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

Hello, everyone. Welcome to the DIB Second Quarter 2025 Financial Results Earnings Call. [Operator Instructions] As a reminder, please ask your questions by submitting them via e-mail to webcast@dib.ae. I will now hand over to your host, Janany Vamadeva from Arqaam Capital.

Thank you, Seb. Good evening, 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 DIB's Q2 2025 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 Naveen Rajanala, Head of Investor Relations. Without any further delay, I'll now turn the call over to the Head of Investor Relations. Naveen, over to you.

You thank very much, Janany. A very warm welcome, ladies and gentlemen, to DIB's First Half 2025 Results Webcast. This webcast will be led by Dr. Adnan Chilwan, Group CEO of DIB along with Mr. John Macedo, CFO of DIB, and myself. Can I please ask everyone to send in your questions to the e-mail address: webcast@dib.ae, and we shall address these questions at the end of the presentation. With that, let's kick off with today's presentation. Let's start with Slide 4. The global macroeconomic environment in 2025 has seen a lot of volatility and this was largely due to trade-related uncertainties. But we're now starting to see a resolution of some of these uncertainties as U.S. enters into trade agreements with various economies. The tariff situation, along with recent geopolitical tensions, have caused volatility in the oil prices this year. Now despite the oil price weakness, the GCC economies are expected to demonstrate strong growth this year. One of the key factors for the expected growth rate is the long-term diversification plan put in place by these countries over the past few years, moving away from reliance on hydrocarbon sector. Now various GCC governments have announced their intention to implement expansionary budgets with focus on health care, education and infrastructure. Now this is best reflected in some of the recently announced measures such as unified GCC tourism Visa, expected new property law in Saudi Arabia. These measures shall attract new investments in these sectors, thereby driving upstream and downstream economic activities. Lastly, the GCC economy's long-term strength is well reflected by some of the key macro indicators shown on this slide, such as low debt-to-GDP ratios, expected fiscal budget surplus. With that, let's move to the next slide where we'll take a closer look at the UAE economy. UAE's economy has progressed quite a bit in terms of its economic diversification into non-oil sectors, and this factor is very well known. And there's been a lot of progress in its diversification journey over the last decade or so. Non-oil sectors contributed 75% to the country's GDP in 2024. So the UAE economy grew by 4% in 2024. And this year, the economy is expected to grow even higher at 4.4%. Now let's shift our focus to some of the key growth drivers of the Dubai economy. Dubai's population has been rising consistently over the last few years, and this growth has been driving demand, especially in sectors such as retail, construction, financial services, to name a few. The other 2 key indicators for Dubai's economy are real estate activities and tourism numbers. Both of these continue to trend positively, boosting other sectors such as travel, hospitality, construction, et cetera. Moving on to the next slide. The UAE economy is underpinned by a strong and well-regulated banking sector. The banks in UAE continue to demonstrate strong balance sheet expansion, robust capital position, healthy liquidity levels, improving asset quality and rising profitability. Now the charts -- the various charts on this slide show consistent growth and improvement across key metrics for the sector. And this is also reiterated by the recent results by most UAE banks. For DIB, too, it's been yet another healthy quarter, and this shall be discussed in detail by our group CEO over the next few slides. With that, I shall hand over to Dr. Adnan Chilwan to take you through the financial results and business updates for first half 2025. Dr. Adnan, over to you, sir.

Thank you, Naveen. As always, I will do a quick page turn to take you through the bank's key achievements in the first half of 2025 and then open the session for question and answers. And finally, use the last few minutes of the hour to summarize the call. I start by drawing your attention to Slide 8. We see that the GCC region's growth momentum continues to be strong with large economies continuing their diversification efforts, and these efforts continue to stay on track despite short-term volatility that we've seen caused by geopolitical events. The UAE's economy has had a robust 2024, and our expectation is for a stronger growth in 2025. Rising population, tourism numbers and demand for real estate, which we've seen in the earlier slides, confirm these positive economic trends. Specifically on Slide 6, we've seen that the banking sector in UAE remains strong with most of the key indicators trending in the right direction. Liquidity, credit growth, capitalization, all point towards a sector ready to take on demands of one of the fastest-growing countries globally. At DIB, as we look at the first half of the year, the bank has delivered more than AED 60 billion in gross new underwriting with 18% year-on-year growth in credit, supported by 21% year-on-year growth in liabilities, the bank's balance sheet has crossed $100 billion, another historic milestone for the first time. This positive momentum has resulted in a robust first half profitability as pretax profits reached AED 4.3 billion, a 16% jump compared to the same period last year. Important to note that it is the core business that has supported the growth, including customer-driven fees and commissions, which has seen a strong performance in the net funded income line, which I will showcase in the next slide. On Slide 9, we can see that the bank's operating revenue grew by 5% year-on-year to end at AED 6.4 billion in the first half of 2025. Now it's important to note that the funded income remained stable despite the lower rate environment compared to the same period last year, now clearly highlighting our ability to manage the cost of funding to minimize impact on net interest margins. Quality underwriting, coupled with strong economic performance across all sectors led to the continued downward trend in impairment charges with 61% year-on-year drop to end at AED 256 million. The bank's profitability, as I said, has come in strong with 16% year-on-year growth in net profit before tax, and it has ended at AED 4.3 billion, supported by a steady increase in funded income and a 16% jump in non-funded income. The bank continues to generate healthy returns for its shareholders with return on tangible equity at 21% and return on assets at 2.4%, in line with the guidance for the year. The consistency of the bank's profitability growth and the returns generated on a quarterly basis over the last 18 months is well exemplified by the bottom left chart on Page 9. But moving on Page 10, let's look at our revenue drivers. The bank's funded income levels continue to be stable despite slight decline in margins. Obviously, recalibration due to lower rates has impacted the income line, and by lower rates, I mean low rates compared period to period, but we have managed to largely compensate with a reduction on deposit rates over the same period, thereby minimizing the impact. Non-funded income showcased strong growth of 16% year-on-year with improved contributions across the various components, consistently as the economic environment continues to progress on positive momentum witnessed over the years. Important to note that majority of the non-funded income has come in from recurring sources such as foreign exchange, fees and commissions, investments in properties and associates and similar line items. Slide 11. As discussed in the past, the bank has been investing in its people, technology upgrades and digital transformation plans, and our expense growth is primarily driven by these investments. Hence, in the first half of 2025, our expenses have grown by 7% to reach AED 1.8 billion when compared to AED 1.7 billion in the first half of 2024. The bank's cost-to-income ratio continues to be low at 28.4%, reflecting an efficient franchise. And the bank's operating profit, as you can see on this slide, for first half of 2025 has increased by 4% year-on-year to reach AED 4.6 billion. On Slide 12, a look at balance sheet. The bank's balance sheet has grown this year so far, and it has been impressive, growing by 8%, crossing the $100 billion mark. And this has been supported by a 14% growth in customer deposits and an impressive deployment in net financing assets by around 12%. Financing growth is on the back of gross new underwriting of close to AED 49 billion across our retail and corporate banking businesses. And when you add the Sukuk portfolio, which has grown by about AED 11 billion, our total gross underwriting for the first half of 2025 has reached AED 60 billion across all our businesses. On the other hand, the bank's nonperforming financing ratio has improved by 36 basis points and is now down to 3.36% as of the first half of 2025 on the back of settlements, repayments, recoveries as well as a very buoyant market. Slide 13, we see our total assets. The top 2 charts demonstrate how DIB has consistently grown its financing assets and its Sukuk portfolio over the last 18 months. As you can see, the bank continues to have a well-diversified portfolio as reflected in the bottom right pie chart. The bank's consumer financing portfolio, as you can see in that pie chart, constitutes about 30% of our financing book with all product lines showing solid growth with a significant jump in our cards portfolio, and we'll look at this in greater detail on subsequent slides. The wholesale financing portfolio, on the other hand, continues to be well diversified with large contributors to new financing this year being sovereigns, GREs, utility companies, aviation, manufacturing to name a few. Real estate exposure is now down to 11% of the bank's total financing book. The next 2 slides look at asset quality. On Slide 14, we continue to see sustained improvements over the past few quarters. with the bank's nonperforming financing ratio now falling to 3.36%, its lowest levels in the last decade or so. On a year-on-year basis, the nonperforming financing ratio has fallen by 163 basis points. The drop in nonperforming financing balances this year to the tune of AED 850 million is primarily driven by recoveries across various segments as the economic environment remains positive. Cost of risk also remains extremely low. And for the first half, we've seen cost of risk of around 16 basis points, reflecting the quality of our book, especially the new facilities underwritten over the last few years. On the other hand, the bank's coverage ratio continues to strengthen. Cash coverage ratio has increased by 8 percentage points. It stands at 103% and total coverage, which includes collateral values, has increased by 18 percentage points and stands at around 145%. A granular look at asset quality on Slide 15. The bank's asset quality improvement story is well rounded, and this is further reflected by the decline in Stages 2 and 3 exposures, which fell by 410 basis points, and they stand at around 7.5% of the bank's gross financing assets over the last 12 months. Specifically, Stage 2 exposures fell by 23% year-on-year. They stand at AED 10 billion, while Stage 3 exposures declined by 27% year-on-year, and that stands at around AED 8 billion. On the other hand, coverage for Stage 3 improved to 60.2% with stable ECL coverage level of 6.8% for Stage 2. So both asset quality in terms of absolute amounts, they've been trending downwards within each of our stages, and our coverage for each of the stages has been trending upwards. Slide 16 looks at our liquidity. Our liquidity profile continues to be stable and healthy. The customer deposit balances have grown by 14% year-to-date, and they stand at AED 284 billion. So you can see that substantial portion of our balance sheet has been funded by customer deposits. Our CASA balances have also grown by 8% year-to-date to cross the $100 billion mark. And our CASA as a percentage of total deposits continues to be stable at 36%. In terms of regulatory liquidity ratios, these are maintained well above the regulatory requirement, whether it is the LCR ratio or the net stable funding ratio. Slide 17 highlights our capital levels. Despite the strong balance sheet growth in the first half of the year, DIB continues to maintain solid capital ratios well above the required minimum regulatory levels. At these levels, there is enough room for us to further support the growth agenda that we have for the remaining part of 2025. CET1 ratio, to be specific, stood at 13% as of first half, implying a healthy buffer of 300 basis points over the minimum capital required CET1 ratio. And on a total capital adequacy basis, the bank remains strong at 16.7%. The next few slides are going to demonstrate our businesses in detail. Slide 19, we look at our Consumer Banking business. The growth momentum that we witnessed in the Consumer Banking business has been extremely healthy as assets have grown by 13% year-to-date to end at AED 71 billion. So when you look at quarter-on-quarter growth, second quarter, we've seen higher growth than the first quarter. And on a year-to-date basis, we've seen a 13% uptick in our Consumer Banking franchise. Growth has been led by good performance across all our key products with home finance growing by 12%, our auto finance book growing by 13%, our cards business growing by 33% and our personal finance book growing by 9%, underscoring the strength of our retail franchise. When you look at gross new underwriting across the consumer banking business, we've seen record levels at close to AED 18 billion in the first half. Now this is a strong 46% growth year-on-year compared to the first half of 2024. Now customer deposits within the consumer bank have also grown by a healthy 7%. They stand at around AED 98 billion, and the CASA mix of our Consumer Banking book is very stable at around 52%. As we move on Slide 20, we look at our corporate banking business, and this is both our domestic corporate banking business and our cross-border corporate banking business. The local and cross-border corporate business has seen very strong first half results and the assets have grown by 11% year-to-date. These stand at about AED 166 billion. The growth driven by this new gross underwriting of around AED 31 billion in the corporate bank as compared to AED 17.3 billion in the first half of 2024. So an exceptional first half within our corporate banking book, and that is -- that constitutes a year-on-year growth of around 78%. So that has clearly underpinned very strong performance when you look at all our businesses. Growth was particularly strong across various sectors, but some sectors, if we had to name, would include aviation, utilities, telecommunications, financial institutions, and this is both domestically as well as regionally. Our wholesale deposits have been robust, and these have increased by 32% year-on-year, and these stand at around AED 186 billion. So it's important to note that in terms of funding our corporate banking growth, we have also seen an uptick in our corporate banking deposits. So that's a great story for us. Our cross-border business continues to be very active in capital markets. And in the first half of this year, we have participated in a lot of syndicated deals as well as debt capital market transactions for large corporates, financial institutions as well as GREs. Now this is both within the UAE as well as the wider GCC region. Slide 21 is an important slide as well because it looks at the third business of ours, which is our treasury book. The bank's Sukuk portfolio now stands at around AED 89 billion, and that has grown at a pace of 9% year-to-date. The growth in the portfolio was largely driven by financial institutions and the services sector, typically the ones that have done capital market issuances in the first 6 months. The Sukuk portfolio continues to be of high quality with sovereigns comprising 65% of the total portfolio and well-rated financial institutions forming around 13% of the portfolio. Now when you look at revenue contributions from the treasury book, you can see a 9% year-on-year growth, and that book has contributed about AED 1.4 billion. Slide 22, let's very quickly summarize our digital strategy. As a part of our digital strategy, we've always been focused on increasing digital channel adoption amongst our customers, driving customer acquisition digitally, while adding new features and capabilities to make our customers' lives easier. This focus has resulted in consistent growth in registered user numbers across the digital channels as well as higher digital transactions, both in terms of numbers as well as volumes. For example, the new onboarding model for, let's say, our SME and business banking customers has contributed to pick up in new-to-bank customer acquisition. Now such tactical enhancements continue to strengthen customer onboarding journeys across our retail franchise as well as our business banking franchise. Slide 23 is yet another important slide because it highlights our sustainability efforts. In 2025, we've been laser-focused on expanding our sustainable finance capabilities. This has yielded around AED 2.7 billion in gross new sustainable finance since the beginning of the year, with exciting transactions to follow in the pipeline. Now a major enabler of this growth has been the publishing of the sustainability-linked financing framework, which we did towards the end of last year, beginning this year, which has opened a realm of new global financing opportunities in industries critical to the global clean energy transition, such as aviation, telecom, agriculture and so on. Alongside this, our existing sustainable finance products continue to thrive with over 1,800 electrical vehicles financed in the first half of 2025. These add to our sustainability finance numbers and allow us to grow our portfolio moving in the right direction. DIB is firmly committed to advancing sustainability, evidenced by our sustainability-related financing portfolio, now growing to approximately AED 16 billion in the first half as well as we have facilitated sustainable Sukuk issuances globally to the tune of around AED 14 billion. So clearly, a sustainability agenda has been set 2 or 3 years ago, and we are making great progress to make sure our own issuances as well as our financing book continues to grow in a very judicious and sustainable manner. Slide 24 -- Slide 25 rather, looks at our first half performance in terms of our guidance. Now you can see that our net financing and Sukuk book, which is our growth engine, has grown by 11% in the first half. very, very close to the full year guidance of around 15%. Net profit margins, slightly under pressure. And I can see a lot of questions on that. So I'm going to answer that the moment we open our Q&A session. Our net profit margin guidance for the year was 2.8% to 3%. And we have seen that in the first half of 2025, we are at around 2.7%, slightly below the guidance. Our cost-to-income ratio is at around 28%. We are confident that we should be meeting the year-end guidance at the end of 2025. Return on tangible equity and return on assets has come in at guidance levels. Nonperforming financing is very strong. Our full year guidance was at 3.5%. We've done exceptionally well there, and we stand at 3.36%. And our coverage ratio is also better than our guidance, which was at 140%, but we've come in at 145%. I pause here and open the floor for Q&A sessions, and I see that there are a lot of questions. We are going to take a couple of minutes and try and gather as many similar questions as we can, and then we'll open the floor and try and answer them. And then as promised, I'll use the last 5 minutes of my call to summarize the performance of the bank in the first half of 2025.

[Operator Instructions] As a reminder, if you would like to ask a question, please send them via e-mail to webcast@dib.ae.

We have the first question from Olga, Bank of America. Let me read out the question and Dr. Adnan will answer them. What makes DIB expect such a strong NIM recovery in H2 2025 as suggested by FY '25 guidance? If there are any negative one-offs in noninterest income in second quarter, if they can be quantified and explained if they can -- if they are recurring or nonrecurring. And the next question is on real estate gains and if they can be modeled for the next quarters. The last -- the next question is on the effective tax rate for 2025 and 2026. And lastly, the question is on NPF ratio and if there is -- why there was a drop in provision charge if the NPF ratio target has been met.

Okay. Thank you, Naveen. I'll take these questions in the order that they've been raised. I can see that on subsequent questions as well, there is a recurring theme on net interest margin. So let me try and answer this in a very detailed manner. While Olga and Rahul are talking about the guidance for NIM, which is at 2.8% to 3%. Now mind you, we had given this guidance at the beginning of the year. And at that time, we had anticipated that there would be roughly around 4 interest rate cuts. Now if there are interest rate cuts, and if you recollect what I had mentioned that in the event that there are interest rate cuts, DIB is uniquely positioned to its peers because a major portion of our liabilities and to be specific, let's just say, 64% of our liabilities are fixed deposits in nature. So when interest rates go down, a large portion of our liabilities are going to be repriced to our advantage. Now on the other side of our balance sheet, our assets, which continue to grow, our financing assets which continue to grow, have to a large portion being already locked. And by that, I mean our fixed rate financing in terms of our consumer book or our fixed income Sukuk book. So the rates on our asset side are locked. Should the interest rates go down, rates on the large portion of our liability book would be repriced. Now that delta would then mean that our net interest margins would have been at the levels of 2.8% to 3%. However, having said that, the first half of 2025, we've not seen any interest rate cuts. So if you recollect, when we were anticipating rate cuts, 4 rate cuts for the year, everybody was being opportunistic and suggesting that there would probably be one rate cut every quarter. That has not happened in the first half. And hence, you see there is a pressure on our net interest margins because we've done well on our asset side by booking new volumes or locking fixed rate financing. However, on the liability side, a large portion of our liabilities continue to be fixed deposits and are priced higher than where we would want them to be priced at. So having said that, in the second half of 2025, should the interest rates start to come down, and there is a possibility that now starting September, there would be interest rate movements, we would be at an advantage given the structure of our balance sheet and our liability book because a large portion of our liabilities would be repriced downwards. I hope I have clarified this and I've cleared the NIM-related query because that continues to appear on almost all the questions. And probably maybe towards the end of the call, I might also summarize this more succinctly, but it is important for everyone to understand that the pricing -- the NIM pressure, the net profit margin pressure that we have seen is not on account of our asset yields, but it is on account of our liability or our deposit pricing, just clearly because the interest rates have not moved in the expected direction, which was anticipated at the beginning of the year. Your second question, Olga and Rahul, is around negative one-offs in net interest income in Q2. There have been no negative one-offs in net interest income. So I don't need to quantify them or explain any further. How shall we think about modeling DIB's gains from real estate? Over the last 18 months, the UAE's real estate market, specifically in Dubai and the Northern Emirates has been very, very buoyant. And like I've mentioned on all the calls, we've been very opportunistic trying to unlock value out of our legacy real estate investment book. And by that, we mean certain assets that we've carried on book value for a very long time. So this is a great time for us to unlock that. Unfortunately, that cannot be modeled, and we cannot anticipate what would be the gains in Q3 or in Q4. But rest assured, the objective of the bank is to run down that investment book and benefit from the market that we see today. There are pipeline transactions for Q3 as well as Q4. We are working on them. Probably too early for us to get ahead of ourselves and quantify them, but I can assure you there will be gains in Q3 as well as in Q4. Effective tax rate for the second half of 2025. Our effective tax rate for the whole of 2025 is 15%. But having said that, we are also working on ways to see if this effective tax rate can be reduced, and that can be definitely crystallized if everything goes in the right direction towards the early part of 2026. Again... [Technical Difficulty]

Unfortunately, we have lost connection with the speaker line. Please stand by whilst we revert to the back up.

[indiscernible] on account of better recoveries as well as the growing denominator. Let's take some other questions.

The next set of questions are from Rahul from Citi. He is specifically asking about the 2 large transactions recently announced [indiscernible].

Sure, sure. So we've had a fantastic first half of the year. And we've alluded to the fact that our wholesale book has grown. The transactions that you're talking about, specifically, there have been some very large transactions, which you have not highlighted in the first half of 2025. But giving you some color on Turkish Airlines transactions, which was announced that has not been included in the first half. The Pakistan transaction has already been included in the first half. So one of them has not been included and one of them has been included. But more importantly, I think there are so many transactions which you are unaware of, which have not yet been announced, which are in the pipeline. So you will see a very healthy Q3 as well as Q4. So we are looking at a positive momentum in our financing growth engine across all our businesses. So Q3 is going to be yet another very strong quarter as well as Q4 pipeline looks very, very strong. In terms of cost of risk, we should look -- like I've always mentioned, our normalized cost of risk is at around 60 basis points. Of course, the first half of 2025, given the recoveries, we are at around 16 basis points, but that is not normalized cost of risk. Normalized cost of risk, one should factor at 60 basis points. Of course, we cannot anticipate recoveries. So whenever recoveries happen, they just enhance our P&L, right? So we've seen that happening in 2024 with some of the large names and recoveries, and we've seen also that happening in the first half of 2025. Having said that, I can also tell you there are some recoveries planned in Q3 and Q4. So asset quality is going to be a very strong point for the bank in the remaining part of the year as well.