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

Ladies and gentlemen, welcome to the Emirates NBD Results Call and Webcast for the First Half of 2020 for Analysts and Investors. Please note, this call is open to analysts and investors only. Any media personnel should disconnect immediately. 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. Please go ahead.

Thank you, Marguerite, and welcome, everyone. Joining me, as usual, are Patrick, the group's CFO; and Paddy, our Head of Investor Relations. Before we go through the results in detail, I'll update you on the operational developments within the bank and the economic environment. For much of the second quarter, the UAE and other countries in which we operate were in strict lockdown. Despite this, Emirates NBD continued to provide full uninterrupted banking service to our customers and the wider community. Once again, I want to express my gratitude to our staff, who helped customers continue to bank safely and securely during these unprecedented times. Over the last 3 years, we invested to develop our digital banking offering. The real value of this has been apparent during the lockdown. We've seen an increase in the number of retail and corporate customers who regularly use our digital platform. Lockdown accelerated the adoption of digital banking for many customers as in line with government directives, we temporarily closed the majority of our branch network. Given the current challenging operating environment, we, like all companies, have reviewed our operating platform to meet the current and future anticipated behavior of our customer base. One consequence of the increased adoption of digital banking is we expect to see lower footfall in our branch network. In coordination with the government of Dubai in March, we announced a series of relief measures to support our retail, corporate and Islamic customers. We proactively reached out to our customer base, and support has now been provided to approximately 1/10 of our customers, primarily through the deferral of both interest and principal for periods of up to 6 months. We were one of the first banks in the UAE to fully draw down our share of the 0 cost funding provided by the Central Bank's TESS facility as well as quickly utilizing the AED 6.9 billion to 0 cost funding for the benefit of our customers, we have provided an additional AED 1.4 billion of interest or principal deferrals to date supporting over 90,000 customers. In addition, we have waived certain fees to help individuals and businesses cope with the disruption. We believe that providing support now, we will assist in stabilizing the economy and minimize the impact on our customers. Turning to the economy. The UAE government and the UAE Central Bank took decisive actions to protect the health of UAE residents and to provide economic relief measures to support customers and UAE banks. The swift government action has enabled the reopening of the UAE economy in a phased and controlled manner. We've seen many people returning to work. We ourselves have been gradually increasing numbers staff back to the office and currently have about 30% of our staff in the office or in branches. We have introduced many procedures to ensure the safety of our staff and customers, including regular disinfection of our buildings, social distancing measures and providing protective equipment. We've seen the phased opening of shops, restaurants and services within -- in the UAE. Flights are now resuming and hotels are reopening. The economic improvement is reflected in the UAE headline PMI, which rose to 50.4 in June, the first reading and expansion territory this year. Companies are more optimistic about the economy continuing to recover over the next 12 months. We have seen business banking volumes improving through May and June, although we do not expect volumes to return to pre COVID-19 levels this year. Looking at performance, Emirates NBD delivered a net profit of AED 4.1 billion for the first half of 2020 and made a strong -- maintained a strong balance sheet despite the challenging operating environment. Total income of AED 12.6 billion improved 33% year-on-year on line growth and higher fee income from the inclusion of DenizBank. Net profit declined 45% year-on-year due to higher impairment charges and the gain on disposal of network international stake was not repeated this year. Profit was down 24%, excluding the network international gain in 2019. Emirates NBD's strength is underlined by its ability to deliver a solid profit during these challenging times. The bank's balance sheet remains strong with stable capital and liquidity and credit quality within management's expectations. UAE Central Bank's introduction of TESS and reduced cash reserve requirements has been effective ensuring healthy liquidity in the banking system as evidenced by declining EIBOR rates during the second quarter and negligible seasonal volatility in the run-up to the quarter end. Our capital ratios are over 7% above minimum requirements. And this, along with our ability to generate a healthy operating profit, provides a strong loss absorption capacity. We are delighted to be officially ranked as one of the top 100 banks in the world, with Emirates NBD ranked 87th in The Banker's list of World's Top 1,000 Banks for 2020. During the second quarter, Emirates NBD was included in the MSCI Emerging Market Standard Index, and this has helped increase foreign ownership above 10%. I'll now hand over to Patrick to go through the results in some more detail. Patrick?

Thank you, Shayne. I will talk through the performance for the first half of 2020, which is set out on Page 4 of the presentation, and then second quarter, which is detailed on Page 5. Just starting with Page 4. Total income improved 33% year-on-year, as DenizBank added AED 4 billion of income in the first half with no pre-acquisition comparative in H1 2019. Net interest income improved 36% year-on-year, with loan growth and higher NIMs from DenizBank and overall remained flat to H2 2019. Non-funded income improved 24% year-on-year and declined 7% compared to H2 2019 as a consequence of the lower customer activity during the Q2 COVID-19 shutdown period. Excluding DenizBank, net interest income declined 7% year-on-year, due to falling margins, and non-funded income declined 15% year-on-year. Again, as a result of lower business volume due to the COVID-19 disruption. Costs increased 42% year-on-year, with the inclusion of DenizBank. Excluding DenizBank, costs improved 1%, as cost control measures started to take effect. We also see a 9% improvement in costs over the preceding half year on lower staff and marketing costs as well as lower costs from DenizBank. So these combined to deliver an improvement in pre impairment operating profit, which is up 29% year-on-year and up 1% of the preceding half year. We have significantly increased impairment allowances in 2020 in anticipation of a deterioration in credit quality in subsequent quarters. There was a modest increase of 0.2% and the NPL ratio to 5.8%, and the impairment charge of just over AED 4.2 billion represents 243% year-on-year increase and a 17% increase over the preceding half year. This has helped maintain a strong coverage ratio, and I'll elaborate on that shortly. The increase in provisions has resulted in a 19% fall in operating profit. Net profit fell by 45%, as the gain on the disposal of the network international shares 2019 was not repeated this year. But excluding this, profit was down 24% year-on-year. Net loans grew 1% during 2020 with lower business activity and deposit balances declined by 2%, mainly due to Turkish lira depreciation. Liquidity remains healthy, as demonstrated by the advances to deposit ratio, 96.1%, and the liquidity coverage ratio of 152.5%. We have a strong diverse funding base, which we have used to support clients through these challenging times. The profile of the quarterly results on Page 5 is affected by the same drivers, as I've just outlined. So I don't propose going into these numbers in detail. But just in summary, income was down 17% in Q2 over Q1, following the Q1 interest rate cut and lower client activity during the COVID-19 lockdown period. Costs were, however, down 5% Q2 over Q1, which we will see later. And impairment was lower in Q2, following our strong levels of COVID-19-related overlays booked in Q1 and the benefit of a corporate restructuring in Q2. And therefore, net profit was down 3% over Q1. Just on Slide 6. We see that year-on-year, lower interest rates adversely impacted the loan spreads by 96 basis points. This was partially offset by a 59 basis point improvement in deposits and funding costs. Excluding DenizBank margins, would have finished H1 at 240 basis points, but the 44 basis point contribution from DenizBank lift the margins to 284 basis points for H1. The chart on the bottom right-hand side shows that margins in the group contracted in Q2 as lower interest rates impacted loan spreads by 130 basis points, reflecting the all-in 1 and 3-month EIBOR rates of over 140 basis points during 2020. This is partially offset by an 85 basis point improvement in funding costs and 11 basis points from DenizBank. We have maintained the NIM guidance at 2.55% to 2.65%, as we anticipate a smaller impact on loan yields in the second half of this year as earlier rate cuts have now largely flowed through to EIBOR rates, but the full year guidance of 2.55% to 2.65% means that the H2 NIM will be lower than the Q2 NIM. As I mentioned last quarter, we have operated in low interest rate environments before in 2016 and 2017, when interest rates were low, Emirates NBD was still able to deliver 250 basis point margins, and there are various levers that management can pull to help mitigate against the low interest rate environment. In respect of repayments relief offered to customers and clients that are dealing with liquidity issues as a result of COVID-19, where payments are deferred without interest, the effective interest rate yield on those loans decreases, but this does not have a material impact on the reported income of the group. On Slide 7, we see the bank continues to operate with strong liquidity. We have AED 102 billion of liquid assets, which covered 17% of total liabilities, 22% of total deposits. The liquidity coverage ratio remains healthy above 152%, while the advances to deposits ratio was just above 96% at June 30. EIBOR and LIBOR rates declined in the first half of 2020, reflecting the earlier cut in Fed and CB UAE interest rates towards the end of each -- and towards the end of each quarter, we typically see a rising LIBOR rates as banks start to pay off their liquidity over the quarter end. In June, however, there was only a modest ride LIBOR rates, reflecting the healthy liquidity in the UAE banking system, and that's helped by the significant liquidity measures introduced by the UAE Central Bank. In Q2, once capital market conditions improved, we issued a further $483 million of private placements with -- that's in dollars, sorry, $483 million of private placements with a 12.1 year weighted average life. Total senior issuance year-to-date now stands at AED 10.9 billion, which covers 93% of this year's maturities. And the pie chart on the bottom left shows that customer deposits continue to make up 3/4 of liabilities. And I think that leads nicely on to the profile on the next page. So on the bottom right of Slide 8, we see the group's deposit mix improved again in the second quarter. With CASA growing by AED 8 billion and fixed deposits reducing by AED 11 billion. I mentioned earlier that management have various levers to mitigate somewhat against a low interest rate environment and our ability to attract and retain CASA through successful campaigns is one such lever. DenizBank's deposit base in dirhams declined due to currency movements and was flat in local currency. CASA across the entire group represents 49% of total deposits. And the domestic CASA engine for MX NBD remained strong and represents 57% of domestic deposits. Gross lending increased by 2% in the first half. Within that, retail gross lending declined 6% during 2020 due to lower credit card and personal loan balances, while corporate lending grew by 3% and Islamic financing grew by 4%. Turning to Slide 9. Now I include the slide as it shows the improvement the bank has made in diversifying the loan book, 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, with international and GCC making up 25% of the loan book. Now this improvement in diversification also extends the segment level, where 34% of loans are sovereign, down from 43% a year ago. Retail lending has grown from 11% to 16%, while corporate has grown from 31% to 37%. And then the pie chart on the right-hand side shows the diversity of the loan profile by sector. On Slide 10. As I mentioned earlier, the NPL ratio increased slightly by 0.2% to 5.8% during the first half. It is still too early to predict the level that NPLs will rise to. But in anticipation of the weakening in credit quality, we continue to maintain a strong coverage level. And coverage overall has risen by 4.6% to 116.9% in H1 as the bank took over AED 4.2 billion in impairment allowances. This equates to an annualized cost of risk of 172 basis points, with DenizBank continuing to boost coverage by having an annualized cost of risk of 374 basis points in the first half of 2020. And Emirates NBD's comparable cost risk is 126 basis points, up from 91 basis points in 2019. Overall coverage dropped slightly in the second quarter as impaired loans increased by AED 1.5 billion compared to a AED 0.8 billion increase in provision. Around half the net increase in impaired loans related to 1 credit, which we disclosed in April of this year. Provisions continue to be reviewed as the impact of COVID-19 becomes more apparent in subsequent quarters. And the Stage 1 and 2 expected credit loss, or ECL allowances, amounted to AED 10.1 billion or 2.6% of credit RWA. On to Slide 11. Slide 11 provides more detail on our strong levels of impairment coverage by ECL stage under IFRS 9 and also to set out how the bank has approached provisioning for COVID-19. In Q2, we were able to update the macroeconomic variable forecast to reflect the impact of COVID-19, and our scenario weightings have been returned to using 40% baseline, 30% upside and 30% downside scenarios compared to using the 100% downside in Q1 when the MEVs had not been updated at that point in time for the impact of COVID-19. The group has also applied portfolio level ECL adjustments to wholesale exposures based on affected sectors as well as to retail customers taking up deferrals based upon employment status and levels of salary inflows. But the group continues to assess individually significant exposures for any adverse effects of COVID-19. And the chart on the top right-hand side shows the Stage 1, 2 and 3 impairment allowances have grown in total by a net AED 3.1 billion since the end of 2019. It is now at AED 32.3 billion, and that is further broken up into the allowance by stage. And then the chart also shows the respective stage coverage ratios on the right side. We have increased Stage 3 allowances by a net AED 1.3 billion during the first half, given 85.3% Stage 3 coverage. And then Stage 1 ECL allowances increased by a net AED 0.4 billion to AED 5.1 billion. And this increased Stage 1 coverage to 1.2% on 89% of total gross loans outstanding. Stage 2 ECL allowances increased by AED 1.4 billion to AED 5.0 billion, and this increased Stage 2 coverage to 18.9% on 5% of total gross outstanding loan. Details of deferrals included in Note 25 of the half year financial statements, as required by the CB UAE. But in summary, as follows, We've provided AED 8.2 billion of deferred principal and interest repayment support to our customers and clients in the UAE and retail customer support was substantially through Q2, with most support maturing through Q3. While CIB clients repayment support is typically for up to 6 months. Overall, total principal related to clients we are supporting with deferrals is AED 49 billion or 13% of total UAE lending. So we continue to be vigilant and take a cautious approach to our provisioning, and we'll keep you up-to-date as the rest of the year plays out. I'll now hand over to Paddy to take you through the remaining slides.

Thank you, Patrick. Slide 12 shows that core gross fee income improved 4% year-on-year due to the inclusion of DenizBank. Core gross fee income declined by 33% compared to the first quarter as all sources of fee income were adversely impacted by both the COVID-19 shutdown and the waiver of some fees as we provided support to affected customers. In June, as business began reopening, we've started to see some recovery in the volume of fee income-generating business, we expect business volumes that generate fee income will improve in the second half of the year from the low base of Q2, but this will be a function of economic activity. Income from property and investment securities represent only 2% of total non-funded income. On Slide 13, we see that with the inclusion of DenizBank, costs in Q2 increased by 36%. Looking at Emirates NBD only, costs improved 3% year-on-year due to lower staff and marketing expenses. Following the cost rationalization exercise last year, costs improved by 5% over the previous quarter on lower staff and marketing expenses and lower costs from DenizBank. The cost-to-income ratio rose to 34% in the second quarter, given an average cost-to-income ratio of 31.7% for the first half. We expect the average cost-to-income ratio to continue increasing towards 33% due to lower income in the second half. We embarked on a further cost rationalization exercise in the second quarter, but there is a risk that the cost-to-income ratio for the full year exceeds the long-term management target of 33%. And this is not surprising given the rapidly -- given how rapidly global interest rates were cut earlier this year and the immediate impact that such cuts have on income. Slide 14 shows that the capital ratio strengthened between 0.5% and 0.6% in the second quarter. Common equity Tier 1 ratio rose to 15.3% from 14.8%. The reported capital ratios as of the 30th of June now include an add-back for incremental Stage 1 and 2 ECL allowances as permitted by the UAE Central Bank. Excluding this add back, all capital ratios increased by 0.1% during the second quarter as retained earnings more than offset the 2% quarterly rise in risk-weighted assets. As with previous years, we anticipate that retained earnings in subsequent quarters will strengthen the capital base, particularly given the modest loan growth expectations for the remainder of 2020. TESS offers banks relief from capital buffers until December of 2021 without supervisory consequences. Hence, until that date, minimum capital ratios for D-SIBs are 8% for common equity Tier 1 ratio, 9.5% for the Tier 1 ratio and 11.5% for the capital adequacy ratio. And as Shayne mentioned, Emirates NBD's actual capital ratios are over 7% higher than these new minimum. Earlier this month, we issued, a $750 million additional Tier 1 Basel 3-compliant perpetual note. We also have Central Bank approval to call a $500 million old style additional Tier 1 note in September. If this note is called, I know this will be published next month. And if called, the net effect on the new issue will be to improve both the Tier 1 and the capital adequacy ratios by approximately 0.3%. In terms of divisional performance, Patrick has provided some extra information this quarter on ECL. So in the interest of time, I won't spend too much time on divisional performance. On Slide 15, we see the RBWM year-on-year revenue fell by 9% due to lower fee income as volumes were impacted by the COVID shutdown. Customer advances reduced by 7% and deposits grew by 4%, supported by a successful marketing campaign. The first half cost-to-income ratio for RBWM improved to below 26%. Emirates Islamic was able to grow financing and investing receivables by 8% in the first half. Customer deposits were broadly flat, and AI has a healthy 69% of deposits coming from CASA accounts. AI's total income was lower by 26% year-on-year, reflecting the challenging market conditions due to COVID-19. On Slide 16, we see that the corporate and institutional banking income fell by 3% year-on-year, mainly due to lower fee income. Fee income declined 19% year-on-year as lower lending fees and trade commissions more than offset an increase in investment banking activity. Loans grew 3% and deposits increased by 7%. Global markets and treasury revenue declined as net interest income was adversely impacted by lower interest rates. Non-funded income improved 76% year-on-year, thanks to a strong performance by the trading and sales desks. As Patrick already mentioned, the global funding desk has covered 93% of term liabilities maturing this year. On Slide 17, we see that DenizBank had a good start, a good first half, delivering nearly AED 4 billion in revenue and a net profit of AED 929 million. DenizBank continues to take significant provisions to boost its coverage level. Margins contracted 52 basis points during the second quarter to 4.4%. We had earlier guided for margin contraction as asset pricing catches up with earlier rate cuts. And with that, I'll pass you back to Shayne for his closing remarks.

Thank you, Paddy. So to summarize, positive income contribution from DenizBank itself offset a decline in net interest income from lower rates and lower fee income due to the COVID-19 shutdown. We have provided support to approximately 1/10 of our customers, primarily through the deferral of both interest and principle for periods of up to 6 months. In addition, we have waived certain fees to help individuals and businesses cope with the disruption. We've seen an increase in the number of retail and corporate customers who regularly use our digital platform. And this earlier swift government action has enabled a reopening of shops, restaurant and services within the UAE economy in a phased and controlled manner. Flights are resuming and hotels are reopening. The economic improvement was reflected in the UAE headline PMI, which rose to 50.4 in June, first reading in expansion territory this year, although we remain cautious given the continued economic uncertainty from coronavirus. Emirates NBD delivered a net profit of AED 4.1 billion for the first half of 2020 and maintains a strong balance sheet despite the challenging operating environment. With that, I would like to open the call to questions. Marguerite, can you please go ahead?

[Operator Instructions] And we can now take our first question from Naresh Bilandani from JPMorgan.

Shayne, Patrick, Paddy, it's Naresh Bilandani from JPMorgan. And appreciate the additional disclosure that you have in the financials. I do hope we get a similar variety from other banks too. So really great effort there. I have 3 questions, please. Just very quickly on the questions, please. So first of all, in the Note 5 of the financials. You mentioned that roughly about AED 82.6 billion or so of 0 cost funding was received from the Central Bank and is recorded in the interbank, while repo has certain equities. Is this funding a part of the overall AED 6.9 billion that you've secured under TESS? And can you please just throw some light on the repo collateral that was offered for this funding? That's the first question. The second is in Note 17 of your financials, you have mentioned the modification adjustment. Can you please explain that a bit? Assuming some recoveries, I think that number could potentially be in the AED 100 million, AED 200 million range. My understanding of your modification recording is that you are using the effective interest rate method. So if you can please just explain this recording here? And the third is now in context of the AED 8.3 billion deferred amount that you have kindly disclosed. If I look at your overall sort of market share of loans, roughly about 22%. Then is this a fair representation of the total amount of deferred loans inside the system? If you can just please throw some light on that, that would be super helpful.

It's Patrick here. Maybe I can take those. Just your first one, on the repo-ing that we disclosed. So yes, share of the overall 0 cost funding was the AED 6.9 billion. So that included repo-ing assets to secure that. So we disclosed in Note 3 that AED 4.3 billion of Central Bank notes being repo-ed. And then, in the following note, Note 5, we show the AED 2.6 billion are being repo-ed to support the AED 6.9 billion. And we have then provided additional customer support over and above the TESS amount. So that's the difference up to AED 8.3 billion of overall funding. Your point on Note 17 on the modification adjustment, yes, we have made a modification adjustment. So where you have given up interest, IFRS actually still requires you to record interest on a level yield basis. So it means you need to discount those future cash flows to determine what the modification loss is. So you book that to the impairment line, and then you get to unwind that through your interest income. Overall, it's not a material amount for us. So that's one. So net-net, there's an immaterial impact on the P&L for 2020. And your third one, about you're trying to triangulate around the whole banking system, I don't think we can quite do that.

I don't think you can do that, Patrick.

Yes.

Because remember that TESS, when you actually claim TESS, you're claiming on the deferment amount, right? So to use your allocation, you decided which loans went into that. Generally, the actual principal amount deferred in total for retail was, I think, for most banks, far less than it would be for wholesale for obvious reasons, they're bigger lines. But it was up to the bank to allocate that money to their clients. But remember, the clients had to qualify for it and prove that it had been affected for that retail. So I don't think you can do any just straight triangulation to say if we've got 22%, that means that the whole system has got this. It depends on what loans that you picked and what clients requested. So I don't think there is just a general response there, I'm afraid, Naresh.

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

I just wanted to focus on some of the migration that we've seen in the different stages. We've seen a pretty static distribution of Stage 2 and Stage 3 as a proportion of gross loans, which is surprising given the environment that we're in. Do you feel that -- or are you comfortable with the level of Stage 2 classification at the moment? Or do you see significant room for that to start moving upwards and need for even further provisioning as we go into the second half of the year and into next year? And then the second question I have is really on the foreign ownership limit. What we need to see for that 40% foreign ownership limit to be implemented and how far we are down the process?

It's Patrick. I'll take the first part of that. On stage migration. For the first half, we have had about AED 2 billion of migration from stage or increase in the Stage 2 amount and about AED 1.5 billion of increase in the Stage 3. So there are a couple of things going on with Stage 1. We are applying the IFRS 9 staging criteria. It is just under 10% of our clients in retail have deferrals, so where there is a deferral. The main driver in retail for an example is the 30 days past due, where there's a deferral, obviously, it means that, that element won't be downgraded because it has been deferred. Having said that, we have then taken additional overlays within retail for particular sectors where there hasn't been a stage migration, but we do anticipate some of that risk. Now with the deferrals happening principally through Q2, yes, you won't see the buildup going through to Stage 2. And I think it will be more through Q3 on the retail side that we'll see the formation or the delinquency rates. And then on the CIB side, because some of those deferrals to assist clients principally with liquidity because that's up to 6 months, that's more likely that we will see the NPL build through Q4 and towards the year-end and into next year. So that's really the shape of that. But I would point also to the overall coverage levels that we have, 1.2% on Stage 1, the over 18% on Stage 2 and a very strong 85% on Stage 3. On the second part on the FOL...

The FOL? As you know, the shareholders approved the general reassembly in March. So that's done. But we also have to get ready to be approved from the FCA, the Central Bank, UAE, Department of Economic Development and the DFM. So there's a whole bunch of regulatory approvals required. This is obviously a price-sensitive question. And as soon as we have all our approvals lined up, we will announce the market immediately.

We can now take our next question from Shabbir Malik from EFG Hermes.

My first question is on credit quality. I noticed there is some NPL formation sequentially. If you could please discuss what caused those increases in the first quarter? I noticed some increase in the corporate book and in the Islamic book in the first quarter. And related to that, your NPL coverage kind of slipped from the first quarter levels. So are you satisfied with the current coverage levels? It went up to, I think, around 120% and now it's, I think, come down to about 110%, 115%. So maybe if you can share your thoughts on your coverage levels. And just, I guess, some clarification on the TESS deferrals. You said that retail, for retail, the deferrals are up to -- for up to 3 months. And on the corporate, the deferrals are up -- for up to 6 months. I just want to level check those facts.

On the first quarter's numbers, you remember that we disclosed the market -- a particular name. I'll say it, it's disclosed, right? NMC, it was disclosed to the market. So that was the major one that you saw in the first quarter. On the coverage ratios, that's a dynamic ratio for us that we're always managing. So I sort of -- it's just about a rounding error of what the slip is from our perspective. And I think, please have a look at our coverage ratios compared to not just the UAE, but the whole region. I mean we're like massively above anyone else. So I sort of -- maybe you need to address that question at a few of the others. But I think for us, our coverage ratio is up very, very healthy of where they are. And we've been super conservative in building them up in the first quarter and additional on the second. So the -- I think we're doing as much as we can. Do we think there's going to be more coming at us? Absolutely. There's no doubt about that. And that's why we've been building those ratios up. So I think we're in a very strong position as we go into the second half to cover the problems that come at us. And we've been very conservative on how we've been building our buffers for that wave that we do expect to come at us in the second half. I think we're better prepared than I can see of anyone across the region. On the TESS deferrals on the retail side, if clients come back to us with proposals to defer out further that allows restructuring, we will certainly figure that. Because for us, yes, look, I mean let's think about retail. Some people have had their -- sorry, cut by 50%. Well, the easiest way is just to keep deferring, but that's certainly not our plan. Now the plan is we need to rebuild those repayment schedules for customers with their new reality as we move forward. So we will be looking at people who have had salary cuts to actually restructure their loans over a longer period so that they can afford the loans that they now have. So I think on retail, we will see quite a lot of restructuring as we go forward. But let's be honest. We're also going to see that on corporates as well. If you had a property portfolio that was yielding X and is now yielding less, therefore, we may have to kick out the tenor a bit to actually match the new cash flow profile of the company. I think you will see banks doing a lot of reprofiling of their customers over the next 12 months as the reality of lower cash flows reflects in their repayment capacity.

Okay. If we can just pause there with the calls. We've got a few questions coming in over the Internet, over the web. So I'll just pose those to Patrick and Shayne, and then we can carry on with any further audio calls. First question is from [ Itero ] at [ Seco ]. What percentage of loans have been deferred? And does the 0 cost funding offset this? Patrick?

Well, I guess I noted in the presentation that it was 15% in the UAE balances have been deferred or relate to customers' balances deferred, remembering it's less than 10% of our total customers. And sorry, the second part of that?

The 0 cost funding covers?

Yes. So the 0 cost funding by its very name means that there has been a benefit to the bank, which helps to fund the interest relief that we have provided to our customers.

Actually, I'll expand on that. No, it doesn't, is the answer. The TESS allocation of AED 6.9 billion, if you work out what we allocated as interest-free for our -- for 3 months for our retail clients and our micro SMEs, that is largely now expired. If you look at what that was worth in funding costs versus the offset in interest, it's actually a slight loss on that. So -- and we waive fees as well, et cetera. So don't get me wrong, TESS was extremely helpful from a liquidity position. But as importantly, one of the things that Central Bank is, their reduction in the cash reserve ratio also gave us a lot of our own liquidity back, which was frankly extremely helpful for the whole industry. It really did boost a lot of liquidity in there. So the combination of the TESS and the CRR was very positive from liquidity. But if you're asking just particularly on TESS, I'd say no, it didn't offset the loss of the 3 months interest waiver and fee waiver that we did in those first -- that first period. Now we are not now for loans that were interest free. We're no longer giving interest rate, right? So now as we move into the second part of the cycle as the economy opens, we are charging interest. But on the same token, we are offering to restructure clients to meet their new cash flow realities.

Thanks, Shayne. There was another question on FOL. Shayne has answered that. We don't have any further information to add to that. And Waleed from Goldman's asked, in terms of -- so the cost of risk has dropped in Q2. How should we read into this trend, Patrick?

Well, first of all, we did make very strong levels of COVID-19-related overlays in the impairment charge in Q1. So that set us up nicely. We have updated all the MEV. So there were additional ECL charges in Q2, of which was offset by recovery. So it's not one quarter makes a trend for the rest of the year. So it is going to be more into Q3 when we see the retail delinquency rates. And then, as I said before, the NPL's formation is more likely to be evident in the latter part of the year.

Okay. And what cost savings do we expect from the cost structure inflation exercise?

So in H -- in the first half, the cost base there includes the cost to achieve those saves. So the costs were even so slightly down Q2 over Q1 so the benefits from that will come through in the second half. I won't quantify that explicitly for you in the second half, but it will improve the cost base relative to the first half. Obviously, won't offset entirely the reduction in the income that would be relative in the second half to the first half.

Thank you. And a couple of questions from [ Elena ]. How many staff have been affected by the job cuts? Recently, there's a $605 million net fair value gain in OCI. Can you just elaborate about that?

Maybe it's on that second point. So through OCI or other comprehensive income, where there are certain debt instruments that have been fair value through OCI. So while there's dislocation in March and April, there was a recovery in prices, particularly in Turkey. So that's merely that revaluation gain that comes through reserves rather than the P&L.

On staff, you would have read the media reports where they said just over 800 staff. Obviously, we must be leaking because they were correct. So it's about that amount. And please remember, this is on top of about 500 we took out in the last quarter of 2019. You remember, when we discussed this before, we were unsure about what the economic activity would be looking like in 2020, and we wanted to rebalance our headcount at that time. Of course, we didn't know that COVID was coming when we did that. So we took about 500 out in the last quarter of 2019 and another 800 we took out in the second quarter. And as Patrick said, all those costs for redundancies were in those second quarter cost numbers.

Just another question from [ Elena ]. Do we have minimum Stage 1, 2 and 3 ECL coverage requirements?

No.

No. There's no regulatory...

The -- a couple of more questions. Do loans continue to move through stages if they are receiving forbearance?

So if there has been a credit event. So in the CIB side, if there's a downgrade in their credit quality, yes, they will go down through the stages, even if there has been deferrals on that.

And damage-paying revenues declined. What's the driver for this there?

Well, I think that's very similar to the rest of the group and probably the rest of the world. There was significant dislocation and disruption and lockdown from COVID-19. So inevitably, there's a lot lower high-volume activity. Turkey has also been cutting rates rapidly. In the short term, that actually helps their margin. Then, over time, the asset repricing catches up. So it's really no different from the rest of the group in that respect.

Marguerite, we're happy to go back if there's any further questions on the lines, please.

Sure. We have one more question from Jag Pasunoori from Franklin Templeton.

I see your CASA deposits have gone up and time deposits have gone down quarter-over-quarter. It seems you are confident about your liquidity situation. Can you please comment on that? And on the retail side, your assets went down like 13% quarter-over-quarter. And apart from lower card and private banking, is there any other reason behind these lower assets? And can you please provide some key metrics on Liv., your digital banking product?

Okay. So just the first one -- sorry, I'll put my microphone on. Just on your first question on the deposit mix. So as the interest rates come down on term deposits, as those come up for renewal, people will have a decision to make as to whether they retain that in a new lower interest rate fixed deposit for some time or it stays in CASA. So we are also able to retain CASA balances as well. So as we move -- improve that mix, inevitably, that also helps overall cost of funding as well. So that's real strength for the group being able to retain that CASA and not have to pay up for more expensive term deposits. In competition, it will be at that the ample liquidity in the market means there is lower pressure in that respect. I didn't quite get the second question there, though. Which product specifically was that?

I was saying, I saw that your consumer segment going -- I'm looking at your operational segment details. Assets were down 13%, 1-3 percent quarter-on-quarter. I was wondering why they were lower significantly.

So for retail, the actual loans themselves were down 7%. We present that on Page 15 of the deck. And that's principally credit cards and personal loans. So just lower balances. There's been a lot less spend in activity on those. And then that comes up to the monthly repayments. So you get a lowering of the balance. With the lower activity, we don't get to really renew that. So that has been shrinking in the short term. CIB has been growing as has the Islamic banking sector as well.

But the reality of retail banking, when you're outside is, you need to run fast just to stand still because the amortization within the portfolio means that if you're not booking loans every month, which we've slowed down to a trickle during the lockdown period, it means that you do need that volume to keep the balances up. So we did have a couple of months where our volumes are quite low. Just to give you some views of where are we on loan volumes at the moment because I think that's pretty important that U.S. analysts and investors know where we are. We're probably back at the moment to -- depending on the product, but average between the Islamic and the main bank up to around 75% of first quarter's volume. So it's been quite reasonable recovery where it's actually come back faster than we would have thought. So the volumes are, at the moment, are quite okay. And July is looking decent as well. So I think we are seeing some better economic activity and loan demand in the retail space versus -- there was hard to go and sell our credit card when you're in lockdown. So we did get a big drop in volumes, obviously, when the whole country was in knockdown.

Well, we have a few more questions coming in on the web. So let me just pose those to...

You have one more question on Liv., yes?

Yes. If you can provide some key metrics -- if you can provide some key metrics how the Liv. kind of performed in the second quarter?

Yes. Liv. continues to perform very well. As you know, it's -- the number -- our customer acquisition has been growing month-on-month, really. Even in Q1, as we mentioned, it continued to add about 10,000 to 11,000 new customers. Now during Q2, the strength of Liv. as indeed the strength of our digital bank, really came through in terms of customer's ability to open accounts, et cetera. What we've seen with Liv. is they've gradually expanded their offering in terms of credit cards now being available and some other loan type products. So Liv. continues to grow. The discipline we have there, everything has to be straight through processing. There can be no paper trail involved with that so it has to be complete straight through process. And so that discipline has to be there before we can open the product with Liv.

I think off the top of my head, it's 380,000 clients now, I think?

Yes.

Yes. Slightly down?

Yes.

Thanks. A couple of questions here. Patrick, in Note 25, we talk about the AED 49 billion versus the AED 53 billion. Can you just elaborate on that? And also possibly another question for Shayne. Do you see any opportunities for public funding given the Dubai World repayment? And Patrick, a question on MEV models. Do you anticipate more specific provisions in the future as we continue to update our assumptions, the MEV assumptions?

Maybe if I just call up the question first. Look, each quarter, we update the MEVs. If the economy and the forecasts deteriorate or improve, that changes the effective provisioning that you make. There's a baseline, an upside and a downside. So it is quite dynamic, so it will change, whether it's better or worse, you have to see quarter-to-quarter. And on the very first question, just the difference between the AED 49 billion the AED 52 billion. The AED 49 billion are the actual loan balances, and the AED 52 billion are the loan balances and credit conversion factors because as the exposure at default, it's not just for loan balances.

I didn't quite understand what the question is on the public funding Dubai World. What does that mean?

I think that we're elaborating given Dubai World has repaid, do you anticipate that there will be public funding opportunities?

As in government?

It's -- the question purely says public fund.

We haven't seen a lot of demand from GREs at the moment, for funding. So at this stage, I mean we have be involved in funding things like some of the privatizations of pipelines, et cetera. We haven't seen much else.

Yes. And if you look at the financial statements, you'll see that, actually, government lending has declined by about 0.5% since the beginning of the year. And as Shayne quite rightly pointed out, CRE lending is about 6%. And actually, we have about 6% of deposits coming from GREs as well. And that's been pretty stable over the last year.

Okay. The MEV question, Patrick? Oh, you answered that. Sorry, I beg your pardon. A couple of questions here. Shayne, would you consider a share buyback given your excess capital? And Patrick, one question. The driver for hospitality lending declining by AED 5 billion over the first half. I'll just look into that because I'm not aware of that number. So Shayne?

On buybacks. I think on buybacks, given where we are in the economic cycle, obviously, buyback is going to be a Board decision and not mine for a start. But certainly, my view will be, at the moment is, I'd rather have the capital cushions given more where we are on the cycle and the uncertainty as we look forward. So I think at this stage, we're comfortable with our capital, where it is. We continue to be conservative on how we build our provisions. And I think, I don't see, even in the short-term that, that would happen.

I mean just on that first question on the sectors, I mean, we do set out -- I mean, not only do we have it by percentage in our pie chart in the presentation, but on Page 13, Note 6, we set out the key sectors. And that hospitality sector is flat since the year-end. So it's certainly not AED 5 billion.

Yes. If you want to follow-up on that point, do please come through to me, but yes, we don't see any drop. I think we've answered all the questions on the web. Again, if you feel we haven't answered those, please fee-free to contact me. Marguerite, are there any more questions on the lines?

Yes, sir. We have a final question from Junaid Farooq from FIM Partners.

I have a question on the provisioning in the second quarter. So I'm just looking at the segmental breakdown, and I see that in the CIBG, the Corporate and Investment Banking Group, the provisioning number for second half -- for first half is lower than what it was reported in first quarter. It seems like there is a reversal because of -- potentially related to Dubai World. So I just want to understand, on the corporate side, excluding that one-off reversal, can you give some color on what kind of provisioning did you take in the second quarter? And if this provisioning in the second quarter is a function of how do you see the portfolio held? Or is it just too early? And hence you are comfortable with the provision you talked previous quarter and don't want to add to it.

Okay. So they don't have time for any more questions. I would now like to end the call. Thank you for joining today's conference. You may now disconnect.