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

Ladies and gentlemen, welcome to the Dubai Islamic Bank First Half 2023 Financial Results Earnings Call. [Operator Instructions] I will now hand you over to host, Janany Vamadeva, from Arqaam Capital. Miss, please go ahead.

Thank you, Lauren. 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 Q2 2023 Earnings Conference Call. I have with me here today from DIB management, Dr. Adnan Chilwan, the Group Chief Executive Officer; John Macedo, the Chief Financial Officer; and 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, Kashif Moosa. Kashif, over to you.

Thanks, Janany, and welcome, everyone, to DIB's first half results webcast, 2023. 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 provider, which is webcast at dib.ai -- and they will be addressed at the end of the presentation. So with that, let's start. We move on to Slide 4. In the slide, you can see that the U.S. spread continued its rate hike trend during the first half of the year, raising rates by an aggregate of about 75 basis points. The aim obviously being to lower inflation. But even with the call last month, the Fed share sort of cautioned that they would be -- while there has been some progress in bringing down inflation still remains elevated and one of potential upside risk to the rates given the tight labor market. The World Bank continues to have moderate forecast for global GDP growth for this year, again, amidst the elevated inflation levels and also a cut because of the cut in oil production by OPEC Plus for the remaining half of this year. Closer to home and among the GCC region, the world banks expect the UAE to lead with the highest GDP growth with 2024 estimates at 3.4%, driven by a rebound and acceleration in public and private non-oil GDP. And overall, UAE banking sector continues to remain healthy with the initial first half 2023 reporting season now being ticked off and showing some strong and improving balance sheet and profitability. Moving on to Slide 5. The economy of the UAE continues to exhibit strong current and future indicators, steered by visionary strategies such as reserving national identity, environment and sustainability, bilateral trade deals, expanding them and development of the educational system. Further indicators of the UAE economy has shown strong positive growth as well. For example, FDI levels are up 10% year-on-year. Banking sector credit is up 3% and 3.5% as of quarter 1, 2023 and deposits also up 15% as of quarter 1, 2023. The tourist numbers also are up welcoming about 8.5 million visitors in the first half of 2022 compared to 8.3 million visitors in the first half of 2019. So higher than 3 pandemic levels. And the PMI levels also continued to show increasing levels of economic activity driven by rising employment and of course, the growing population of the bank. On the financial market front, the DSM performance was also positive regarding 14% year-to-date jump as listed corporates continue to report sound financial and earnings. With that, I will now hand over to Dr. Adnan Chilwan, Group Chief Executive to take you through the full-year financial results. Dr. Adnan, please.

Thank you, Kashif. Good afternoon, everyone. As always, I will do a page turn of the presentation and then leave enough time to take your questions. My first slide is Slide 7, tighter key highlights for the first half of 2023, an overall robust set of results across the bank, and this is around both profitability and balance sheet. Over the period, the bank's financial position has expanded, and that expansion is underpinned by solid franchise value, which is capitalizing on the growth of the economy. And the UAE economy, as you can see, has expanded about 7% in 2022. And in the first half, I think it's close to around 4%, and that growth is amongst the highest in the world. In line with the operating environment, our core assets, mainly financing and Sukuk investments were up by 5.3% on a year-to-date basis, exceeding our full-year guidance. And this is underpinned by gross new underwriting and Sukuks during the year, which equated to nearly AED 45 billion, which is up significantly by 36% year-on-year. This, however, was offset by regular repayments to the tune of AED 25 billion. And when early settlements of around AED 7 billion are added, it has resulted in a net positive movement of close to around AED 12.7 billion or circa AED 13 billion. The bank has delivered a net income of AED 3.1 billion, which is up by 15% year-on-year. Now this is a true testament to the bank's efficient P&L management as well as robust financial position and its franchise strength. The cost-to-income ratio, as you can see, has further improved by around 50 basis points year-on-year, and we are currently at 26.4% amongst the lowest in the market. So overall, another set of results in one of the fastest-growing countries in the world, I think in the first 6 months, it's only fair to say that DIP has performed significantly well. Slide 8, a slightly different-looking slide than usual, financial performance, and we are looking at balance sheet here. Digging deeper into the performance, we have delivered balance sheet growth of around 4% year-to-date, and the balance sheet footing stands at around AED 300 billion. Asset growth during the period is a function of the financing portfolio, which has grown by 2% year-to-date, and the Sukuk Investments, which have grown by 18% year-to-date. Put together, I think I've already mentioned that we've grown by close to around 5.3% year-to-date when it comes to financing and Sukuk together. On the funding side, deposits have increased by 6% on a year-to-date basis, and that is on the back of a 5% increase in corporate deposits and an 8% increase in retail deposits. Even on a quarter-on-quarter basis, the deposits were also strong at around 6% up. Our efficiency ratios in terms of return on assets and return on tangible equity has outperformed our year-end guidance. So we remain completely positioned vis-a-vis our commitment to our shareholders and other stakeholders. I'm going to look at Slide 9 and 10 together, and that is looking at the income statement. Similar to the balance sheet, the P&L picture is also very strong. Persistent efforts to focus on improving our financial performance has kept the bank adequately profitable. In terms of NIM or net profit margins, we've registered 3.2%, exceeding our full year guidance, and this is up by around 40 basis points compared to first half of 2022. Now however, on a quarter-on-quarter basis, and this is something that we also mentioned in our last webcast. On a quarter-on-quarter basis, our net profit margins have softened by 10 basis points. This is predominantly because our customers within our liabilities have rotated their funds from CASA accounts to investment accounts or rather fixed deposits, term deposits, whatever you may want to call them. However, we remain comfortable with our full year guidance as far as NIMs are concerned. But this is clearly, if you want to be self-critical, this is clearly a trend that we want to address going forward. I, we would expect our net interest margins to also improve quarter-on-quarter, given that the interest rate environment is high. But in our case, I think we've seen some mild softening for the reasons that I have mentioned. Clearly, as we go along the presentation, you'll also see what I've mentioned is validated with the fact that our current and savings account stand at around 39%, which has come down from the 43% that we used to be at the beginning of the year. So that has added to our cost of funding, and this is a trend that we are cognizant of and this is something that we want to take within our stride. And it's important that we reflect on being a little self-critical and this is something that we want to do going forward. OpEx has moved up 9% year-on-year as we are ensuring optimal spend while looking to grow and strengthen the group over the next few years. And this is something that we mentioned in the last quarter of 2022 -- into 2023 saying that we should be expecting increase in OpEx, and that is because we are strengthening our control functions, investing in the future in terms of technology as well as in terms of our risk management systems. But needless to say, I also did mention that as long as we can deliver our guided cost-to-income ratio, we should have done well for ourselves. And that is exactly what we have done even in the first half of 2023, where our cost-to-income ratio is at 26.4% and that is down by around 50 basis points year-on-year, well within our guidance that we have given to the market. On a quarter-on-quarter basis, of course, the picture is also good when it comes to cost to income ratio, and that has gone down by around 110 basis points to 25.8%, but that's only for quarter 2, 2023. So if you actually look at it on an overall basis, of course, we are well within our guidance of 26.4%, as I've mentioned. All of the above has led to a solid 15% year-on-year net profit growth in the first half of 2023. On Slide 11. When we look at deployment of our funds, our assets have expanded by 4% to end with the balance sheet of around AED 300 billion, majority of which is coming from our disbursements in our financing and Sukuk investment. Our new gross financing amounted to AED 31 billion, and that's on the loan side, while our Sukuk doubled to around AED 14 billion year-on-year. So overall, if you add up the 2, we've had gross underwriting across all our businesses to the tune of around AED 45 billion. Now real estate within the loan book stands at around 19%, which is also in line with our guidance. On Slide 12, a detailed look at our consumer business. This portfolio is up by 4% year-to-date, and it stands at around AED 54 billion, constituting 27% of our total financing within the bank. Now this portfolio has grown in the last 6 months, and this is led by higher deployment within our auto finance business as well as our home finance business year-to-date, including our personal finance business, that has continued to do well for us. And it's only within our strategy to improve these 3 contributors going forward as well. Across all the products within Consumer Bank, we booked gross new business of AED 10 million during the first half of 2023. And this is up when compared to the first half of 2022 when we had done gross underwriting of around AED 8.6 billion. So clearly, there is traction within our consumer business. And despite the routine repayments within the first 6 months of AED 8.3 billion within consumer, the consumer portfolio has exhibited positive growth for the year of around AED 2 billion. This incremental growth is a product of all the retail business segment that we've been focusing on over the last 18 months or so. Now within retail or within consumer, our revenues have -- are up by 26%, and yields have expanded by 87 basis points to reach 6.6%, underpinning very strong profitability. On a year-to-date basis, on the liability side within the consumer bank, our CASA deposits have continued to remain sticky, seemingly agnostic to the current rate environment and the total consumer deposits have increased by 8% year-to-date. So overall, very profitable business for us, and it will continue to be a key focus area for us going forward. On Slide 13, a look at our corporate business. This portfolio has increased by nearly 1.5% year-to-date stands at around AED 136 billion, and it remains very well diversified, as you can see from the pie in the middle of the slide, a very colorful pie I must say. On a year-to-date growth in financing primarily came from our sectors like utilities, financial institutions, automobile, a bit of aviation as well as some lending to the government sector. Gross corporate new financing has reached to around AED 21 billion during the year. And this, again, is an indicator of growing business volumes, particularly in the private sector. However, this has been offset by routine repayments that is close to around AED 13 billion. And again, once again, we've seen repayment -- early repayments or early settlements to the tune of AED 6 billion in the first 6 months. It's a trend that we have seen continue within our corporate business, and that is what has dropped our growth in our corporate business. And historically, in the last 18 months or so, that is what had tended our growth within our overall portfolio. Having said that, we've experienced that in the first half of 2023 also. But what we've done wonderfully well is that our gross underwriting have been significantly higher across all our businesses, and we have offset that debt by doing more financing within each of our businesses. And I think on an overall basis, that has resulted in the overall loan book of the bank growing by around close to around AED 12 billion, which I've mentioned in the past as well as in the corporate itself, it has grown by close to around AED 1.5 billion. Our revenue trends continue to be on an upward trajectory within our corporate bank, given the very floating nature of our book, which has captured most of the Fed rate -- Fed rate hike, reaching to around AED 2.3 billion in revenues during the year, and that is up by, you can see 39% year-on-year. Our corporate CASA balances stood at AED 32 billion. And this is where we've seen the current account balances rotated into investment deposits. We've not seen that on the retail side, and I did mention that, that has been seemingly agnostic to the interest rate environment. Our retail deposits have been very sticky. Our CASA deposits have been very sticky. But on the corporate side, we've seen some movement from the current and savings account into investment deposits. However, it is worth noting that on a quarter-on-quarter basis, our CASA from corporates have improved by nearly AED 2 billion. But when we look at the 6 months in totality, this is where we see movement within our portfolio. And that's how our CASA overall balances or overall percentage has come down and stands at 39% for the bank. On Slide 14, our treasury business continues to grow. Primarily, the fixed income book has expanded, and it stands at around AED 61 billion, 18% up year-to-date from AED 52 billion at the end of 2022. Almost 3 quarters of our Sukuk portfolio is sovereign in nature. And about 90% of the remaining quarter or the 90% of that remaining book is investment grade or about. Within treasury, our yields have expanded by 65 basis points year-on-year, and they stand at around 4.6%. This is due to the fact that incremental Sukuk investments are coming into the portfolio with higher coupons. And though the revenues were impacted due to higher cost of funding and the fixed nature of our Sukuk investment book. But overall, there is a 65-basis point expansion in our yields on the Sukuk portfolio itself. Slide 15 looks at asset quality. Our nonperforming financing ratio decreased by 11 basis points, stands at 6.5% on a year-to-date basis. And that is actually because of the growing financing denominator. Within the first half of 2023, our absolute amount of nonperforming loans stand at around AED 12.9 billion due to the recoveries, both on coal DIB book as well as NMC and Noor - POCI demonstrating continued improving business sentiment. Cash provision coverage ratio continues to be on an upward trajectory. It has risen by 300 basis points year-to-date, reaching around 81% in line with DIB's risk strategy. Within Q2 2023 itself, impairment charges declined on a year-on-year basis by 13% and by 7% on a quarter-on-quarter basis. Now if you look at that on a half year basis, our cost of risk is down by 10 basis points, and we've reached at 74 basis points, down from 84 basis points in December 2022. Slide 16 looks at asset quality in slide in greater detail. The pie shows DIB's core nonperforming financing, and that has witnessed a slight uptick of around 1.2% in terms of percentage is 1.2% year-to-date, but it has been flat quarter-on-quarter, and that has been normal business activity. NMC and Noor - POCI, which constitutes 15% of our total nonperforming financing have both declined by around AED 2 billion. Slide 17 looks at asset quality in stages. Now I just want to focus on Stage 2 and the self-critical year. We see in our stage 2 financing increase by around 17% year-to-date stands at around AED 18.2 billion. And on Stage 2, our coverage has dropped by 80 basis points. It stands at 6.7%. And the reason for that is just one account within our corporate book, which has faced impacted by the higher interest rate and whose repayment CapEx capability has been impacted by the increase in interest rates recently. To us, this is not a credit issue because we are working to assist the customers during this period. And as a part of risk policy and automatic downgrade happens when an increase is witnessed in stage 2. Important to note that for this particular customer, the business is very profitable, and our exposure is also fully secured. So from a prudent perspective, we have made sure that this comes in Stage 2, and we will work with the customer in regularizing the repayment according to a new schedule that we would have to craft. As mentioned earlier, Stage 3 loans have improved by around 0.7%, while coverage remains robust at almost 63%, and that continues to improve quarter-on-quarter. Slide 18, it looks at our funding sources and liquidity. Liquidity of the bank continues to remain strong. You can see that LCR ratio stands at 159%. And this is up by around 9% year-to-date, allowing the bank to onto obligation. I mentioned about CASA at length in details. CASA stands at around AED 81 billion. It accounts to around 39% of our overall deposits. On a quarter-on-quarter basis, important to note that our CASA has improved by around AED 1.5 billion. And I also mentioned that when we were looking at our corporate business. We continue to see a migration of Wakala deposits a migration to Wakala deposits further. And this is something that we saw in the first quarter, and we are also -- we also saw this in the second quarter. And that's the reason why our CASA percentages have come down from around 44% at the beginning of the year to around 39%. We want to change that trend, and we want to make sure that going forward, we would try and enhance our CASA ratios. Also, it is important to acknowledge that with when the interest rates start to go down, we anticipate that our CASA book will start to rise as well. This is something that we've seen in the past. On Slide 19, look at capitalization. The levels remain very robust. CET1 stands at around 13.4%, and that is up by around 50 basis points, you can see in the graph. Our CAR stands at around 17.9% and that is up by around 30 basis points on the graph. Both were above the minimum regulatory requirement of 10% and 13.5%, respectively. Total equity now stands at around AED 43 billion. The next slide looks at our digitalization and strategy, and our digital strategy has continued to support our growth. On this slide, we present a few digital metrics pertaining to our consumer business. The continuous growth in this statistic seen here demonstrates the strength of our digital channels, which have been instrumental in fostering and enhancing customer engagement across various channels. Now this is clearly evident as we have witnessed, the new to bank acquisition from digital channel is higher when compared to our branch network. Slide 18 is a slide on our sustainability and ESG strategy. We've already unveiled our ESG strategy within the first webcast during the year, and that strategy articulated the vision, the 2 pillars as well as the 8 strategic priorities that we've set for ourselves. This slide is only a subset of that. It shows you what we've done in the first 6 months, and it covers 4 strategic priority areas. Before I go into those areas, it's important to demonstrate or important to highlight that our ESG portfolio remains a key part of our growth strategy. Year-to-date, the portfolio has seen a growth of around 12%. And that is primarily coming from our corporate business as well as our green vehicle financing that we've introduced within our consumer business. Now on a portfolio basis, this portfolio has now crossed around AED 2.2 billion. But if you also look at ESG to Sukuk investments, the total green investments within the bank, which means financing and Sukuk stand at around AED 3.6 billion. And this is something that we will continue to grow as we go forward. Now a look at the 4 key strategic priorities that we worked on during the first 6 months, -- we've enhanced -- we focused on employee well-being. This is one key strategic priority for us out of the 8. And as an initiative, we are pleased to announce the opening of [indiscernible], which is a paring [indiscernible] Chacon, which supports our staff with a work-life balance and parenting within the workspace itself. Another strategic priority for us is championing business ethics and customer privacy. To this effect, we have strengthened our IT infrastructure and ecosystem. We partnered with IBM Consulting, and we've accelerated our data transformation journey. Another strategic priority area for us is to propel sustainable financing. And that we've done within our own issuances, we started the year with our successful sustainable Sukuk of around AED 750 million. And then we also came back to the market with another issue and did tap the market with another AED 1 billion. So in total, we've done around AED 1.7 billion, and we also have committed that any capital market activity that we do for ourselves on the liability side will always be sustainable in nature. The fourth priority area that we worked on during this quarter is the financial inclusion and to promote financial inclusion, we recently recognized -- we were recently recognized by Emirates Development Bank and the Ministry of Economy for our crucial role in facilitating access to financing for SMEs within the UAE. Our sustainable SME portfolio also has now crossed more than AED 2 billion. So we'll continue to focus on our ESG pillars as well as ESG strategic priority areas because, as you know, our vision is to own the space. And this is something that remains like an outstanding item within our strategy, and this will also form a standing part of our webcast, and we will continue to appraise you of the development and the initiatives we are taking within our ESG space. So this is only going to grow from here in terms of what we are going to do in each of these strategic priority areas as well as in terms of our own financing and Sukuk growth, we are trying to make sure that, that portfolio continues to increase as we go forward. Slide 22 look at our new digital proposition that we've launched. And again, this is a part of our dry strategy, its digital transformation, if you remember. We have actually launched in the second quarter our digital proposition called Alt. And it is predominantly driven by a continuous quest for digital excellence, and it's in line with the transformation strategy that I have just mentioned. What is Alt? Alt is a full-fledged digital umbrella brand, which houses all of the bank's digital offerings under one roof, providing customers with a seamless and hassle-free banking experience. And what this -- and what that means is that it's a platform that brings together more than 135 digital services that we had within the bank, and that is done through the digital channels, the DIB's mobile app, online banking, ATMs as well as WhatsApp. So everything that existed on these platforms have now been housed on a single platform, and that's what is called as Alt. This is a one-stop shop for all our banking needs. It enables customers to open a bank account within minutes, get onboarded without being a customer of the bank. So any new individual within the country can be onboarded here. Can apply for a personal finance on an auto finance or credit card, go and do their remittances, either locally or internationally, make payments and much, much more. So all in all, 135 services have been collated and consolidated under one platform. Slide 24 is the last slide before I pause to take questions. And it's nothing but a summary of everything that I've mentioned, and I won't go into this, but some key highlights here is that the bank has had a wonderful first half of 2023. I alluded to on my first webcast that we see very strong pipeline in terms of underwriting. And ever since that first webcast, all the interactions that I had with analysts as well as investors on deal and non-deal roadshows. I mentioned that we have a very strong pipeline in Q2, and that is just demonstrated here in terms of results, where you can see gross underwriting has been AED 45 billion, and the net growth after the normal repayments as well as extraordinary settlement has increased by around 5.3%. So that actually shows you that everything that I mentioned on the first call as well as in our interaction has actually come through. Our commitment has seen our balance sheet grow by around 4%. The bank's profitability continues to be very solid, very robust, very resilient. And that has also resulted in very strong efficiency ratios, both ROE and ROA, and we have surpassed the guidance. Our margins continue to improve year-to-date. I've already been self-critical, so I'll save you that trouble of net interest margins quarter-on-quarter. So overall, when you look at the table on the right side of that graph, you'll see that we have surpassed almost everything that we ventured on at the beginning of the year. We want to continue to maintain the guidance that we have because there's still some work to do across some of the other metrics. But the one guidance that you want to revise upwards is the growth guidance, and we are moving that from 5% for the full year to 7.5% for the full year, which means that another 2.5% increase from what we started at the beginning of the year. Q2 has been a very good year for us in terms of -- Q2 has been a very good quarter for us in terms of growth. If you recall in Q1, our growth -- overall growth was around 1%, which means that we've really, really done well in Q2, and that is something that I alluded to on my last call. I take a pause here, and I'm going to open the floor for questions, and I'll try to take as many as I can. We've got only 25 minutes to do that. Please use the portal send us your questions, we'll try to skip through them, take a pause here and come back to you and answer as many as we can. But in the event that we are unable to answer your question given the limited time we have, please do reach us on our investor relations portal, and we will try and answer as many as we can after the call as well.

Thank you, Dr. Ladies and gentlemen, please send your questions too. We will start answering them in that order. Thank you.

[Operator Instructions].

So the first question is from Janany Vamadeva, talking about the NIM outlook for the second half. And what does it mean for the cost of funds going forward and the deposit flows? And the second question is about the increase in Stage 2 again and some details.

Thank you, Janany. As always, a very good question. I'd start by saying that while I was making the presentation, I've been self-critical, right, which meant that we do realize that on a quarter-on-quarter basis, our net interest margins have gone down slightly though, but they've gone down. On a year-to-date basis, we are at 3.2%, which is up. Now when we gave our guidance at the beginning of the year of around 3%, that was taken into account all if you reselect when I mentioned, we had given a guidance of around 3%, even though the interest rates were expected to go high and continue to increase, we were cognizant of the fact that there would be a challenge to maintain these balances in current and savings account. We were anticipating that there would be a rotation into fixed deposits. We were anticipating that those 6 deposits will be at a higher rate when rolled over same time 12 months back. So when you put all that together and extrapolate, that's the reason why we gave year-end guidance of around 3%. We were not trying to be conservative. We were trying to be realistic. And that is actually being now seen in the first 6 months quarter-on-quarter, where the net interest margin guidance or the net interest margin is coming under pressure. Even though our full year guidance, we are sticking to 3.2%, which is -- sorry, sticking to around 3%, which is up from where we were last year, we had anticipated this. And I think, again, depending on what interest rate hikes would be witnessed in the next 6 months, we would have to try and revisit this net interest margin guidance closer to those quarters. But as of now, we are holding on to this guidance. And all that I want to say is that this is something that we did mention even on our first call when if I remember correctly, you did mention that we are being conservative on our net interest margin guidance given that interest rates are going to go up. But at that time, I did mention that we don't want to get ahead of ourselves. We anticipate that there would be rotation from CASA into fixed deposits and the cost of fund would come under pressure. This is exactly what has happened. Your second question on sectors that drove Stage 2 loans? And do you -- how do you see it having an impact on NPF formation or cost of risk? No, we do not see it having an impact on any NPF formation. Because we've seen some stress, and that is only coming because of higher interest rates and the capability of the client to service. It's only one customer that I mentioned. We are not losing sleep over this. It is something out of prudence. We've classified as Stage 2. But we are going to work with the customer and going to restructure this facility. We are adequately collateralized, in fact, 100% secured. So we do not anticipate this to move into NPF at all. This is not a new customer. This has been with us for the last 12 years. We've had an excellent relationship with the customer, very strong customer and a very well-known customer within the private sector. So nothing to worry about as far as that is concerned. In fact, the cost of risk, we would hold our guidance for an annualized 80 basis points. We've seen 74 basis points year-to-date. But given that we've got to look at this on a 12-month basis, we continue to look at 80 or hold it at 80 basis points.

[Operator Instructions]

So we've got a number of questions from Edmond from Bloomberg. I'll just quickly run through them and then Dr. Adnan will answer that. So first one is on the retail book. And is there a proportion that still needs to be repriced as the interest rates remain higher? The second is on the home financing and how do you expect the mortgages to go forward into the second half of the year. The third is on the cost of funding. -- and the liquidity and deposit gathering and what do you think should be the trend now going forward? And the last is on do we -- will we continue to see early settlements and repayments in the second half?