Emirates NBD Bank PJSC (EMIRATESNBD) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Emirates NBD Q1 2020 Results Announcement Analyst Call and Webcast. If we are all ready to begin, I will now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.

Thank you, Morgan, and welcome to this briefing call for Emirates NBD's first quarter results. Joining me are Patrick, the Group CFO; and Paddy, our Head of Investor Relations. Before we go through the results, I'd like to say how proud I am with the selfless efforts that my colleagues have made to keep Emirates NBD running seamlessly during these very challenging times. Support functions don't normally get a mention, but they have done a truly remarkable job to ensure the bank remains open and fully operational, with most staff now working from home. Usually, IT support only have one site to look after, but now they're responsible making sure that thousands of home sites run smoothly and securely. The safety and well-being of our staff, families, customers and community is of paramount importance. As part of the precautionary measures introduced by the Government of Dubai to limit movement and interaction, we have temporarily closed the majority of our branches. To ensure the continued provision of important services to customers, a small number of branches remain open. We have implemented strict sterilization protocols of these branches, installed thermal scanners at entrances and trained staff on safety guidelines and social distancing practices. 3 years ago, we embarked on a significant initiative to enhance the bank's digital capabilities and provide customers with a seamless and secure online banking solution. In these times of restricted movement, the value of this transformation is now more apparent than ever. Retail customers can use Emirates NBD's state-of-the-art digital platform to do everything from opening an account, applying for a loan or credit card, paying bills, remittances, saving or investing, all from the safety and convenience of their own home. Corporate customers benefit from these features and other solutions such as smartTRADE, a new service that provides business solutions such as completely contactless processing and real-time tracking of trade finance transactions. The Government of Dubai has been proactive in promoting working from home and social distancing for the safety of all. Emirates NBD and Emirates Islamic, in coordination with the Government of Dubai and other Dubai-based banks, announced on the 23rd -- sorry, 22nd of March, a series of relief measures to support our retail, corporate and Islamic customers. These include retail loan customers, who've been placed on unpaid leave or reduced pay, can request a repayment holiday of up to 3 months without any interest and fees. Customers with personal or auto loans or mortgages can apply for 1 month repayment holiday without fees. We will refund fees when a customer draws cash at the ATM of another bank. Credit card customers can have an interest-free installment plan for school fees or grocery purchases. Small business customers of merchant, equipment or business vehicle loans who were impacted can apply for a 3-month repayment holiday. We are working with business banking customers who have working capital facilities to develop an optimal financial solution. We offer wholesale banking clients reduced bank charges on digital transactions through smartTRADE and enhanced credit and trade lines to manage ongoing operational costs. Emirates NBD is providing support to our customers and helping keep businesses operating through these challenging times. It is humbling for me to see the support and kindness which staff, families and customers have shown to one another and makes me immensely to be proud of Emirates NBD. Emirates NBD and Emirates Islamic made a AED 4 million donation to the Ministry of Finance's drive to ensure that all school children have access to laptops and Internet to continue with their education through distance learning. The group also made a AED 10 million donation to the Community Solidarity Fund against COVID-19 to provide medical, economic and social assistance to disadvantaged members of our community. Looking at our performance, the bank has delivered a AED 2.1 billion net profit in the first quarter. This is despite simultaneously facing 3 headwinds from low interest rates, a low oil price and an economic slowdown due to COVID-19. I'll let Patrick walk you through the main drivers of profitability in the first quarter. But before I do, I will outline the potential impact and timing of these headwinds. The bank's liquidity remained strong in Q1, thanks to Emirates NBD's stable deposit base. When oil last fell below $30 a barrel in 2016, there was some pressure on liquidity within the UAE banking sector. Emirates NBD has a diverse retail and corporate deposit base, which limited the impact from a low oil price. The bank's domestic deposit base was stable in Q1. Towards the end of March, we did see deposit costs rise as reflected in higher EIBOR rates. This is normal behavior at quarter end. And in April, we have seen EIBOR rates declining again. Next, looking at the low interest rate environment, we have previously stated that a 200 basis points downward move in interest rates would adversely impact net interest income by AED 3.2 billion. The UAE Central Bank cut rates by 125 basis points in Q1, 100 basis points more than we anticipated. If we pro rata this extra change for 10 months of 2020, this led to NIM's guidance being revised down by 20 basis points. Finally, COVID-19 is expected to have a significant impact on the global economy, leading to lower GDP growth. Tourism, hospitality, transportation, logistics, trade, construction and real estate are all expected to be adversely affected. The OPEC agreement reached in April is expected to result in a sharp contraction in oil production this year. We have not seen credit quality immediately affected. What we do anticipate is deterioration in credit quality in subsequent quarters. A customer is not eligible for the experienced difficulties in addition to an impact when relief measures expire. It is too early to predict the level that nonperforming loans will rise to, but the group is very well placed, having established strong impairment coverage ratios prior to the emergence of COVID-19. And in Q1, we have taken additional provisions to cover this risk. Patrick will provide more color on this shortly. Our strong capital base and quality of earnings gives the bank a sizable cushion to absorb low income and higher provisions. Finally, we have made further progress in a number of strategic initiatives. At the general assembly last month, shareholders approved the increase in foreign ownership limit to 40%. This is subject to regulatory approval, both from the SCA, Department of Economic Development and the UAE Central Bank. If and when there is any development, we will inform the market via DFM announcement. Liv. continued to grow its customer base and now has over 370,000 customers. Liv. launched an instant digital credit card, which customers can get within minutes via the app. The credit card allows customers to select and change loyalty and rewards, giving them a truly customized card. Liv. has also commenced a pilot launch in the Kingdom of Saudi Arabia, a large market with a young and dynamic population. With that, I'll hand over to Patrick to go through the results in more detail. Patrick?

Thank you, Shayne. I will take you through the performance for the first 3 months of 2020. As Shayne mentioned, we are facing multiple headwinds from low oil prices, low interest rates and the economic disruption from COVID-19. I know your focus will probably be more on the impact of these headwinds, so I will be spending time explaining, where possible, the impact on how this flows through to guidance. Let me just start with Q1 performance set out on Page 4 of the presentation. Total income improved 46% year-on-year, principally from the addition of DenizBank in Q1, adding AED 2.3 billion, but below pre-acquisition comparative in Q1 2019. Income, excluding DenizBank, was down 2%. Quarter-on-quarter, total income was flat with both quarters including DenizBank, so it is like-for-like, net income declined by 3% as lower interest rates fed through to the loan book, but this was fully offset by an 8% improvement in noninterest income. Costs increased 47% year-on-year with the inclusion of DenizBank. However, excluding DenizBank, costs increased by only 2%. We have also seen an 18% increase -- sorry, improvement in costs, quarter on costs -- quarter-on-quarter, following on from the actions taken in Q4 2019 to lower staff costs as well as lower marketing expenses, coupled with an improvement in the DenizBank cost base. These combined to deliver an improvement in the pre-impairment operating profit of 46% year-on-year and up 10% quarter-on-quarter. Whilst credit quality was stable in Q1 with an NPL ratio of 5.5%, we have significantly increased impairment allowances in anticipation of a deterioration in credit quality in subsequent quarters as required by IFRS 9. The credit impairment charge of just over AED 2.5 billion represents a 349% year-on-year increase and a 24% increase quarter-on-quarter. This has significantly boosted coverage ratio, and I will elaborate on this shortly. Loans grew by 1%, and deposit balances declined by 1%. Liquidity remains strong, as demonstrated by the advances to deposit ratio, just under 95%; and liquidity coverage ratio, the LCR, close to 150%. We have a strong funding base, which we will use to support clients through the crisis. This may see a rise in the AD ratio and a decrease in the LCR as we also expect to see across the industry. On Slide 5, we see that year-on-year, lower interest rates adversely impacted loan spreads by 70 basis points, and this was partially offset by 43 basis points lower deposit and funding costs. Excluding DenizBank, margins would have finished Q1 at 256 basis points, but the 46 basis point contribution from DenizBank lifted margins to 302 basis points in Q1. The chart on the bottom right shows that margins in the group contracted in Q1 as lower interest rates impacted loan spreads by 22 basis points, which is partially offset by a 16 basis point improvement in funding costs. DenizBank contributed a further 3 basis point to margin contraction. As I indicated last quarter, DenizBank's margins initially benefited from lower interest rates. Its funding costs declined faster than assets repricing. We're now starting to see assets started reprice and catch-up and feed through to margins. There are 2 key things affecting the full year margins: one, the Q1 interest rate cuts; and secondly, the customer support measures the bank launched in coordination with the Dubai Government, as Shayne mentioned. In respect of the impact of the interest rate cuts, which was 150 basis points by the Federal Reserve in Q1 and 125 basis points by the UAE Central Bank in March and revising 2020 guidance on NIM lower by 20 basis points to 2.55% to 2.65% range. These base rate cuts are 100 basis points more than we had originally been anticipating in the UAE and will impact the bank for 10 months of 2020, albeit the full impact both take time to flow through as assets and deposits reprice over the next few months. We have assumed no further cuts in the U.S., UAE and Turkey for the time being. It is also worth bearing in mind that banks have operated in low interest rate environments before in 2016 and 2017 when interest rates were low and that NBD was still able to deliver 250 basis points margin. Obviously, it's now at new lows. In respect of repayments relief offered to customers and clients that are dealing with liquidity issues during the COVID-19 crisis, the payments are deferred without additional interest charges, the effective interest rate yield on those loans decreases. Given the scheme really launched at the end of March and clients who are just now starting to extend terms, this has no impact on Q1. And for the rest of the year, it will depend on how many customers avail themselves of this offer. And clearly, this is a significant change in interest rates, and we will update you again when we release the H1 results. On Slide 6, we've seen that the bank continued to operate with strong liquidity. We have AED 112 billion of liquid assets, which covers 18% of total liabilities and 24% of the total deposits. The liquidity coverage ratio remains healthy at close to 150%, while the AD ratio was just under 95% at 31 March. EIBOR and LIBOR rates declined in February and the first half of March, reflecting the cuts in global interest rates. However, during the second half of March, we saw EIBOR and LIBOR rates climb. The banks started to pay off the liquidity, particularly towards the quarter end. Central banks and governments globally have been supportive of individuals and businesses affected by COVID-19, significant amounts of liquidity injected into the banking system globally. And in early April, we have seen EIBOR and LIBOR rates falling again. During January and February, we raised AED 9.1 billion of term funding in 5 different currencies with maturities out to 20 years. This included 2 benchmark public transactions. In the first quarter, we have funded 78% or just over 3/4 of term liabilities maturing in 2020. The pie chart on the bottom left shows that customer deposits continue to make up 76% of liabilities. This leads nicely onto the profile of deposits on the next page. So at the bottom right of Slide 7, we see that Emirates NBD's total deposits were stable during the first quarter with CASA growing by AED 10 billion and fixed deposits reducing by AED 10 billion. In Q1, we continued with a successful campaign to attract and retain CASA. When interest rates fell in February and March, we also saw some customers reluctant to renew fixed deposits at lower rates and lose the money in CASA. DenizBank's deposit base in dirhams declined due to currency movements but grew on a local currency basis. CASA across the entire group represents 46% of total deposits. The domestic CASA engine for Emirates NBD remains strong and represents 54% of domestic deposits. Gross lending increased 2% in the first quarter. Within that, consumer lending declined by 5%, while Islamic financing and corporate lending both grew 3%. Turning to Slide 8. We included this slide last quarter as it shows the improvement the bank has made in the diversification of its balance sheet, particularly with the addition of DenizBank a year ago. The loan book was heavily concentrated with the UAE making up 93% of total loans. Currently, the UAE comprises 3/4 of loans, and International and GCC making up the other 25% of the loan book. The improvement in diversification also extends to the segment level where 34% of loans are sovereign, down from 42% a year ago. Retail lending is growing from 11% to 16%, while corporate has also grown from 32% to 37%. And the pie chart on the right side shows the diversity of the loan profile by sector. Just on Slide 9. As I mentioned earlier, we see that the NPL ratio on the top-right chart was steady at 5.5%, and it's still too early to predict the level that the NPLs will rise to. But in anticipation of the weakening in credit quality, we have started boosting the bank's coverage level. Coverage has risen by 8.2% to 120.5% of NPL. But the bank took over AED 2.5 billion in impairment allowances, including just under AED 900 million to COVID-19-related expected credit loss overlays. This equates to an annualized cost of risk of 210 basis points, with DenizBank continuing to boost coverage by having an annualized cost of risk of 430 basis points in the first 3 months. Emirates NBD comparable cost of risk, excluding DenizBank, was 161 basis points, up from 91 basis points in 2019, substantially due to the COVID-19 overlay. Provisions will be reviewed as the impact of COVID-19 becomes more apparent in subsequent quarters. We expect the credit -- consequences of COVID-19 to be felt sometime to come, and this stresses the importance of the support offered by the Government of Dubai and the UAE Central Bank to affected customers. Stage 1 and 2 expected credit loss allowances totaled AED 10 billion or 2.6% of credit risk-weighted assets. Just turning to Page 10, I have included a new slide in this quarter to provide more detail on our strong levels of impairment coverage by ECL stage under IFRS 9 and to set out how the bank has approached provisioning with the potential impact of COVID-19. Given the severity of the impact on the global markets was mostly felt from March, there is limited updated and reliable forward-looking information available for ECL calculations, that is to update the macroeconomic variables that determine the probabilities of default and the loss in default and in turn the staging between Stage 1 and 2 and 3. As noted on the prior page, we have yet to see the formation of significant new COVID-19-related NPLs. The chart on the top right shows that Stage 1, 2 and 3 impairment allowances have grown in total by a net AED 2.3 billion since the end of 2019 up to AED 31.5 billion. And this is broken up further into the allowances by stage. The chart also shows the respective stage coverage ratios on the right side. We have taken a further AED 2.5 billion of credit impairment charges, of which AED 1 billion was Stage 3 on the existing NPL, net of recoveries, and just over AED 1.5 billion on Stages 1 and 2 covering COVID-19 and other credit risks. This compares to AED 1.4 billion taken to Stage 1 and 2 for the whole of 2019. With the additional charges, Stage 1 covenant is strengthened to 1.2% from 1.1% at the start of the year, and Stage 1 loans at 89% of total gross outstanding loans. Stage 2 coverage has risen to 19.3% from 15% at the beginning of the year or 5% of gross loans and advances. Stage 3, which is 6% of the total book, maintains its high cover level at just under 90%. In making the Stage 1 and 2 assessments, we adopted both a modeled and overlay approach. Further details we have set out in Note 26 of the quarterly financial statement. But briefly, in summary, we were able to update our ECL models up to February, which also gave the model significant increase in credit risk, otherwise known as sukuk, and the staging at that point and then apply an overlay for COVID-19. In terms of staging, at the end of Q1, we have considered giving substantial government support given to customers, including the CBUAE's testing and our customer relief measures. The relief offered to customers may indicate a significant increase in credit risk. However, the group believes that the extension of such payment relief does not automatically trigger the stage migration for the purposes of calculating the ECL at Q1 as the release has been made available to borrowers affected by COVID-19 outbreak to resume regular payments. So the end of Q1, sufficient information was not available to enable the group to individually differentiate between a borrower's short-term liquidity constraints and a change in its lifetime credit risk. Our customer is continuing to be assessed closely for stage migration on a case-by-case basis due to COVID-19 disruption. In terms of the ECL overlay calculation, we started with the February calculation and assessed the range of possible stress outcomes and increased the downside weighting through to 100%. In addition, the group has applied further adjustments for retail exposures to industries whose employees are expected to be most impacted due to COVID-19 such as airline, hospitality, retail and tourism. As I noted earlier, this overlay approach added just under AED 900 million to total ECL for Q1. Inevitably, this approach is judgmental and will change as information becomes available through the year. I do hope this provides greater clarity on the approach we have used, which has led to higher impairment allowances that I think should not have been unexpected in the circumstances. So I'll now hand you over to Paddy to take you through the remaining slides.

Thank you, Patrick. Slide 11 shows that core fee income improved 46% year-on-year due to the inclusion of DenizBank. Property losses are lower this year due to lower levels of breakdowns in the remaining property inventory compared to the comparable quarter last year. If we exclude the contribution of DenizBank, noninterest income declined by 4% due to lower fee and income related to investment securities. On Slide 12, we see that with the inclusion of DenizBank, costs increased by 47%. Looking at Emirates NBD only, costs increased 2% in Q1 compared to the first quarter of 2019 due to higher depreciation and IT costs. Following the cost rationalization exercise last year, costs improved by 18% over the previous quarter on lower staff and marketing expenses, coupled with improved cost management by DenizBank. The cost-to-income ratio at 29.8% is within guidance, but we expect this to increase during the year on lower expected income in subsequent quarters, which will be partially offset by further cost management. As the shape of total income becomes clearer during the rest of the year, following rate cuts and reduced yields from support provided to customers, this ratio may rise further. Slide 13 shows that the common equity Tier 1 ratio at 14.8% is lower than the 2019 year-end of 15.3% due mainly to the AED 2.5 billion dividend payment in March. Profit for the quarter was partially offset by foreign currency translation losses recorded in reserves. As with previous years, we anticipate that retained earnings in subsequent quarters will strengthen the capital base, particularly given the modest loan growth expectation for the remainder of 2020. TESS offers bank central -- banks relief on capital buffers until the 31st of December 2021 with very supervisory consequences. The capital conservation buffer stays at 2.5%, but banks can tap into 60% or 1.5%. Emirates NBD is a D-SIB and can use 100% of its 1.5% D-SIB buffer. Hence, until the 31st of December of next year, minimum capital ratios for D-SIBs are 8% with a common equity Tier 1 ratio 9.5% for the Tier 1 ratio and 11.5% for the capital adequacy ratio. Emirates NBD's actual capital ratios are over 6% higher than these new minima. Moving on to the divisional performance. Patrick has provided some extra information this quarter on expected credit losses. So in the interest of time, I won't spend too much time talking about divisional performance. On Slide 14, we see that RBWM was able to grow year-on-year revenue by 6%. They were also able to grow deposits in Q1 due to a successful marketing campaign. As a precaution, as Shayne mentioned, a large number of branches have been temporarily closed. However, the bank's strong digital credentials mean that we're able to offer customers virtually a full uninterrupted banking service. Liv. continues to grow with a customer base of an excess of 370,000. Liv. has recently launched an innovative digital credit card that allows customers to tailor the card to the preferred rewards scheme. And Liv. has launched a pilot launch in Saudi Arabia last quarter, a large market with a young and dynamic population. Emirates Islamic was able to deliver loan growth, which helped offset a decline in non-funded and investment income year-on-year. On Slide 15, we see that Corporate & Institutional Banking grew revenue by 2% year-on-year as loans grew 3% and deposits advanced 11%. Global Markets & Treasury revenue declined 95% year-on-year as net interest income was adversely impacted by lower interest rates, which were at their peak in Q1 2019. Noninterest income declined 11% year-on-year due to tougher market conditions for trading and sales. As Patrick already mentioned, the Global Funding Desk have covered over 3/4 of term liabilities maturing this year. On Slide 16, we see DenizBank had a strong first quarter, delivering a 23% quarter-on-quarter improvement in net profit as a 25% improvement in costs more than offset higher impairment allowances. Margins contracted 14 basis points during the quarter. And as we guided at the beginning of the year, margins are expected to show further contraction as asset prices catch up with earlier rate cuts. With that, I'll hand you back to Shayne for his closing remarks.

Thanks, Paddy. So to summarize, most of the bank's staff are working from home with a small number of branches remaining open. Interestingly, Patrick was mentioning to me that even the quarter's financials were closed at home, which is pretty remarkable, maybe we don't need so many buildings in the future. Despite this, we have continued to offer full uninterrupted banking service to all our customers. In coordination with the Government of Dubai, we announced a series of relief measures to support our retail corporate and Islamic customers affected by COVID-19. Despite taking additional provisions in anticipation of a deterioration in credit quality in subsequent quarters, the bank still delivered a healthy profit while maintaining a strong balance sheet. We have issued revised guidance as lower interest rates, coupled with the economic impact of COVID-19, will affect both income and credit quality. With that, I would like to open the call to any questions. So operator Morgan, please go ahead.

[Operator Instructions] We will take our first question from Waleed Mohsin from Goldman Sachs.

My first question is on the cost optimization. So very impressive cost rationalization on a quarter-to-quarter basis. Just wanted to get a sense of how much more can we expect on the cost line, given that you've already delivered 18% sequential cost optimization? So that's the first question. Then second, in terms of asset quality, you provided a lot of details on incremental ECL and the macro overlays. Just curious to hear that if you look at your net provisions on the UAE business, it was AED 1.1 billion. And when we think about some of the exposures which have been recently reported, have they all been taken care of? Because the ECL overlay looks like a high number. But when you look at the net number for UAE, relative to some of the exposures which have been quoted, it looks like a reasonable number, but still want to get your thoughts about how much of this is reflective of existing loans and how much of this is forward-looking action that management has taken? And a final question linked to asset quality. When we think about migration of exposures, how much of an impact do you expect on capital from the increase in risk weights on movement between exposures going from Stage 1 to 2 and Stage 3?

Thank you very much for that. It's Patrick. I'll take those questions. Just your first point on cost optimization. So yes, we have had an improvement in the first quarter. You will have seen in Q4 last year, we actually went to about 36% with the cost/income ratio and then built it back down under that for the full year. The difference for this year will be more a factor of the level of income outturn for the full year, given this is a cost/income ratio. So with the reduced guidance on margins, clearly that's going to take some aspects of the income out of that. It does relate to BC and how much would come out of non-funded income through the year. We are optimizing costs and having another look at those, as we do in any case, out of cost discipline, but the current target remains at 53%. And we will update you at the half year when we get to that close. On the second point, just on asset quality. We have to distinguish between Stage 3, Stage 1 and 2. So for Stage 3, you were talking about the AED 1 billion or AED 1.1 billion provisions that we have made and whether or not that is sufficient. Remember that our strong coverage levels is at 90%, and that is before factoring in collateral, which takes the coverage ratio to over 200% as far as a coverage ratio. So at the moment, we're at 120% cover on -- specifically on Stage 3, it is on 90%, adding collateral added to significantly both of that. And then you asked whether the -- there is a -- what part of that is ECL. ECL is principally for Stage 1 and Stage 2. So the total ECL for Stage 1 and Stage 2 is AED 1.5 billion, of which AED 800 million -- sorry, just under AED 900 million of that was for the COVID-19 overlay. So very strong coverage ratio. So that should give you some comfort around that, that we are well placed at this time to navigate through the challenges of the remainder of the year. And just on the capital side of that, you will see that capital ratio or our CET1 is at 14.8%, so that puts us in a very strong position as far as being able to absorb any increase in NPLs. And as Shayne mentioned as well, it's too early to tell exactly what the NPLs will be for the rest of the year.

If I could just add, Patrick, there's a related question on NMC, which I think the Goldman Sachs guy was really trying to get at without saying the name, but we have the one on the -- that he's mentioning. So I'll just cover that. Firstly, I have to say, we never comment specifically on any client. But in this case, we have declared what our exposure is. It's just over $200 million. For us, that's relatively small based on capital, based on profitability, based on cost absorption capacity. So for us, that's not a big number. Don't get me wrong, I don't like losing money to any client. But for us, it's not a material issue. That's what I really want to add.

Yes. That was going to be my follow-up question because I was going to ask specifically about NMC, but you've answered that.

I thought you might want to ask that one.

Yes. So just a follow-up on that. I don't know if you can comment on it, but is it now officially part of the NPL ratio? Or shall we just take comfort from the existing coverage levels, which can take care of it once it migrates?

We won't make a comment on that on a specific basis. I'm sorry I can't.

Okay. I think we've got a few questions coming in on the webcast. So we'll just take a pause from the phone call questions and we'll cover a few of these, and then we'll switch back to further questions. Shayne has already covered -- so the first question is from Janany at Arqaam. Shayne has already covered the NMC point. I'll let Patrick cover some of these questions. I'll quickly just cover some of her latter questions. Regarding the 2020 payout, that's a management -- or sorry, it's a shareholder decision, which will be taken at the next AGM, so we can't comment on potential 2020 dividend. Janany also asked why did we pay the 2019 dividend when NMC and indeed COVID-19 had started. Again, the shareholders had approved the 2019 dividend at the March general assembly. And I just make reference that it was, if you look at the percentage of the payout ratio, excluding the one-off from Network International, it was in its low 20s, and that does represent a payout in respect of 2019 performance. And finally, before I pass over to Patrick, Janany asked, are we comfortable with our capital ratios given the potential increase. Again, as I mentioned, the capital ratio minimum have dropped by 3%. And so we effectively currently have a 6% -- over 6% buffer above the minimum capital requirements. And as I mentioned, we anticipate that any future profitability for the remainder of the year would enhance our capital position. I'll pass over to Patrick for...

If I can just add on the capital, often we get criticized from the analysts that we're holding too much capital. And now we're getting questions, do we have enough. I think we've been very conservative with how we've managed our capital over the years. Having nearly 15% core Tier 1, to me, is a very high number globally and regionally. I think on top of that, the other thing I would add is, from an analyst perspective, I think if you did some comparisons around our staging covers, Stage 1, 2 and 3, you'll see how robust our coverage is. We are by far in this region well covered compared to the competitors. We've been very conservative how we built out our coverage historically, and this is putting us in great shape as we hit this situation at the moment. So we are comfortable with our capital. We're comfortable where we are on our provisioning levels. I'm not saying that won't cost us to have more as we go through this crisis. But we are -- we come into this crisis in a very strong position from a capital and coverage position.

Janany had a couple of other questions, quite a few questions, indeed, which I'll pick out a number of those, which one being according to the financial statement, ECL model has been updated for retail segment of the affected sectors. Does this mean that there has been no adjustment to the corporate segment and this will exert significant pressure on provisioning in the coming quarters? I made a specific reference to retail because that is when we were looking at the scenarios. These were specific sectors where they're using the expert judgment and looking at the outcome. It looked like we could add some real provisions there, whereas the stressing on the model and our weighting through to 100% more than covered the risks that we were seeing changed through the corporate model. So it's not that the corporate model has not been stressed. It is in that, and it has been reviewed. It is just in the retail sector specifically, on a portfolio basis, where the individual parts that it looked like they're particularly under stress, we've made specific expert overlays for those as well. And just another question there. Has the Central Bank communicated with banks on provisioning for COVID-19? Any color you can provide there would be helpful. Does the accounting treatment in terms of accrual interest changed the staging, depending on whether the payment deferrals are part of the test or outside of the test. Just on that latter part, the accounting for that is something I referenced where if you are given relief, the bank's relief measures, whether it's inside the test or outside the test, that essentially means for those that you have a lower yield on the interest rate for that. So that's the accounting for that. So you can continue to accrue, but you are essentially on a lower yield. So it's accounting as opposed to the test program being about cash or liquidity relief for our customers. So they are deferring when they pay in cash. They just pay that amount later on. And on the first part, has there been communication with the Central Bank? We are following IFRS 9, so there is no regulatory change to IFRS 9, particularly in the first quarter. And so the overlay approach that we have taken is in line with convention and including statements made by the IASB as well. Paddy, are there any other phrased questions you would like me to answer now? Or should we move on to another question?

Great. I think you answered Elena from Al Ramz. She had a similar question on the Central Bank and IFRS 9. So that's been answered. Vijay from Al Tayer Group just asked about DenizBank and funding costs. Yes, Vijay, they have seen an improvement both on availability and pricing of funding of money market and wholesale funding. And in fact, that was reflected in the syndicated loan that they did in the second half of last year with a lot of demand. In fact, they were, I think, probably the only bank in Turkey who did a 2-year tranche as well. Patrick, I'll just cover a couple more questions here. Vijay also asked about the ECL model. I think Patrick has explained that very comprehensively. So we'll just take a pause with these questions and then pass back to the operator for any further voice questions.

We will take our next question from Hootan Yazhari from Bank of America.

I just wanted to revert back to the dividend. You made it very clear that the decision is down to shareholders down the line. But are there any pressures coming from the Central Bank like we've seen in the European countries, forcing banks to preserve capital or take a more conservative approach to dividends? And would you consider paying out bonus shares rather than doing -- paying out capital? Or is this something that's sacrosanct for your shareholders and, as a result, you prioritize dividends above all else? Another question I wanted to ask was regarding fee income trends. Obviously, there's a lot of stresses developing in the system. Are you having conversations with your client base to migrate more of the revenues into the fee income bucket given margins are coming down? Or is that something that's not happening, you have to give away on the fee income because everything is stretched right now? Just anything that you can give us in terms of trends that you expect on fee income would be hugely helpful.

Okay. Let's answer the dividend one. I think, as Patrick said, the dividend payout ratio for 2019, ex Deniz, was low 20s. So it's not as if we've had a very generous dividend payout policy historically. We have been preserving capital. We did that significantly around the -- building up muscle for an acquisition, which we did with Deniz, and then continue to pay out at about the same rate in '19. So it was still a pretty low payout ratio. On future dividends, that will be a decision at the end of the year. We've got a long way to go with the economic effects of this virus, and it's really too early to call what we would do on dividends and what we would do on any bonus issues, et cetera. It's just far too early for us to talk about that at this stage. On fee income, obviously, every bank wants to maximize its fee income. But there's no doubt, we are going to see impact on fee income. If you just think about things like trade volumes obviously dropping right across the world, and a lot of foreign exchange comes off the back of trade, so it feeds through to everything from issuing a letter of credit, feeds right through to the FX margins that you would make on the transaction. So we are seeing a reduction in fee income coming through now. And we are -- obviously, the amount of new loans that are coming through normal credit card applications, auto loans, et cetera, they do have -- quite a lot of them are fee-based, are obviously being impacted by a reduction in volumes. So we do anticipate fee income to drop this year just as an effect of the uncertainty, so both confidence and also the effect on the economics of the countries that we operate in. How much that's going to be is a very interesting point because how long is a piece of string, I think, is when does -- when do we get out of this situation and when does the world get to some sort of normalization economically is going to be a challenge for us all.

We will now take our next question from Mahmoud Elsafty from Ghobash Trading.

My first question, about the costs and the costs in absolute terms rather than cost-to-income ratio. Can you please quantify the impact of the initiatives you touched based on? And for provisioning, is it a fair assumption to use Q1 as an indication for the remaining of the year? Are you in a position to comment on this?

Patrick here. Just on the costs, I think I set out an approach to that just in one of the early questions, and our approach in the guidance that we give is around the cost/income ratio. And I think you broke up slightly, so I think you said costs were out rather than cost of risk?

Cost.

Yes, costs? Good. And then for the provisioning, so the approach we're taking for Q1 is not necessarily an indicator of what the rest of the year looks like. IFRS 9 requires you to have a forward look at what the lifetime losses might be on, say, Stage 2 or 12-month losses might be on Stage 1, through the year. The macroeconomic variables will be updated. It will take time for those to settle down. They are not just spot rates within 2020. They are looking out 1, 2 and 5 years ahead, including oil prices, GDP, employment, et cetera. So there'll be variability around that. And I think that if IFRS 9 is implemented, there was always this question mark around volatility that you might see with that. However, given we have taken an overlay approach, that is making the best estimate we can at this point of time. As we've said before, it will take time through the year to see the formation of NPL and then through into next year as well. Number of customers this year, obviously, will benefit from relief for liquidity purposes, but we will, of course, make sure we are keeping an eye, on a regular basis, on any actual downgrades in credit risk within the portfolio.

Just to add on costs to try to give you sort of an idea of what we're doing, we're looking at every cost line that we have item by item. Anything that we can defer on capital expenditure, we are. Obviously, we've frozen all headcount costs. We will get a reduction in some of the sales force costs because they're not -- a lot of them are on an incentive basis for selling. Obviously, volumes are down on selling. But be assured that every line of cost that we can reduce, we are reducing, including existing contracts. So for us, it's obviously -- one of the levers we have to pull hard on is costs. And we're certainly right into that, to pull it as hard as we can.

One last question about the SME being some of them in vulnerable position given the situation. How much exposure out of your loan book is to SME? And what are the measures that you're taking to float these companies or help them out?

We actually -- I can't remember the exact numbers on this in the exposure. It's actually not a very big proportion of our book.

Yes. It's about 2% to 3%, and that includes Emirates Islamic and Emirates NBD.

Yes. It's not a huge proportion of our book, SME exposure. On measures, the micro SME segment, we have offered 3 months interest-free and repayment-free as part of the initiatives that we launched with the Dubai government for individuals and for SMEs that are impacted by COVID-19. That's not a very big P&L effect, both from the consumer and from the SME portion of our business. I just wanted to touch on TESS because I think some people get a bit confused about TESS and what it allows. What it allows is actually you claim under TESS the deferred payments. So the example I'll give you is, if you had a AED 1 million mortgage, and you deferred payments for 3 months, the only amount -- and say the repayments were AED 50,000 a month, the only amount that you can claim under TESS is AED 150,000, not the AED 1 million. So what TESS provides you is basically the cash flow mismatch at free of charge from the Central Bank. So it's the AED 150,000, not the AED 1 million. It does not provide you capacity to claim, for example, for a new SME loan. So if I have -- if a client has -- needs more working capital, for example, that's in SME, I can't claim that under TESS. I need to make my own credit decision on that, and I don't get any rebate back from the Central Bank via TESS. Hopefully, that clears up some of the noise around what does and what doesn't qualify. To qualify in there, also customers need to prove that they have been affected, right? So obviously, some industries, like airlines, is a no-brainer. But people who are still being paid and have a good credit history, it doesn't mean we won't defer payments if they do have some difficulties, but they will not qualify under TESS as a client.

Thank you. We'll just answer a few more questions that have come in on the web.

We have one from Naresh at JPMorgan on -- 2, 3 questions. The first one, what is the size of modification loss that you will take due to forbearing, if the forbearance period increases to 6 million -- sorry, 6 months, and how much further would that affect the P&L? Just in broad terms of where we are estimating just the existing estimates, we have included that in our margins. So roughly 3 to 5 basis points within the margin, if there is, say, a 30% to 50% forbearance within the portfolio. The second one, can you explain -- sorry, that was basis points on the net interest margin, by the way. That's where the cost will go. Can you explain how the interest accrued but not received in forbearance period? How is that adjusted? How is this recognized in the P&L and how much your provisions include the suspended interest? So when there is forbearance and there is a delay in the payment from an accounting purposes, you continue to look at the overall yield of the extended tenor. So if you were planning to get plenty of interest over 12 months, and then you were getting plenty of interest over 15 months, you essentially have a lower yield, but we continue to recognize that. There is the potential that you have accrued interest and later becomes part of any credit impairments. And then 3, what is the level of Stage 2 and Stage 3 loans you expect to see in course of this year? Do you believe that 2020 is likely to be more asset quality pressure than -- sorry '21 will be likely to see more asset pressure than 2020? Well, I think we can't -- we don't know at this stage what the migration will be through to the NPLs. A lot of the impact and the economic consequences during lockdowns and stifling of economic activity that's happening through March. So we will know a bit more when we get to the half year. And then the NPL emergence may be delayed slightly if we have forbearance. And then we will have to look to see what is emerging in 2021, but we can't provide specific guidance on that. But we have stated our guidance as saying that, "Look, NPLs will be increasing. We just don't know by how much at this stage."

Patrick, do you want to take the first 2 points of the next question, then I'll answer Part 3 and 4 and a couple of others?

Okay.

And a couple of follow-up questions, from that one?

Yes. Okay. When would you expect to update the macroeconomic variables and the ECL model? We will look to see what our independent provider of the macroeconomic variables that's able to provide through the second quarter. There has been indicative macroeconomic variables coming out. Just given things can and will change through the quarter, we will assess those and how we apply that into the model and then how we factor that against the overlay that we have already taken. It's important that the macroeconomic variables are reasonable and supportable. On the next one is ENBD going to be part of the recapitalization of Emirates Airlines?

We would never comment on a particular client. So sorry.

I'll take the next couple of questions. Janany was also asking about Emirates NBD's role in funding certain GREs, such as DP World and [ MENA ]. Again, exactly as Shayne says, we do not comment on relationship with actual or potential customers. Note 23 of our financial statements does give our related party exposures. And there, we disclosed that 5% of our loan book is to GREs. And then Janany has also asked about the -- any update on the FOL. As Shayne mentioned, at the general assembly, the shareholders approved. They increased to 40%. That is subject to regulatory approval. There's 3 regulators that we need to get approval from, which includes Central Bank of the UAE, the Department of Economic Development and SCA, Securities and Commodities Authority. And again, because it is price-sensitive information, we are unable to comment on the actual state of those approvals. I'll answer one more question, and then I'll pass back to Patrick with a few questions on NIMs and cost of risk. Salah asked about Turkey and increase of capital. And so we have mentioned previously that we have $1.2 billion equivalent of Tier 2 notes in DenizBank and that is being restructured to make it more capital-efficient. Approximately $400 million of that will be converted into common equity Tier 1 and the remaining $800 equivalent will be restructured, again, to make it more capital-efficient from a Tier 2 perspective. Okay. I'll just pass over to Patrick for some questions on NIMs and cost of risk.

So we have a question from Shabbir at EFG Hermes. First of all, what are the factors shaping your NIM guidance, especially what factor other than the rates drive your NIM forecast? And the second part of that, how does the loan repayment deferral impact your revenue? I think I've now answered that second point, so I will just come back to the first one. In a way, the main impact is the rather obvious one, I'm afraid, is the rate cuts, both the Fed and the Central bank of the UAE cutting their rates that then feeds through to EIBOR and LIBOR, respectively. Given the rates in EIBOR has not dropped by exactly those benchmark rates, it means margins take time to go lower. Basically as EIBOR and LIBOR catch up to those, but given the uncertainty in markets in the last month, those rates have stayed quite elevated and certainly have not come down by the benchmark cuts. And then, of course, there's the timing of the repricing of the assets. And the other main variable too is the volume. So you can actually deduce from the Q1 numbers what the average interest-bearing assets are because we have NII disclosed there and the margin. And then, quite frankly, if you simply apply 20 basis points that we're guiding to depending where you are in the range, really gets you the overall impact to our margins. There are a number of other variables other than the timing of that, and that is the impact on the forbearance, the customer relief that we are providing. So it's probably the other variable impact. Paddy, I can answer the next question. Can you please comment on the credit quality of DenizBank, 450 basis points cost of risk, have you seen a material deterioration? No. I think as we were guiding at the year-end when we presented results that had 5 months of DenizBank in there, we had about 390 basis points in cost of risk. We've been going through the portfolios. We said at that point in time, we haven't found anything that we have not expected during the due diligence and the acquisition. We continue with our robust approach to provisioning and actually of the Stage 3 impairment of AED 1.1 billion, a substantial amount of that would be in Deniz, and there was nothing unexpected from where we were thinking the impairment with the -- with DenizBank that's in line with our overall expectations.

And Jagadish from Franklin Templeton asked about how many percent -- how many of our Liv. customers are new to the bank. That remains very healthy, around an 80% new-to-bank customer level, Jagadish. Okay. Well, operator, we'll go back to the call for any more questions.

We will take our next question from Lemer Salah from Barings.

Two questions on my side. So the first one is on the Turkish exposure. What do you expect in 2020 in terms of any potential capital injection in DenizBank continuing with capitalization levels? And also considering -- like I mean, over the weekend, the Turkish Central Bank has advised the banks to continue lending. Plus at the same time today, there was a headline on injecting capital in big banks, which might potentially also require injections in pipeline. So that's question #1. And question #2 is on your own capitalization level. Obviously, you said like -- I mean, you've got excess spread of 600 bps, although minimum levels. You do have a Tier 1 coming up in 5 months. What do you envision to do with that? What are your expectations on that front?

Thank you very much for the questions. And I'll just take your second question first. Regarding the additional Tier 1 that is callable in September, again, no decision has been made on that. And there's -- the bank, if it decides to call, is required to give between 20 and 30 days notice period. So a decision will be made based on economic considerations, much closer to the time. Regarding -- sorry, Turkey -- I couldn't really hear what you were saying on Turkey, but I'll -- what I picked up, I'll try to address. I mean some of the measures in Turkey, for example, they've locked the FX rate for bank capital calculation versus at 5.93 was it? 5.93? I think it was 5.93. So that means that, from a capital perspective, in Turkey, albeit on consolidation, it doesn't work. But from the solo level, their capital is in a decent position. And as Paddy mentioned, we are reconfiguring some of the Tier 2 because actually it'll become capital-inefficient given its length. So we had to push some around and restructure it. So we're doing some work there. On lending there, I would say, at the moment, their liquidity position is sound. They're in a good position from a liquidity position, both on foreign exchange and in Turkish lira, with an AD ratio below 100%. So they're in a decent position there. Do we expect some effects of what's happening in Turkey? Obviously, we do. And two, if you think about how big tourism is in Turkey, and how many people it employs as an industry, there's obviously going to be an impact through -- just in that channel quite significantly, as we've been expecting and living in Dubai. In some regards, there was quite a correlation between the tourism industries in both the UAE and in Turkey. From a provisioning perspective, we said to you last year that we'll be aggressive on our provisioning in 2019, and we have again in 2020. So what we expected. We looked at this book up and down, back to front so many times. We are on track there. On government pressure, I'm not a politician. I'm not going to comment on government pressure. But the bank is continuing to lend, helping its customers through this crisis. And I think they're in a good position. We have excellent management in Turkey. For those who have met Hakan, he's a very robust, battle-hardened veteran. We've put Jonathan Morris, who used to be on the Board there to help manage what's happening. And I think the addition of him there, he's very strong on operational, very strong on risk and very strong on liquidity. So I think we're in a good position all over the globe with the quality of our staff. And the one thing I would say to you is if you look at us as an organization, we're full of battle-hardened veterans that have been through a lot of crisis. I worked in Asia through the Asian financial crisis [ run a brand ] risk for Northeast Asia. I was in Singapore for SARS and managed through that and I was the Chief Risk Officer globally for StanChart in those days for wholesale bank. We went into this crisis very well prepared from a capital, very well prepared operationally. We were very quick to trigger our operational aspects of split operations, heat guns, scanners, et cetera, et cetera, well on truly before most people were thinking about even ordering. We had the gear on the ground. So we -- I think we have the experience and the management team to handle it. Do I think it's going to be easy? Of course, I don't think it's going to be easy. This is a pretty hard economic impact globally that will impact every organization probably unless you're a supermarket.

Okay. Just one follow-up question because then I mean you managed to answer a large portion of my questions. But there's just 1 more question. I mean, in terms of FX level for Turkey, most of your GCC peers have given a rough guidance of, I mean, 7 on the lira currency as across the dollar. For potential capital injections, what would that level be for Emirates NBD?

Well, at the moment, there is no requirement from the Central Bank because they've locked the exchange rate, because most of the impact you see on capital in Turkey for banks is the mismatch between their loans, which are -- a lot of the corporate loans are in euro or dollars. And their capital, which is in Turkish lira. So what the Central bank did as one of its initiatives, was lock the conversion rate for capital at 5.93. So at this stage, there's no requirement to put additional capital into Turkey. Now do we -- when we consolidate the accounts? That's a completely different story. Obviously, we use IFRS 9, and we consolidate at the rate applicable at the time. But from a solo basis, their capital calculation is fine because of what the Central Bank has done.

And there's a couple more questions if I can just pass them over to you.

Sorry, just going back to that last question. And remember, we are putting in more capital with the conversion of that Tier 2, right? So we're converting some -- it's not additional capital, it's conversion of existing Tier 2 to Tier 1 as part of the restructuring of that capital there, which we've planned well in advance of this coronavirus hitting. That was not part of the consideration. Then we had inefficient Tier 2 capital, but not all of it was qualifying. It was leftover from when the Central Bank owned it, and now we're basically restructuring it positively for the next...

Shayne, if -- we've got a question from Jagadish, which is asking, have we accessed TESS or any other programs launched by the Central Bank. There's also a couple of other questions. What percentage of loans have availed the payment moratorium so far? And are corporates asking for interest or principal deferment in addition to your earlier question.

On TESS, we have taken a large chunk of TESS already. I'm not sure if I'm allowed to say how much, probably not. I'm sure the Central Bank won't want to announce that. So no, I won't go -- but yes, we have taken a substantial amount of TESS already. We -- that doesn't mean that -- and remember, this is from April, not in March. And just remember, how this system works is we don't need to allocate the loans to them for 60 days. So we're basically -- it's not as if we're -- yes, we haven't got enough for we've actually been allocated so far of deferments. I can't give you the percentages, but we have taken a large chunk. We will use as much of that allowance as we possibly can, getting zero-cost money is a pretty good thing for us. So obviously, we will take as much as we possibly can. But we also have to make sure that we have enough loans to allocate into it. At this stage, it's actually nowhere near enough that we could allocate into the pool. And if we don't allocate the correct amount, and they will [ order us ] and we will be fine. So we're quite careful to make sure that what we draw, we will have enough deferments to actually qualify under TESS. Again, just reiterating, it's only deferred amount that you can claim not the full life.

Okay. We'll go back to the call for any further questions.

We'll take our next question from Chiro Ghosh from SICO.

This is Chiro from SICO Bahrain. I have just one question, that is and -- look, you have maintained your loan growth guidance at mid-single digits, right, since before the coronavirus time? So how confident are you about being able to manage this kind of loan growth, considering your size and this economic condition? And even if you are, which are the sectors do you believe that would be lending to?

Yes. Patrick here. So yes, we retained our guidance. You will see in the accounts, the gross lending is up 2% year-on-year or for the year already and 1.3% up on a net basis. But as we navigate the rest of the year, we will be supporting our clients. So we do have an expectation that lending could be within that -- still within that mid-single-digits range.

Okay. And just one question. A previous one. I think there were some disturbance in the lines, so I missed it. So let's say the company is struggling, and you have given them a 3-month extension or something, so would that qualify as a nonperforming or it won't? A struggling company.

Yes. Well, but in the -- for any customer or client that is currently in Stage 1, just because they have availed themselves of customer relief measures that does not automatically, in the models, make them downgraded to Stage 2, for example. We do then need to look at the credit performance. And then when we're looking at whether any relief measures take you down from Stage 2 to Stage 3 that is more under IFRS 9, a function of whether there is actually a credit deterioration. The fact that someone has availed themselves of this in itself does not mean that it's downgraded.

No, let me reverse the question. So if a company is struggling and most likely, it will become a nonperforming loan, will it get this 3 months of extension? Or it won't get? Just thinking from the other side.

Any substantial credit that we look at, that is relationship-managed, every decision on deferment is made individually. So the micro SME and the retail is a programmed situation. For anything that's a relationship management in business banking or in wholesale banking, all those decisions on deferments are made as individual transactions. So we would also look at the credit quality of that at that time. Sorry. Just being in TESS does not obviate NPLs, right? So just because you put something in TESS, it doesn't mean that you don't need to do the normal credit assessment that's required and determining the staging or the coverage ratio if they should really be nonperforming. So it doesn't actually eliminate that at all. The ones that are programmed, yes, you will get a bit of a tail, but that's not a big number in the scheme of things.

So effectively they're independent of each other, right? The testing and -- okay.

I'll just answer a few more questions while we have the line. There was a question from [ Metehan ] on NMC. We -- and whether any provision included in Q1. As Shayne mentioned, we don't disclose any information on a individual customer basis. Vijay from [ Fiera ] asked about NIM guidance and then the absolute number of net interest income. We don't give guidance on absolute numbers. We provide information on expected loan growth, expected margins, et cetera, and allow people to make their own conclusions on that. So we don't -- we won't be giving guidance as we've never done on absolute amount of net interest income. The -- I've already answered the question [ Ali ] asked about Tier 1 and the potential impact on the Tier 1. As I said, we've already answered that question about the decision to call or not call. There's also a question on -- from [ Vishal ] on sovereign loan growth. As I said, we don't give individual guidance on which parts of the book will grow. The overall loan guidance is maintained at mid-single-digit for 2020, okay? And Suleman from Tricap was asking whether the $400 million of Tier 2, whether that would lead to a dilution for Emirates NBD. No, it won't. We already held those notes at purchase, and you will see that, that has not led to any dilution of Emirates NBD's capital position. Okay. Operator, I'll go back if there's any further questions on the lines.

There is. We'll take our next question from [ Junaid Farah ] from [ SIM Partners ].

Actually, all my questions have been answered. So thank you.

Thank you very much. Okay, I will take one from -- okay, go ahead.

Go ahead, Morgan.

So our next question is from Alok Nawani from Ghobash Trading.

Just 2 questions from my side. You mentioned the interest rate sensitivity that you have is AED 3.2 billion for every 200 basis points movement. Should we be looking at this number with respect to your reported net interest income of AED 6.2 billion last year? Or should we be looking at it on a pro forma basis, given Deniz was only consolidated for 4 months, I believe? That's one. And the second question I had is on the increase in ownership to 40%. Do you have any sense of time line on when you might expect to receive the regulatory approval that you spoke of?

Maybe I'll take the first one, and then Shayne to answer the -- Paddy to answer the second one. Just on the interest rate sensitivity that we published before the full year accounts, it is a sensitivity that is relevant to this year and the -- pending the balance sheet as well. So that has been part of what we have indicated before when we had said, for every 25 basis points, it's approximately AED 400 million of net interest income. Yes. So I think that's probably the right answer to that one.

Which then translates into the NIM guidance downward.

Exactly. And so overall, the 20 basis points that's coming down, and I think as indicated before, you can actually reduce what the average interest-bearing assets are and run that calculation.

Okay. In terms of the foreign ownership, again, I've nothing really to add to what I've already said. There is regulatory approval needed from 3 bodies, the Department of Economic Development, SCA and the Central Bank. We do not comment on the status of those approvals. And so we cannot add anything further. As and when all the approval have -- is forthcoming, we'll make an announcement to the market. And we have to do that in that fashion because it's market-sensitive information. And couple of other questions, I'll quickly take. It is Chiro from SICO asked we have a big amount of debt maturing in 2020, '21. Will these then refinance the lower rates? As we've already mentioned, we've covered 3/4 of this year's maturities. A large part actually of what we have maturing next year is a club deal, which we typically roll every 3 years, and it's with our relationship banks. The amount of debt, typically, we will issue about AED 13 billion to AED 15 billion in public issuance and private placements on a year-on-year basis. So if I look at the amount of debt maturing next year, that -- it's AED 8.5 billion of term debt, which is not the club deal. So again, those parameters -- we're comfortable with those parameters. And also bear in mind that for the last couple of years, we've actually been financing well in advance of our maturities. And so we have actually been prefunded. Okay. Suleman, Patrick has already answered your question about the average margin for the year. So we'll move on to that. We covered that. And I'll ask Patrick just to answer a question from [ DJ Adama. ]

Okay. So the question he is asking, is there any new regulation from the UAE Central Bank that the provisions increase related to COVID-19 could be added to your capital and gradually phased over the 5-year period? There was an article in the Gulf News a few days ago. Yes, there was a press release, but there has been no -- there hasn't been a formal emission of a regulation on that at this point in time. So the capital -- CET1 ratio that we have disclosed at 15.8% is fully loaded with the impact of the COVID-19 overlay that we have added in there, and that equates to approximately 20 basis points within that. In other words, if we had capital relief on that, the capital ratio would have been around 15%.

Okay. Just a couple of more questions. Again, Suleman reasked the question of average NIMs. Yes, Suleman, if you look the guidance of 2.55% to 2.60%, given that we had 3.02% in the first quarter would imply lower NIMs for the whole year and lower NIMs in Q2, 3 and 4. And that's a function of lower interest rates, where 3/4 of our loan book is -- resets within 6 months to date. So that was reset at lower rates. And also DenizBank, where DenizBank benefited from recent rate cuts and because it's liability profile is shorter, and in 2020, assuming no further rate cuts, we expect the assets to reprice and catch up and see a contraction in margin from there, okay. And there's a question from [ Abdullah ] on EIBOR transition. [ Abdullah ], if you don't mind, I think that's very technical. So we can take that off-line and we can respond off-line on that particular question.

There's no impact for us in this quarter. It's just Phase I on the disclosures that the bank adopted in the hedging policy for -- under IFRS 9. And so it is slightly different from other banks. They are still using the IAS 39 approach to hedging parameters. And it's about disclosing that need to use or the amount of our hedging that will rely on LIBOR's valuation after 2021 is not concerned material.

I think you just answered the question actually there.

Yes. Thanks. I don't need to take it off-line. Okay. Morgan, any further questions?

We have one last question in the queue from Jag Pasunoori from Franklin Templeton.

So what percentage of loans are impacted by COVID-19? What percentage of loans are under payment moratorium so far? Can you disclose that?

We won't disclose that. But I have to say, it's pretty early days. So the impact so far has been pretty minimal. It's not a huge number at this stage. Do I expect that to accelerate? Yes, I do. But at this stage, where we are, we haven't had a massive number of even SMEs getting deferrals at this stage. And just remember, really, the TESS program only -- we only started implementing it from the 1st of April, so it hasn't been going for very long. So the effect at the moment is not huge. Do I expect it to grow? Yes, I do expect it to grow as the economic impact affects more customers and their cash flow, and we would expect to receive more deferrals as we go forward. But it's pretty hard to try to estimate what will that be. How long will this -- the lockdown go for? When will the tourists come back? All those things are pretty significant for the country.

Okay. I'll just tidy up. There's a few more questions, which I'll just tidy up with on the web. In terms of SMEs, interest waived or deferred? Again, it is done on a case-by-case basis. We are -- we work with our customers to find the optimal solution. Similar question about corporate principal deferment is done on a case-by-case basis. Yes, I think we've covered everything. Any further questions on the phone lines?

We have one question from Vijay Raghavan from Al Moosa Group.

Good set of numbers. Just a few questions on -- I've not listened to all. Most of the others clarified already. One thing is on DenizBank, where I see a significant reduction in the operating expenses as well as the taxation part. I mean, can we assume that it is used to be cost incrementation which basically means would that -- can we expect that to continue in the future quarters? Or is it kind of a one-off in this quarter? And my second question will be on the impairments. I know there have been a lot of press reports on the specific outstanding, which we have all seen in the last couple of weeks. So your subsidiary, Emirates Islamic, I presume, maybe you can just confirm a yes or no. The figures of the Emirates Islamic is consolidated. So your provision would probably include any provision if at all they're made for that case without...

Yes. The results are consolidated, given that we own 99.99% of it. And also, I would just say that the NMC exposure that we disclosed is also in Emirates Islamic, not in the main entity, but both the whole thing is consolidated. And the other question, Patrick, I don't think you heard it probably, was on are the cost reductions in Deniz sustainable? I think that was the question you asked about?

Deniz-specific.

Deniz-specific.

Yes.

Well, they are the costs overall, there was a reduction in costs from Q4 to this year. We said last year that we'll be taking action against certain redundancies and actions to get the cost base for this year into the right shape. But as far as Deniz goes, that includes an element of the FX appreciation. So quite a high percentage is up. So it is 5 basis points lower considering on a constant currency basis, but if you look at another 20 basis points drop in the following year. So I think that run rate of the cost is in the right shape so it doesn't have to be subject to FX.

Also I think other thing to comment on just on cost is, please remember we took out about 500 jobs in the last quarter of 2019. So we did take quite a lot of costs out. So some of the cost increase you saw in the last quarter came off the back of those redundancy costs of taking out that headcount. So there is a big cost upfront as you take people out. And that's one of the reasons why we saw a cost drop in the first quarter versus the fourth quarter of 2019.

Sure. Just a final question on the web from [ Casper ] asking if loans would transition between Stage 1 and 2, 3, et cetera, through the stages. If you look -- if you read the TESS paper, you will see that the preference is for TESS -- loans covered under TESS and not to transition. Obviously, loans not covered by TESS, those are subject to our own credit assessments. We would apply our standard credit methodology. But for the first -- effectively loans tagged under TESS, there is a preference that those loans do not transition.

Having said that, with our overlay, there is coverage that's gets carried and then that's not moving down the stages.

Good point.

I mean in many of the ECL calculations that I'm sure the analysts on the front will do against other banks, you'll see that we're at double the coverage rates of most in Tier 1, 2 -- in Stage 1, 2 and 3. So we have plenty of muscle within those lines already. And if there's no further questions, I'd like to thank you all for joining us. It's probably good to get out of the office -- get out of our homes for a change, and we managed to get into the office today to take this call. So it was the first time for a while we've all put on a suit and tie and frankly, it felt good. Well, I'd just like to leave you with the message that the bank is well positioned for COVID-19. We have the liquidity. We're strong there. Capital ratios are strong as we've talked about today. We have a very strong franchise. And I think that's one of the great things about the organization is we do have very big market shares in deposits that is keeping our liquidity very strong. We have the technology. It's enabling us to continue to operate on an amazing basis, I have to say. We've got all the technology sitting at home now, and we're managing the bank very well from home. And I think, lastly, I would leave you with the message is you do have management here that's been through many crisis. We know how to handle it, and we're well positioned to get through this crisis and come out at the end even stronger bank than we currently are. I thank you all for joining the call and talk to you more at the half year. Cheers. Thank you, operator.

For any further questions, please contact our Investor Relations department whose contact details can be found on the Emirates NBD website and on the results press release. A replay of this call and webcast will also be available on the Emirates NBD website next week. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.