second is on the indication and guidance on how we think 2023 will look like?

I think, I've just answered the question, but again, just for Rahul's benefit. Any early signs of stress in the economy with high interest rate? No. At least from DIB's perspective, I can tell you that we've not seen any early warning signs or any stress. Our loans continue to be serviced. Our asset quality is holding. You can look at absolute NPLs coming down. Our percentage is arrested at 6.5%. We also anticipate that this would further improve by the end of the year, given that our denominator would also increase. Mind you, the percentage, 6.5% in Q3 is the same in Q2. And you can see that the denominator in Q3 has gone down a little, and that has had still no impact on the percentage, which means asset quality definitely is improving. So clearly, no signs of stress as far as we are concerned because of higher interest rates. And your next question is on early indications and guidance on how 2023 would look like? I think it's still early days. If we follow the pattern that we used to, that we are used to, while engaging with the market, we do that in the first call of the year, where we will talk about our full year results as well as give guidance for the next year. So we just have to wait probably for another quarter, and we would be very transparent in setting guidance for 2023.

Question from [ Alrams ] from [ Shevan ]. Is the bank hoping to reduce related exposure further and by how much and by when?

Well, I think real estate exposure as a part of our loan book, we've always wanted to keep it close to around 20%. We are at 21%. So always, there is -- the strategy of the bank is to try and manage this ratio as much as we can. But with regulation changing, the central bank would be -- the regulator will be looking at real estate ratio, and would be calculating it on basis of real estate to total risk-weighted assets. So obviously, when that ratio would come into effect, we would be also coming to the market and telling the market where we are in terms of real estate, risk-weighted assets to total risk-weighted assets.

[Operator Instructions]

So a couple of questions from Janany from Arqaam. How do you expect high interest rates to impact cost of risk trend going forward?

I've already mentioned this. But as of now, we don't anticipate -- you see interest rates have substantially increased when you look at it from the beginning of the year, right? So if anything, we would have seen deteriorating asset quality, if any, we would have started to feel the pressure. But no, we have not seen. And I think fundamentally, the reason behind that is, at the time of underwriting these credits, we've made sure that there is adequate debt-to-service coverage ratio and any increase in interest rates really does not impact our customers to the effect that you are alluding to. Having said that, all of the business macro environment within the UAE is very good, businesses are flourishing. So clearly, revenues also on the client side are going up across all businesses. So I think the ability to service these loans is much better for the clients also. So I think given that we have seen no pressure and no stress of higher interest rates on our asset quality.

Second question from Janany is on the NIM expansion, which he has sales expanded quarter-on-quarter, but the pace was lower than Q2 from a sequential perspective. So what's driving this? And are you able to get the full benefit of higher rates with the borrowers? Or is there some pressure on NIM stemming from this?

I think if you look at net interest margins, Janany, and thank you, it's a very, very good question. So if you look at net interest margins, they have gone up by close to around 30 basis points from the beginning of the year. And of course, it's a function of rising interest rates, but also has the ability to kind of reprice our portfolios on both sides, right? So on the asset side we repriced the portfolio with new rates. On the liability side, we've managed the cost of funding and the cost of deposits well. I've mentioned that we have let go of a few expensive deposits, and that has helped us to increase our net interest margins. And you would appreciate when compared to some of our peers we are on the higher side, and in fact, growing sequentially quarter-on-quarter as well as year-to-date. So the fact that we have gone up by around 30 basis points is very heartening for us. Where do we see this? We probably would go up even further by the end of this year, given that interest rates are expected to rise, at least 1, if not 2. And that would also mean that our assets would be repriced faster than our deposits. So clearly, I think we've managed to make sure that our net interest margins in the current environment is quite good, and that's what is driving our profitability because profitability is not only driven by the top line, but also by our ability to manage our cost of funding, and that is reflected in our net interest margin. So we don't see any pressure as such on NIMs stemming from this as of now.

[Operator Instructions]