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

Hello, everyone, and welcome to the Dubai Islamic Bank Second Quarter 2024 Financial Results Earnings Call. Please note to all those who are listening to us via the webcast link, kindly refresh your browser in case you experience any intermittent audio issues. [Operator Instructions] I will now hand over to your host, Janany Vamadeva from Arqaam Capital. Please go ahead.

Thank you, Seb. Good morning -- good afternoon, everyone, and thank you for joining us today. This is Janany Vamadeva and on behalf of Arqaam Capital, I'm pleased to welcome you to Dubai Islamic Bank's Q2 2024 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 Mr. Kashif Moosa, the Head of Investor Relations and Strategic Communications. Without any further delay, I'll now turn the call over to the Head of Investor Relations, Mr. Kashif Moosa. Kashif, over to you.

Thank you, Janany, and welcome, everyone, to the first half 2024 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. I request everyone to keep the questions coming through the e-mail provided webcast at dib.ae, and they would then be addressed at the end of the presentation. So with that, let's start. If we move on to the Slide 4. As you can see, the economic data has been revealing a mixed picture with signs of easing inflation, ongoing concerns about growth and finally, central banks sort of grappling with diverging parts in relation to rate policy cuts. Brent oil on the other has been volatile over the first 6 months of the year on the back of geopolitical tension, the extension of oil production cuts by OPEC+ and energy transition activities. Nevertheless, prices have held up and close at around USD 85 per barrel. The IMF upgraded its outlook for global growth in 2024 to an expansion of 3.2%, up 10 basis points compared to the previous forecast release in January. And the IMF raised the U.A.E.'s GDP growth forecast from 2024 -- for 2024 from 3.5% to 4.4%, primarily due to rise in investments in the U.A.E. and the U.A.E.'s efforts to boost nonoil economy given that the economic growth in the U.A.E. is broad-based and is led by activity in tourism, construction, manufacturing and financial services. Moving on to Slide 5. During 2023, U.A.E.'s economy grew by about 3.6%, thanks to the non-oil sector, which grew by 6.2% a faster-than-expected rate, while the oil and gas sector contracted by 30 -- 3.1%. Financial services was the fastest-growing sector in 2023, expanding by 14.3% year-on-year after the 6.6% growth in 2022. And this was followed by transport and logistics, which were up 11.5% year-on-year. Tourism sector, the contribution of tourism sector to the U.A.E.'s national economy is expected to rise to about AED 236 billion in 2024 allowing the country to achieve its growth of boosting tourism's GDP share to AED 450 billion by 2031. Currently, tourism contributes a decent 11.7% to the U.A.E.'s GDP. Similarly, in quarter 1 of 2024, Dubai recorded an 11% increase in the number of tourists to 5.18 million international visitors primarily coming from Western Europe region, which was Dubai's biggest source of market -- Dubai's biggest source market, followed by South Asia. On the transport side, device metro service is set to expand by providing more stations for commuters and some of the key goals, include increasing the share of public transport to 45%, reducing carbon emissions to 16 tonnes per capita, improving the quality of public spaces to encourage walking and increasing shaded areas. With that, now I will hand over to Dr. Adnan Chilwan, Group Chief Executive, to take you through the first quarter financial results. Dr. Adnan, please?

Thank you, Kashif. A very warm and humid good afternoon to everyone, pun intended. As always, I will do a page turn to the presentation, shedding highlights on the key performance of the bank in the first half of 2024. This will be followed by a Q&A session. And finally, I will use the last 5 minutes of the hour to summarize today's call. Before I begin, I would like to spend a few minutes talking to you about what is happening in and around us. We have been working very hard to ensure our vision of providing continuous and sustained growth remains a constant. That said, our strategic intent has been and will always be to enrich our banking ecosystem so as to ensure that the bank provides solutions and services that are second to none. We have recently achieved a significant milestone with the migration of our core banking system to the latest and most updating version. This transformation is the culmination of over 25 months of effort by more than 2,000 individuals in the bank. Now mammoth projects of such magnitude come with their own set of issues, and it was no different for us during this migration. While there were challenges, we have now entered a phase of stabilization, where we focus on addressing teething issues. The focus of the team will obviously remain on minimizing the impact of customers and stakeholders. What we all are especially happy about is that looking ahead, the new core ecosystem will integrate a wide range of specialized upgrades, giving us access to new product features and created a much needed pathway for a more efficient customer experience. Core platform delivers simplicity, cost efficiency, speed, flexibility, security and future readiness by leveraging capabilities of the cloud and accelerating digital transformation. With that said, I would now like to dive into our performance in the second quarter and also look at how that has panned out for the first 6 months of 2024. DIB has delivered stable resilient set of results during the first half of the year around both profitability and balance sheet metrics. The bank's focus orbited mainly around quality and structural sourcing. Having said that, you can see balance sheet continued to expand by 2.7% on a year-to-date basis driven by DIB's core business with financing and Sukuk investments, which were up by 3.8% year-to-date. Our gross new underwriting and Sukuks during the quarter or rather the first half of 2024, equated to nearly AED 43 billion, of which new consumer banking bookings registered around AED 12.2 billion, while corporate banking was at AED 17 billion of new gross underwriting and Sukuks were close to around AED 14 billion. Total routine repayments came in at a steady pace, which was circa AED 20 billion. But the early settlements to the tune of AED 13 billion from predominantly government-related entities led to a flat performance when compared to where the loan book was at the same period in 2023. Again, this was due also to the timing of certain deal closures, which have culminated post June and hence, will be captured in the next set of results. Overall, the portfolio has added nearly 2% year-on-year, net growth amounting to AED 10.5 billion. Zooming into the P&L, I am again pleased to announce we have delivered net profit, which is pretax of about AED 3.72 billion, up 18.1% year-on-year. And accordingly, the resulting return on tangible equity is at 12 -- 20.2% and the resulting ROA is close to around 2.2%. Another continued achievement from quarter 1 is an improvement in our asset quality metrics, the nonperforming financing ratio has improved to 4.99%, which has been down by 41 basis points on a year-to-date basis. And the coverage ratios continue to be on the rise. Overall, once again, we've delivered a stable set of results in quarter 2 and more importantly, in the first half of 2024. On Slide 8, a look at the financial performance, and this is balance sheet. Digging deeper into the performance, we delivered balance sheet growth of 2.7% year-to-date to reach AED 323 billion. While the bank's financing portfolio, as I said, is flat on a year-to-date basis, impacted mainly by early settlements of around AED 12.8 billion. As I mentioned in my opening remarks, the pipeline remains strong, and we are well poised for the rest of the year with some anticipated transactions already concluded in July, and the remaining half of the third quarter also seems to be very strong. The Sukuk portfolio has increased by 15% year-to-date to reach at AED 79 billion. And on the funding side, deposits have also increased by 5.4% year-to-date, supported by both corporate and consumer liabilities. Both our return ratios, return on assets and return on tangible equity has outperformed our year-end guidance. And hence, we remain securely positioned vis-a-vis our commitment to our shareholders. Other vital metrics like asset quality and CASA contributions within the overall liability mix has improved tremendously which will be explained in greater details in the latter section of this presentation. On Slide 9, again, the financial performance. And here, we are looking at the income statement. A resilient story once again from a P&L perspective. Total income witnessed 21% increase year-on-year and stands at around AED 5.6 billion. The bank's net operating revenue is also up and is up by 8.6% year-on-year over the period, and it has reached AED 6.1 billion. Despite the persistent higher rate environment, we've delivered a stable net profit margin, which stands at 3%, and that is in line with our overall guidance. OpEx has been up 14% year-on-year as we are ensuring optimal spends while looking to grow and strengthen the group over the next few years. The cost-to-income ratio as a result is up 140 basis points to 27.8%, but it's still amongst the best. Impairments were significantly down by 32% year-on-year. They stand at around AED 652 million. And this is on the back of strengthening macroeconomic environment within the U.A.E. Similarly, on a quarter-on-quarter basis, Q2 impairments are down by 24% year-on-year, and they stood at around AED 354 million. Our cost of risk translates to around 40 basis points in the first half of 2024 which obviously takes into account the recoveries given the improving asset quality. On Slide 10, we look at a very quick look at our profitability and cost structure. In this slide, I would like to highlight the main contributors to our net operating revenue. The net funded income came in flat, impacted by the pressure of the bank's cost of funding yet nonfunded income recorded a healthy increase of 44% year-on-year. Now this rise is attributed to higher income from investment properties, associate income as well as some other income lines in there. OpEx, like I mentioned before, has been up by 14% year-on-year, and this is in line with the bank's strategic investment plan for customer-centric technology upgrades as well as talent acquisition. Cost-to-income ratio accordingly registered 27.8%, and that was up by 140 basis points year-on-year and close to 60 basis points quarter-on-quarter. This is in spite of key transformation mandates like a core migration, enterprise GL, NPSS and other technological platforms that we are trying to implement within the organization. All of the above has led to a solid 22% year-on-year rise in net profit, and that's pretax obviously, within the first half of 2024, and that profit stands at AED 3.7 billion. And for Q2 2024, it was at AED 1.9 billion, circa AED 1.9 billion, which is up by 14.5% year-on-year. Slide 11 looks at deployment of our funds. Our assets have grown by 2.7% year-to-date and they stand at around AED 322 billion with consumer banking and our Sukuk portfolios compensating for the large early repayments within the Corporate Bank. Now of course, I will dwell into greater details on subsequent slides, and I start on Slide 12 with our consumer banking business. This portfolio is up by 7% year-to-date, stands at around AED 60 billion and constitutes 30% of the bank's total financing. Now this higher pickup has been led by auto financing, on the back of rising nonresident population and higher demand for cars as well as some targeted electric vehicle campaigns that we've been running in the first quarter as well as pre-summer. Credit cards also witnessed a significant pickup over the year-to-date period, supported by the bank's campaigns and product mix variance. Across all products within the consumer bank, we booked gross new business of around AED 12.3 billion during the first half of 2024 versus AED 10.2 billion in the first half of 2023. Now of course, despite routine repayments of AED 3.6 billion, the consumer portfolio exhibited positive growth for the period of almost AED 4 billion year-on-year. Yields within the consumer bank have expanded by 45 basis points year-on-year to stand at 7%, underpinning healthy profitability. On a year-to-date basis, you can see that the consumer -- total consumer deposits increased by 4% to AED 92 billion, while CASA deposits on the consumer side were also up by 3%. Slide 13 looks at our corporate banking business and the portfolio within the corporate bank stood at AED 139 billion during first half of 2024. Like I mentioned before, our gross new corporate financing during the first half of 2024, which was at around AED 17.3 billion was more than offset by early settlements during that period. That said, the revenue trends continue to be on an upward trajectory with revenues from the corporate business up by almost 10% year-on-year. Yields on the other hand, have expanded by 47 basis points year-on-year and they stand at 6.7%. Corporate deposits overall were up by 40% year-to-date. Now corporate CASA balance growth has been strong as well by 19% on a year-to-date basis as the bank continues to attract strategic operating accounts. On Slide 14, we look at another important business for the bank, which is our treasury business. The treasury portfolio primarily fixed income book expanded to stand at AED 79 billion, up from AED 68 billion at the end of 2023. Now that's a growth of nearly 15% year-to-date or around 28% year-on-year. This is a part of a deliberate strategy to book long-term assets in the current high rate environment. Nearly 3/4 of the Sukuk portfolio is sovereign in nature while 90% of the remaining investment grade or above underpinning very high quality. Within treasury, yields have expanded by 17% year-on-year and they stand at around 4.8% due to incremental Sukuk investments carrying higher coupon given the high interest rate environment over the last 12 months, and revenues over the year picked up by 29% to reach at AED 1.3 billion. Slide 15 looks at our asset quality. And nonperforming ratio, like I've mentioned before, has improved by around 41 basis points. It stands at 4.99% on a year-to-date basis. And this is also supported by the resolution of the long-dated new medical center case, which was settled in the first quarter of 2024. Cash provisions coverage has accordingly increased to 95%, and that is up by a solid 5% or 500 basis points from the forecasted or the closed 2023 number. Impairment charges for the first half of 2024 have declined by 32% and they stand at AED 653 million. And that's obviously a result of improving asset quality a strong macro environment as well as that -- which led to strong recoveries for the bank. And hence, on a cost of risk basis, we continue to see a downward trend falling by at least half to 40 basis points from 60 basis points in 2023. But I've always alluded to a normalized cost of risk, which is between 70 to 80 basis points. Slide 16 looks at asset quality by staging. Post the settlement of NMC case, our Stage 3 financing has dropped by 7.8% year-to-date and it stands at around AED 10.6 billion. And in absolute terms, it stood steady when compared to Q1 of 2024. As a result of this, our Stage 3 coverage has increased by around 520 basis points, and it stands at around 73.5%. Stage 1 and Stage 2 financing remains stable along with their respective coverage rates. Our slide 17 looks at funding sources and some liquidity ratios. To start, liquidity of the bank continued to remain intact with LCR at 146%. And CASA in absolute terms now stands at AED 98 billion, up by 19% year-to-date. And in terms of percentages, that comprises 42% of the total liability mix and that is up by around 5% when compared to year-end, which was 37% at the end of 2023. Slide 18 looks at our capitalization overview and the levels remain robust with CET1 at 13.7%. This is up by around 90 basis points and CAR is around 18.1%, which is up by around 80 basis points both well above the minimum regulatory requirement. Total equity of the bank, as you can see from those bar graphs stand at around AED 46 billion. Slide 19, a look at our digital strategy and that digital strategy that we embarked upon way back in 2019, 2020 continues to support our growth. Overall, our digital push continues as users and volumes remain on the right. I've mentioned this on the call that during the quarter, we've conducted a major upgrade to our core banking system towards a more enhanced platform. Once we exit the stabilization period, we are very confident that this will provide the customers an even better and safer banking experience. You can see some bar graphs there, noteworthy of attention is our Whatsapp digital subscribers channel and the subscribers continue to see strong growth increasing nearly by around 35% year-to-date, we've reached around 166,000 subscribers to date. Slide 20 is the last slide before I open the floor for questions and answers. A very quick look at our sustainability and ESG initiatives. The bank has made good progress towards delivering the country's sustainable ambitions and SDGs. And this has been ongoing, and we will continue to do so as we progress forward. The quarter saw DIB establishing more partnerships within this area as well as collaborations and entering into MOUs to support our key priorities, such as diversity and inclusion corporate social responsibility as well as propelling sustainable finance. Our persistent efforts to integrate sustainability within our bank-wide operations is now being recognized by industry, following several industry awards that we've received during the period, and I won't go through them. It's right in front of you on Slide 20. But a little attention towards our products that we have launched within our consumer bank, one of them was the first and foremost, the electric vehicle product that we launched some time a couple of years ago. And even in 2024, we see great traction of that. For example, our pre-summer campaign has seen us underwrite 400 electric vehicles, and that generated over AED 70 million of new financing. As an example, this portfolio stands at around AED 800 million, with AED 210 million of financing done in the first quarter of 2024. So that's roughly around 12% of the overall auto finance sourcing business. So clearly, sustainability is within the strategic theme of the bank, and we will continue to drive this agenda forward and continue to give you updates within this very important area for us because it's a part of our overall vision. That said, I'm going to pause here and I'm going to open the floor for question and answers. And once we use a large part of that hour of the remaining hour, I will use the last 5 minutes or so to kind of summarize today's call. So we are going to be on net for some time until we skim through a few questions, and we'll come back to you in a minute.

Thank you, Doctor. Ladies and gentlemen, please keep sending your questions through, and we'll answer them as they comment. Please note that if there are repeated questions, we will not go through them again. Thank you.

[Operator Instructions]

So we start with some immediate questions from Rahul from Citi. The first one is around the -- can we expect the early repayments in Corporate segment to continue? The second is about the investment property gain in second quarter. And the third is on the run rate for provisioning is that the new norm for DIB?

Thank you, Rahul, for your questions. Clearly, we cannot anticipate early repayments, and that's why they're called early repayments. But we would want to believe that we will not see the same level of early repayments that we've seen in the first half of 2024. And as I mentioned before, that amounted to close to around AED 12.8 billion. So hopefully, we are not going to see some extrapolation in this, difficult to plan for early repayments. But clearly, one thing that I can tell you is that our pipeline for gross underwriting remains very strong. So even if we face a few more early settlements, we're very confident that we will be able to meet our guidance, our growth guidance and in fact, surpass our growth guidance at the end of the year. So we are very confident. The one thing in our control is our pipeline, and we are very confident that our pipeline continues to remain strong and we will continue to focus on all our 3 core areas, our corporate bank, FI and investment business, a retail bank or our consumer business and obviously, our fixed income book also. So gross underwriting will continue to remain very strong. Your question around investment property gain in quarter 2, is there a plan to liquidate more properties and take advantage of peak property prices? Our plan has always been to derisk our balance sheet and exit some of the legacy property portfolios that we hold. And this is like you mentioned, an opportune time for us to exit. This has been sitting on the bank's balance sheet for some time, and you can witness that this has steadily started to come down in the last 18 months or so. Of course, given that the property market is very strong, we are taking advantage of that, and we anticipate that it will remain strong for the remaining part of 2024. And you've got a pipeline of properties that we will be exiting. So definitely, we'll try and make some more gains from the very buoyant property market at this stage. Your last question is around the run rate for provisioning. In the first half, we've seen that at record low levels of around 40 basis points is the cost of risk? And is that a normal level? If you look at the level of provisioning that we are doing on a gross level, it's roughly the levels that we have seen in the last 12 to 24 months. Quarter-on-quarter, we made the same level of provisioning. But obviously, on a net basis, given the recoveries that we have witnessed from some legacy cases and legacy accounts. That has brought the cost of risk down on a net basis to 40 basis points. But just on this call also and on previous calls, I've mentioned that the normalized level is around 70, 80 basis points, given the size of the balance sheet. So I wouldn't say that this is the new normal. I think one should always be guided towards that at least minimum 70 basis points of cost of risk.

All right. So we've got some questions from Janany from Arqaam. The first question is on the loan book and the way -- and the movement in it right now, which seems to be flattish. And then also, the second question is on the margin compression and what's the view on that? And the third one is on the color -- and some color on the system-related outage that has been -- that we've seen and an impact. And the last one is on the impact of the implementation of the new credit risk standards in U.A.E.

Thank you, Janany. Our loan book, obviously, on a net basis, looks flat year-to-date. But as I've mentioned, I think it's important to also understand how the engine is kicking, the core banking engine of the bank, when you look at all core businesses, the gross underwriting has been to the extent of around AED 43.3 billion, if you add up all the businesses together and that is at similar levels to year-to-date 2023. Now if you then see how our pipeline for the remaining quarters -- remaining 2 quarters of the year is, we are very strong. Of course, on a net basis, the growth remains flat, and hence, for that very reason, we are not revising our guidance upwards. We feel that in Q3 should there be no extraordinary early repayments, our portfolio would have shown that we have surpassed the guidance and that's when we probably will give you a revised number for the remaining part of 2024. I anticipate that we will be revising our guidance upwards. I can do that right now also on this call, but I don't want to get ahead of myself. We've seen very strong pipeline translate into our numbers in the first 2 weeks of this quarter. So we just want to make sure that, that trend continues. And probably in the next webcast, we should be giving you guidance on where we are anticipating the full year growth to be. But I can tell you one thing that we will look at an upward revision because that's where everything is heading. Margin compression has eased and how should we look at the remaining half of 2024? Of course, the compression has eased because as you recollect, this is something that I alluded to on my first call, and I also articulated the way we are going to go towards this better enhancement in our CASA mix, running off some expensive long-term deposits that we have and also enhancing our asset business composition by bringing in better quality assets at better prices. This is exactly what we've done. And hence, the margin compression has eased even though the net interest margins remain flat, we are confident that in the remaining half of 2024, the net interest margin should go upwards slightly from where we are at this stage. I've already given some color on the system outage. And I wouldn't say -- I wouldn't refer to this as a system outage because the system was not down. We've done a cutover migration program of this size comes with teething issues. If you are referring to the system outage that happened globally with Microsoft and CrowdStrike, we were not impacted by that. But if you are referring to our core banking migration, then I can tell you, there was no system outage as such, planned activities over a 5-day weekend successfully completed, and now we have migrated to the new core, and we are operating in the new core 100%. Of course, some teething issues that impact customer experience more than revenues and costs, but I think we have salvaged the situation. We've connected with all our customers. We have communicated to the market at large and thanked people for their patients and loyalty and their support in this planned cutover which I must say was necessitated for us to make the bank more robust, more stronger and more progressive. Thoughts on the impact of implementation of new credit risk standards in the U.A.E. this year, again, this is still not finalized. The U.A.E. Banking Federation is working with the regulator. It's in the consultation phase. And I think we don't want to get ahead of ourselves in telling you what the impact would be because it's not final yet.