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

Ladies and gentlemen, welcome to the Emirates NBD 2020 Full Year Results Call and Webcast for Analysts and Investors. Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should disconnect immediately. I'll now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD. Please go ahead, sir.

Thank you, Simon, and welcome, everyone. Joining me as usual are Patrick, the group CFO; and Paddy, our Head of Investor Relations. I'll run through the main highlights for 2020, and Patrick will discuss results in more do so and also talk about the guidance for 2021. Well, 2020 has been a year like no other. No one could have anticipated the level or the spread of -- or disruption of COVID-19 that brought to our personnel and our working lives. 2020 has been a defining year for Emirates NBD characterized by resilience, support and technology. The bank's resilience is evident on many fronts. Staff quickly migrated to a work-from-home culture in March before branches and offices started to reopen towards the end of Q2. The bank's financial resilience is also evident by delivering a AED 7 billion net profit. Which supports the proposed dividend similar to last year. Net interest income increased 8% as the inclusion of DenizBank for the full year helped offset against the impact of lower interest rates. Nonfunded income declined by 8% on lower fee-based activity and expenses grew by 9% as DenizBank costs were included for a 12 months full -- 12 full months. Operating profit declined 29% due to lower interest rates and transaction volume and higher provisions. The balance sheet has remained solid with stable credit quality and strong capital and liquidity ratios. We're aligned with the government of Dubai, UAE government and the UAE Central Bank to provide many forms of customer and community support. We provided interest and principal deferral relief to over 103,000 customers in the UAE and many more in other geographies in which we operate. The Central Bank's test program proved invaluable, not just for the banking sector, but for the entire economy. If you go back in history, financial crisis have not been a result of credit or capital issues but from liquidity stress. And the swift action by the Central Bank helped avoid liquidity stress, ensure that the UAE market has remained liquid throughout the year. As well as providing deferral support, we waived certain transaction fees during lockdown to ensure both customers and noncustomers could use our extensive ATM network safely and conveniently with minimum travel. We increased our charitable and social donations to AED 19 million last year, supporting many worthy causes that were affected by COVID. The value of our underlying investment in technology became evident in 2020 as most of our branch network closed during lockdowns, Emirates NBD continued to offer a full, secure, uninterrupted banking service to customers. We experienced an increase in a number of both retail and corporate customers who use digital banking. We continued to enhance our digital offering through new product launches for both our retail and corporate clients. Given the level of disruption the world experienced in 2020, I'm pleased with the strength and versatility shown by Emirates NBD. As we look forward, there are reasons to be optimistic. Vaccines are now being rolled out and with it brings hope for a safer 2021. There is greater optimism that economic growth return to the countries in which we operate. Irrespective of what 2021 brings, I know I have a proven management team, experienced staff, agile technology and a sound balance sheet to deal with any challenges and benefit from the opportunities that will present themselves in 2021. I'll now hand over to Patrick to go through the results in more detail. Over to you, Patrick.

Thank you very much, Shayne, and a very good afternoon to you all. I will walk through the full year performance for 2020, which is set out on Page 4 of the presentation and the fourth quarter's results detailed on Page 5 and update guidance for 2021 as we go through. So just starting with Page 4. Total income improved 4% during the year. DenizBank added AED 7.3 billion of income compared to AED 3.6 billion for the 5 months in 2019 following an acquisition. Net income improved 8%, while nonfunded income declined by 8% on lower fee-based activity due to COVID '19. Excluding DenizBank, net interest income declined 13% due to lower interest rate environment and nonfunded income declined by 19% on lower client activity. Costs increased 9% in 2020 with the inclusion of DenizBank for the full year compared with only 5 months inclusion in 2019. Excluding DenizBank, costs improved 6% as earlier cost management actions took effect. And the cost-to-income ratio for 2020 was 33.8%, broadly near long-term guidance. This was as expected, given the substantial fall in income not being entirely offset by management's proactive cost actions. These combined to deliver a 1% improvement in pre-provision operating profit. During 2020, the NPL ratio increased by 0.6% to 6.2%. The credit impairment charge of AED 7.9 billion a represents a 65% increase and has strengthened the coverage ratio by 5% during the year to 117.3%. We continue to maintain healthy coverage levels due to the uncertain credit environment. We expect the impact of COVID-19 on credit quality will not be fully evident until future quarters as deferrals roll off, and I'll elaborate on this shortly. Turning to the quarterly results on Page 5. All the quarterly results on this page include DenizBank and are unaffected by the network international disposal in the prior year, so -- are like-for-like comparisons. Quarterly net interest income fell 20% year-on-year due to the lower interest rates, but the decline over the previous quarter was only 2% as most of the interest rate declines have now fed through to the loan book. Nonfunded income was down significantly in Q4 due to lower foreign exchange derivative P&L from hedging and money market swaps. Costs improved 18% year-on-year due to cost management initiatives. Costs in the fourth quarter increased 13% due to the completion of cost management initiatives and seasonality. The seasonality is expected as the bank investment marketing campaigns and other initiatives as we head into the new year as we have seen in prior years. Credit impairment provisions were 24% lower year-on-year for quarter and 27% lower quarter-on-quarter, reflecting having taken substantial action on provisions in the prior 3 quarters. As we have stated before, we have a strong coverage, which allows us to adjust provisions as economic activity and health of the loan book evolved in the coming quarters. Turning to the balance sheet. Net loans has now grown by 1% during 2020 and deposit balances are down 2%, mainly due to lower DenizBank deposits when translated into dirhams. We are guiding for low- to mid-single-digit loan growth in 2021, in line with expectations of higher GDP growth this year. As Shayne mentioned, system-wide liquidity remains healthy as reflected in the bank's liquidity coverage ratio of 165% and the advances to deposits ratio of 95.6%. We have a strong diverse funding base, which we have used to support customers through these challenging times. Just turning to Slide 6. We see that we finished the year with a net interest margin of 2.65% at the top end of guidance and as we indicated in the Q3 results call. This does include a 23 basis point contribution from DenizBank. Lower interest rates had a 140 basis point adverse impact on loan spreads. This was partially offset by a 93 basis point improvement in the deposit and funding costs. Looking at the quarterly margins on the chart on the top right, we see that loans declined by 6 basis points in the final quarter to 2.42%, 6 basis point fall in NIM is less than the 20 basis point decline in Q3 and 34 basis point decline in Q2, reflecting that most of the client in EIBOR rates happened in earlier quarters and lower rates have now largely fed through to the loan book. Entry points NIM, it's 2021, is 2.42%, and our full year guidance of 2.35% to 2.45% suggests, but we anticipate that NIMs will stay roughly in the vicinity of our entry point. There may be some short-term pressure on NIMs in the first and second quarter as the needs, liabilities reprice at the recently announced higher rates. We have incorporated that into our guidance. The rise in rates was welcome to stabilize the Turkish lira and combat inflation, but in the near term, it does compress interest margins. Excluding DenizBank, margins would have finished at 242 basis points for the full year, that the 23 basis point contribution from DenizBank lifted margins to 265 basis points. Turning to Slide 7. We see that the bank continues to operate with strong liquidity. We have over AED 100 billion of liquid assets, which cover 16% of total liabilities and 22% of total deposits. The liquidity coverage ratio was healthy at 165, while the advances/deposits ratio finished the year at 95.6%. We have not seen any material increase in the EIBOR rates towards the end of Q4. Indeed, Q1 -- sorry, 1- and 3-month EIBOR rates only moved by 2 basis points during the fourth quarter. It's a good barometer for interbank liquidity and indicates that banks are not aggressively paying up for liquidity over the year-end. The liquidity measures included in the targeted economic support scheme and extended by the Central Bank of the UAE until mid-2021 have helped ensure orderly and stable liquidity in the UAE banking sector. We have been busy raising term funding, taking advantage of favorable conditions. In 2020, we issued AED 18.4 billion of term debt in 7 currencies with a 9.9-year weighted average life. This included 3 benchmark senior public bonds and sukuks as well as refinancing last year's maturities. It covers around 40% of this year's maturities. We continue to refinance while there's strong appetite. Earlier this month, we were the first Middle East bank to access the capital markets with a $750 million 5-year bond issue. With this, Emirates NBD achieved its tightest ever spread for a benchmark issue. And in December, DenizBank successfully rolled over a AED 780 million syndicated loan, attracting 42 investors from 20 countries. Just turning to Slide 8. On the bottom right of Slide 8, we see that while deposits are down 2% over the year, this is largely due to movements in Turkish lira. Emirates NBD deposit base grew by AED 6 billion. Whilst in local currency terms, DenizBank grew its deposit base by 8%. Emirates NBD's deposit mix continued to improve in the fourth quarter, with CASA growing by a further AED 12 billion. During the year, CASA grew by AED 37 billion, more than offsetting the AED 31 billion burn reduction in fixed deposits. Our ability to grow CASA last year was a function of some specific internal initiatives and other external factors, successful marketing campaigns and strong digital adoption helped the bank attract new CASA and low interest rates, strong liquidity and less spending have contributed to a market-wide increase in CASA. As the economy recovers, we may see CASA behavior change, increases in spending and more investment in inventory may moderate future CASA growth. CASA, across the entire group, represents 52% of deposits, with domestic CASA for Emirates NBD increasing to 60%. Gross lending increased 3% for the quarter. Within that, retail gross lending grew 4% due to higher demand for personal loans and mortgages, while corporate lending grew by 3% and Islamic financing growing by 7%. DenizBank's gross loans and deposits grew by 20% and 8%, respectively, in local currency. That declined in dirham terms due to the currency depreciation. The pie chart, just on the bottom of left there, shows the sector profile of the loan book, highlighting the bank's success in improving diversification in recent years. Just turning to credit quality on Slide 9. As mentioned earlier, the NPL ratio increased slightly from 0.6% to 6.2%. It is still too early to predict the high-tide level that NPLs will rise to. But in anticipation of some further weakening in credit quality, we continue to maintain strong coverage levels. Coverage has risen by 5% to 117.3% in 2020 as the bank took over AED 7.9 billion in impairment allowances. Net cost of risk increased during the year to 176 basis points on high expected credit losses from 117 basis points in 2019. DenizBank continued to boost its coverage, recording net cost of risk of 383 basis points in 2020. Emirates NBD's comparable cost of risk, excluding DenizBank, was 114 basis points in 2020, which increased from 91 basis points in the prior year. You will see that our impairment allowance in Q4 of AED 1.6 million is lower than the average allowance of AED 2.1 billion for the previous 3 quarters. The bank was proactive in the first quarter of 2020 in taking ECL allowances in the face of economic uncertainty. We have maintained a strong coverage throughout 2020. So just turning to Slide 10, we provide some more detail on the levels of Stage 1, 2 and 3 coverage. The chart on the top right shows the Stage 1, 2 and 3 impairment allowances have grown by AED 5.8 billion during 2020 to AED 35 billion in total. Stage 1 coverage remained stable at 1.1% on 88% of total gross outstanding loans. Stage 2 ECL allowances increased by AED 2.1 billion to AED 5.7 billion, increasing the Stage 2 coverage to 21.1% on 6% of gross outstanding loans. Stage 3 ECL allowances increased by AED 3.8 billion during the year, giving a Stage 3 coverage of 85.7%. Just on the bottom left of that page, I have included some additional information on staging of customers who have benefited from repayment deferrals. It shows that of the AED 54 billion of exposure to customers who've benefited from forbearance, 83% is classified as Stage 1, 14% is classified as Stage 2 and 3% classified as Stage 3. On a net basis, only 2% of customers have moved from Stage 1 to Stage 3 since June 2020 when we first provided this disclosure in our financials. Further information of staging and grouping is contained in Note 49 of the financial statements. And at the end of 2020, we held AED 5.2 billion of zero-cost funding, which is supporting AED 5.2 billion of customer repayment deferrals. Through the year, we have provided deferrals on AED 9.2 billion of payments to over 103,000 customers and received AED 4 billion of repayments. The Central Bank continues to provide support to the UAE's economic recovery, particularly with the extension of the zero-cost funding window to June 2021. And we will, in turn, continue to support customers based on their individual circumstances. Just with that, I'll now hand over to Paddy to take you through the remaining slides.

Thanks very much, Patrick. Slide 11 shows that core gross nonfunded income for 2020 declined 2% compared to 2019 due to lower client activity. Core gross income for the fourth quarter declined 33% over the previous quarter, mainly due to a sharp rise in interest rates in Turkey in Q4. Derivative income was also lower as the bank took some hedging action to minimize risks from interest rate volatility in 2021. Following the AED 200 million recovery in fee income in Q3, there was an AED 80 million drop in the final quarter. Fee income is still up 12% on the Q2 low point, with the small decline from -- in Q3, a result of fewer big-ticket items happening in Q4. Income from investment securities was lower as Emirates Islamic revalued its investment portfolio. On Slide 12, we see that costs for the fourth quarter improved 18% year-on-year due to cost-management initiatives and the FX element from DenizBank's cost base. Costs increased in the final quarter by 13% over the previous quarter due to the completion of some cost-management initiatives and seasonality. This seasonality is expected. And as we've seen in prior years, the bank invests in marketing campaigns and other initiatives as we head into the new year. As a result of the seasonality and cost, coupled with lower income, the quarterly cost-to-income ratio rose to 41.5%. Cost-to-income ratio for 2020 at 33.8% was broadly near long-term guidance. This was expected given the substantial fall in income not being entirely offset by management's proactive cost actions. So we've raised 2021 cost-to-income guidance to 35%, although management still focused on a lower long-term cost target of 33%. The higher guidance has been realistic about the impact on income from a rapid fall in rates and the longer time taken to realize the impact from earlier cost-management actions. And the bank remains firmly focused on efficiency and controlling costs. Slide 13 shows that the capital ratio has declined by 0.6% in the final quarter of 2020 due to allowance for the proposed dividend of AED 2.5 billion. The AED 1.3 billion of retained earnings in Q4 offset the 2% increase in risk-weighted assets. The proposed dividend of AED 0.40 represents a 40% payout ratio. After adjusting for dividend, the capital base grew at a faster rate than the 4% growth in risk-weighted assets in 2020, meaning that there was a 0.3% improvement in the common equity tier 1 ratio and a 0.6% increase in the Tier 1 and capital adequacy ratios during the year. The higher increase in Tier 1 and CAR is due to the Tier 1 capital management exercise conducted mid-year. The reported capital ratios include an add-back for incremental Stage 1 and 2 ECL allowances as permitted by the UAE Central Bank. That improves the capital ratios by 0.5%. TESS offers banks relief on capital buffers until December 2021 were both supervisory consequences. And Emirates NBD current minimum common equity Tier 1 ratio is 8%, and the minimum requirement for the CAR is 11.5%. And even excluding the add-back, Emirates NBD's actual capital ratios are at least 6.5% higher than these new minimums. Turning to divisional performance. On Slide 14, we see the RBWM year-on-year revenue fell by 5% due to lower fee income as volumes were impacted by lower activity due to COVID-19. Customer advances grew 2% and deposits grew by 8%, supported by a successful marketing campaign. Full year cost-to-income ratio for RBWM improved by 1.4% to 26.4%. Emirates Islamic's total income declined 22% year-on-year due to the impact from COVID-19 on business activity. Financing and investable receivables grew by 9% while customer accounts increased by 3%. EI has a healthy 68% of deposits coming from CASA accounts. EI returned to the capital markets with a successful $500 million 5-year sukuk issue during the third quarter of 2020. On Slide 15, we see that the corporate and institutional banking income fell by 5% year-on-year due to a 4% decline in net interest income on lower interest rates that was partially offset by growth in lending activity. Nonfunded income declined by 7% year-on-year as higher investment banking activity partially offset lower lending fee and trade commission income. Loans grew 2% and deposits increased by 13%. Global markets and treasury revenue declined 170% as net interest income was adversely impacted by lower interest rates. Nonfunded income was also lower as the bank took action to minimize the risk from interest rate volatility in coming years. The credit trading desk delivered a strong performance, and the sales desk have been working closely with customers to explore beneficial opportunities for customers in this low interest rate environment. Slide 16 shows that DenizBank contributed 7.3 -- AED 7.3 billion in revenue and AED 1.4 billion of net profit to the group's performance. As Patrick mentioned, DenizBank continues to take significant provisions to boost its coverage level with a 383 basis point cost of risk last year. Margins were broadly stable during the fourth quarter of 2020 at 4.27%. However, DenizBank may see some margin squeeze in the first quarter, possibly second quarter, as recent rate hikes feed through to the funding book before loans eventually reprice. The improvement in DenizBank's NPL ratio during the year is partly due to loans growing by 20% in local currency terms and the credit performance of newly originated business remaining healthy. With that, I'll pass you over to Shayne for his closing remarks.

Thank you, Paddy. The bank delivered a net profit of AED 7 billion and a dividend of AED 0.40 per share is recommended, representing a 40% payout ratio. Total income contribution from DenizBank helped to offset the decline in net interest income from lower interest rates and lower fee income due to the impact of COVID-19. 2020 NIM closed at 2.65%, the top of that guidance. Q4 NIM was 2.42%. And we expect NIM to finish 2021 at a similar level in the 2.35% to 2.45% range. Nonfunded income declined during the year due to lower client activity. However, we did see gradual improvement in volume. In 2021, we expect low to mid-single-digit loan growth. We have maintained strong coverage service through 2020. So far, the bank's risk profile of those customers, as stated before has not had a material deterioration. I expect to see our higher cost-to-income ratio in 2021 due to the rapid decline in the interest rate and a more gradual impact from previous cost-management exercises. The cost-to-income ratio should revert to normal level in subsequent years. Credit coverage ratios remained healthy and both liquidity and capital ratios remained strong. We have provided support to over 103,000 customers in the UAE and many more in other geographies in which we operate. In addition, we have waived certain fees to individuals and businesses to help cope with this disruption. We have experienced an increase in number of customers who are using our digital platform as the investment in technology continues to bear fruit. And finally, we are well positioned to support our customers to take advantage of anticipated growth opportunities in the coming years. And with that, Simon, I can open the call for any further questions. Thank you.

[Operator Instructions] I will now move to our first question over the phone, which comes from Rahul Bajaj from Citi.

This is Rahul Bajaj from Citi. I have [indiscernible] actually. So firstly, I see that the Group 2 loans, which are under [ different ] have grown quarter-on-quarter in fourth quarter by almost 60%, 6-0. And group 1 loans, the exposure of -- the gross exposure is flat quarter-on-quarter. So just wanted to understand why are Group 2 exposures going higher Q-on-Q. I mean are there new loans which are being deferred in the fourth quarter? Or how should we think about it? So that's my first question. The second question is on the dividend policy. And we've seen a good jump in the dividend payout ratio this year in 2020. How should we think about going forward? I mean the 40% kind of payout ratio that we've seen in 2020, should we think about it as the new normal going forward? And does this -- I mean, given the fact that the management team is now comfortable with the sort of capital buffer that Emirates NBD has reached? So any comments there would be useful. And [indiscernible] I mean, if you have it handy, I recall you mentioned about coverage ratio for the Turkish business during the previous call. Just wanted to understand where we are at the end of the full year in terms of the DenizBank coverage ratio and what's the target there.

So it's Patrick Sullivan here. I'll take the first one. So that's on Group 2 then dividend policy. So just on your Group 2 point, I think you're looking at Note 49k Page 109, where the Corporate Group 2 went up from about AED 0.6 billion at Q3 in total and has gone up to AED 1.4 billion. So that really -- the Group 2, that is the migration and has an equivalent migration of names into Stage 3 as well. So you can see, even on an IFRS 9 basis and perhaps more useful to look at the IFRS 9 staging of it because that then ties right back into the accounts, and you can see our Stage 3 did go up AED 1 billion in the quarter for the actual allowances made against the AED 1.4 billion increase in Stage 3 loans. So -- and that's set out on Page 9 of the deck we have just been through. So that's substantially what that movement is. So the Central bank grouping is another way of looking at the staging. So Group 1 is all of our IFRS Stage 1, and Group 1 also then includes an element of our Stage 2 under IFRS, where there's been no credit deterioration since the deferral period started, whereas the Group 2 splits that Stage 2 and includes an element of Stage 2 where there's been a credit deterioration since the deferral period started. So in other words, something that was in Stage 2 has then gone down to Stage 3, which is also in Group 2 as well. So you've got that sort of migration dynamic happening. Just on your second point on the dividend. The -- we don't have a dividend policy per se. We had earnings per share of exactly AED 1 per share this year. The Board is proposing a dividend of AED 0.40, which is 40% dividend payout ratio. Last year, the dividend payout ratio was a bit lower given the bottom line profit included the gains from the Network International sale. And that I think if you look back at our dividend history, you can broadly see what the payout ratios have been in the past, but the dividend decision itself is run from year-to-year that the Board and then the shareholders approve at the AGM. And forgive me, what was the third part of your question there?

The third part was on the DenizBank NPL coverage. What was the coverage at the end of the year? And additionally, do you want to bring it further up? Or you think you have done pretty much in terms of propping up DenizBank's coverage?

Did you say DenizBank?

Yes, DenizBank coverage ratio.

DenizBank. Oh, okay. Yes, yes. Okay. So each quarter that we have been reporting through this year and, indeed, since the DenizBank acquisition, we have been indicating quite clearly that we're very comfortable running a higher cost of risk in DenizBank. We wanted to bring up their coverage ratios. The coverage ratios in our external accounts becomes a little bit more complicated because of the acquisition accounting that offsets their pre-acquisition provisions against the opening carrying amount that we book, but they have indeed been building up their coverage ratios, and they've made a very good progress over the year. So we're getting quite comfortable with DenizBank. And they should be able to run a slightly lower cost of risk through the coming year.

I think there was a question online that's similar to that, so maybe I'll answer that one with around the coverage ratios. And I think you can all actually pull out DenizBank's numbers because they're published as a requirement from the Central Bank there. It's fair to say, I think, when you do your comparison of Deniz now compared to when we acquired it, it's very close to, if not, industry-leading coverage ratios there as we have here, I mean, we're the leader in coverage ratios in this market by a long way. And Deniz will be at the top of that tree or, pretty close to it, I think, when we end up getting the comparisons for the industry there. So I think we also had the capacity to do that. I mean it's fair to say that Turkey was a roller coaster this year, Europe interest rates, the economy, et cetera. But at the end of the day, the business there delivered about just close to AED 1.4 billion profit. So a very good result in difficult circumstances. But because their revenue was so strong, we pushed -- the coverage ratio is much higher than we actually anticipated when we did the budget because they have the capacity to do it so I think it's in a good place. Will I see coverage ratio -- would I see a need to increase other than as required by deterioration? I don't see that it will need to do substantial amount of increase in coverage going forward on them. The book there -- I think I made the comment last quarter, what we found in the due diligence pretty much reflects what the result is right now, except that the ones that we knew were a problem have got probably a bit worse, given COVID and the economy and lack of tourism there. So I think we had identified the majority of the problems by far. And some of it, we just need to top up from what we originally envisaged.

We'll now move to our next question over the phone, which comes from Chira Ghosh from SICO Bank.

This is Chira Ghosh from SICO Bahrain. I have a couple of questions. My first one is related to how long does it take for the bank to pass on the higher interest rates in Turkey? Just want to get a sense. And in that sense, if you can also compare it versus UAE. So how long does it take for the interest rate, I guess, to get passed on? That's one. And second one is there were media posts of ENBD's looking for...

My apologies. Your mic is sort of breaking up a bit there. Would you mind repeating that question? It was sort of intermittent.

I'm sorry. I didn't get the question.

Is it better? Or it's still bad? Is it better?

Have a go.

A little bit -- try. Speak slowly, please.

Yes. Okay. So my first question is, so when the interest rate cycle goes up, how long does it take for you to pass it on in your Turkey operation? And if you can give your perspective versus how long does it take in UAE market just to get a better sense? That's my first question. Second one is the media reports that ENBD is after -- were looking to take additional position in Egypt through BLOM Bank or Bank Audi. I don't know whether you can comment on that or not, but I want to get a sense whether you are still looking for more opportunity in the Egyptian market. These are my 2 questions. Sorry. And the third one is a short one about the foreign exchange income. So did you say it was low because of the Turkish operations?

Okay. Perhaps I'll take the first and third question and then hand over to Shayne in respect of Egypt. Just on the repricing in the portfolios when rates change, yes, very different dynamics between Turkey and the UAE. In Turkey, you may recall, if you had been joining our previous calls, as interest rates were falling in Turkey, in the short term, that was improving their interest margins because their cost of funding was reducing faster than the loan repricing downwards. There has been a significant rate rise in Q4, going from 8.25% to 17% through the fourth quarter. And so the converse is true, where the cost of funding goes up quite sharply, and that is a very sharp rise in anyone's books. And yet, it then does take some time for the assets to reprice up after we cover that off. So there is a timing difference. So we will see that impact really come through -- partly, it's already come through in the Q4 results when you see DenizBank's nonfunded income was down significantly, but also then through the first half of next year -- sorry, this year, 2021, we will see that come through as the assets then reprice through various vintages through H1, it should then turn around. And in the long term, higher interest rates are better for banks. There are wider spreads, et cetera, but that will take time. And so we really only see that benefit come through in the second half of the year. In the UAE, with our very strong CASA base, as you have seen in our top line, as interest rates cut really significantly at the end of Q1 and then the market rates coming down through Q2, that comes through very quickly to our portfolio because of the pricing profile on the liabilities, where, once it's gone, there's no way to cut when you've got a lot of your deposits are in CASA, whereas your asset is then repricing relatively quickly down as well. So it's quite 2 different dynamics there. So maybe I'll hand over to Shayne for the Egypt question.

Just to add on to what Patrick was saying before, I mean, if you look at the way our liquidity is positioned and the growth of CASA, if rates start to increase at the tail end of '21 or into '22 with U.S. recovers how we think it should and we start getting inflationary pressures, it's a significant upside for us given our deposit mix as U.S. rates translated to EIBOR here. So I think we are positioned for that. The last cycle, we increased our profitability substantially because of that. Unfortunately, conversely, when rates drop like a brick with COVID, it does have a material impact on our profitability. On Egypt, I would say, this is the third time we've been bidding for an asset or a bank in Egypt since we bought Banque Nationale de Paris. We've made no secret that we are very interested in bulking up in Egypt. For us, it's been a very good market. The returns that we've had on that acquisition have been very strong. We're very happy with that economy and the management we have there and the customer base we have there. But if you look at Egypt, it's a very fractured market. I mean there's not many banks that have more than 2% market share. And there's a lot of banks. We would like to be part of that consolidation play that we think is necessary there over time. However, we're also very disciplined about what we'll bid for and how -- what price we'll play. Three times we've walked out because of price. The [ boycott ] has been insufficient against other players. We'll continue to be disciplined. We want to generate shareholder value. And the worst way to destroy -- sorry, the best way to destroy shareholder value is actually overpay for acquisitions. As we demonstrated when we bought Deniz, we bargained like hell for a long time to get the price that we thought that we could deliver value to our shareholders, and we'll continue to do the same in Egypt. But I would confirm Egypt makes or remains an attractive market for us, and we would like to be bigger in Egypt.

Just the last one about the FX income was weak in the fourth quarter. Was it due to the sharp rise -- you said something.

Yes, yes, yes. Sorry, yes. Yes. Okay. Now just on that, that is very much connected to the sharp rise in rates in Turkey in the fourth quarter. So in DenizBank, we have a very strong foreign currency deposit base. We do use some of that to then fund Turkish lira lending. When you swap those over and the rates go up, you'll essentially get that increase in funding costs. And because you're doing it through derivative, that -- essentially, that cost of funding differential then goes through your nonfunded income line and derivatives, et cetera. So that's really what's driven that in the fourth quarter.

So hopefully, it will not get repeated most likely?

Sorry. What was that?

I think so -- so under the interest cycle... [indiscernible]

Paddy, shall we move on to some of the questions that I think we have coming through on line there?

Yes. Certainly, Patrick. There is a question, which I'll pass over to Shayne. But before I -- the question is on whether we intend to start our own payment processing company after the disposal of our [ endo-share ] and now we're going to do Network International. Patrick, there's also a question if you could answer on our reserves and the potential for release from those. Before you answer those, I'm just going to clear a couple of the other questions. So there's a question on why is it that there's a difference in balance between our exposures on Page 109 and Page 111. That's due to one of them being defined as exposure at default. And Patrick mentioned that before, exposure at default are outstanding balances after taking account of limits credit conversion factors and expected drawdowns. So there is a slight difference between current actual exposure and exposure at default. Question, another question on the coverage ratio, including collateral, including collateral coverage ratio is at 204%. Question on why the Common Equity Tier 1 ratio dropped by 60 basis points. That's aligned for the proposed dividend. And I mentioned that there was AED 1.3 billion of retained earnings, which offset the increase in risk-weighted assets. So the 60 basis points you see there is effectively the allowing for the proposed dividend. A couple more questions before I pass back to Patrick and Shayne. In terms of ESG disclosure, we do publish an annual CSR report, and our marketing team are working on further -- doing further work in terms of our ESG credentials. Obviously, that is a bank-wide and a group-wide effort rather than driven by one individual department. So that is a considerable exercise that is going on within the bank. And then a couple of more questions on DenizBank's nonfunded income. Patrick's already addressed that. And question, one more, percentage of deferral portfolio, which is likely to turn into Stage 3 versus Stage 2. Patrick has mentioned -- he gave those on Page 9. He gave some information about that. So far, we've actually -- so for the first -- for the last 6 months, we've actually seen a modest migration from Stage 2 to Stage 3, okay? So Shayne and Patrick, if you want to answer those other questions?

Yes.

On the Pro's in the company yet, how do you disclose the Network International Prospectus with their IPO? as the question. Yes. On the payment precision company, as was disclosed in the Network International prospectus with their IPO, we are contractually obliged to Network International. So the contract, that's fully disclosed there. So starting a payment processing company, no is the answer. Revisiting our payment strategy, we are doing at the moment because I think, as we move forward, there's a difference between processing and a difference between actually payments themselves. So I think we are doing a strategic review of payments because, to me, payments in effect and the facilitation of payments are critical to managing our cash flow. So the customers' cash flows for CASA. So we are certainly doing a big strategic review of our payments versus processing. And if you look at most banks in this country, they may be acquirers. So they may acquire customers, but the processing is done by someone else. It's a rarity that the banks are actually doing the processing. And so it's an economies-of-scale game, payment processing. And there's particular companies around the world that just specialize in this, and they're very good at it.

Okay. Thank you, Shayne. There's a question online here around the IFRS 9 reserves that we have grown significantly through the year. When would we think we'd be able to release some of these provisions? Is this -- is after the expiry of TESS a possibility as this is still a key uncertainty? Look, we build -- we've been quite proactive about our provisioning through the year. There are really 2 parts to it. One is the Stage 1 and 2 modeled ECLs or expected credit losses. And the second part is Stage 3. Just on the first. In Q1, we actually had a very strong overlay at a point when banks weren't really able to update all the macroeconomic variables. We have since done that and returned to a modeled approach for that. As some of those macroeconomic variables go up and down, you then see sometimes charges and sometimes releases. So that depends on things like GDP, oil prices, the housing market, employment, et cetera. So that's a model, and that will go up and down. That's just a part of living with IFRS 9 is that volatility. On the Stage 3 part, we have a very good track record of maintaining strong coverage for that. We would only really release those provisions when we have recovered the provisioned elements and then working through that. So it is not like we have built up provisions that can then just be released at one go. There is that point about some of the uncertainty about what will happen when TESS comes off. TESS, itself, is zero-cost funding, but we are then providing that support to our customers and clients. And yes, we will get a better idea on the corporate side as we work through the first half. But I should point out, as I noted earlier, we have provided about AED 9.2 billion of support and of that, had a substantial AED 4 billion coming back. So we'll just -- we will update when we come back to Q1 and Q2 on that. And that will be more a function of how the NPL formation is looking.

There was a question on Emirates Islamic. Can we comment on its performance in 2020? I think there's really 2 factors here. You remember that, in the public record, so I can disclose it, that Emirates Islamic was the entity that had our NMC exposure in it. And we've been quite conservative on that exposure. Obviously, you can't talk about provisioning levels, so we have been conservative on it. . They had the lion's share of NMC exposure. There was very little in the consolidated -- sorry, in the main bank. So that is fit into their line there. And additionally, we took quite a big impairment on their investment portfolio. We took the opportunity to write that down quite aggressively. The underlying performance, especially in the retail bank, was actually pretty good and mirrors the performance of the retail bank. And bank, that was quite a strong performance in 2020, given the circumstances. And I think they'll continue to grow market share in that Islamic space, in retail, private banking and the priority banking equivalent. So I think the underlying is much stronger than the results, but it's largely because of those 2 factors, the NMC provisioning and the write-down on investment.

Patrick, before we take some more questions from the call, there's a question here on whether we expect the NPL to -- any increase to be biased in the second half, really, with the roll-off of TESS. And also S&P are expecting higher provisions for UAE banks in 2021. Given Emirates NBD's provisioning buffers, would you expect our cost of risk to be below last year's cost of risk? Or should we wait for 2022 for this to be lower?

Sure. Okay. Just the part of the bias between H1 and H2 for 2021. With IFRS 9, as and when a customer or client has a downgrade, we then do move that through the staging. There are some things in Stage 1 or 2 now, and there is a credit event, and we assess that. And if need be, that will then go down to the NPLs in Stage 3. In the corporate space, to the extent corporate does not have to make a repayment that was scheduled, the ultimate test of whether or not they will repay is seeing the cash. So there will be an element of that where the NPL formation through into the second half will be more of a function of what happens after some of that test support comes off. Having said that, the test support is really helping to prevent credit losses in that it does give our customers and clients both in retail and in the corporate space, time to repay and some of that time reflecting an improvement in the economy and let their businesses get back up on their feet as well. So if the support was cut off either straightaway when payments were due last year or even now, that would have a more negative impact. So it really is a positive thing that some of that support is -- continues to be given to our customers. Just on the cost of risk, we have been quite aggressive on the cost of risk through this year, both in DenizBank and the rest of our footprint portfolios as well. There should be no surprise. Most banks, internationally, are doing that. We hope we have done enough at this point in time for the events that we know of. So all things being equal, we would be looking for a lower cost of risk next year, but still somewhat higher than, say, the 2019 level, where we landed around at 117 basis points.

Thanks, Patrick. Simon, are there any more questions on the line?

Certainly, sir. We'll now move to our next question over the phone, which comes from Naresh Bilandani from JPMorgan.

It's Naresh Bilandani from JPMorgan. Just 2 questions, please. So first of all, thank you very much for providing the extra color on asset quality. I'm just keen to understand, say, Patrick, as you just mentioned that 2021 cost of risk could potentially trend slightly lower compared to 2020, but say higher compared to 2019, that's kind of like, in effect, saying that there will be some level of moderation this year. So if I look through a bit more into the medium term, I'm just keen to understand what will NBD's strategy be. If in case we see an elongation of the credit cycle, the credit asset quality stress beyond the current expectation, would you, from a strategy perspective, make use of the excess provisioning for a bottom line or an ROE perspective? Or will coverage be your first target and you will continue to maintain an elevated level of coverage despite the comfortable collateral that you have as compared to your peers? So just trying to understand whether we will see a reduction in the overall coverage levels closer to your peers or you will maintain an ample coverage level, even if we continue to see a stress on the asset quality cycle. That's my first question. My second question is mainly on the digital banking side on Liv. If we could please have an update of what was Liv.'s performance through the course of 2020, mainly from market share or customer acquisition perspective? And just keen to hear from Shayne also, with the fact that there's rising competition in this space, we are about to see emergence of the new player from Abu Dhabi, just trying to understand what will Liv.'s strategy be through the medium term for growth or market share perspective.

Shayne, maybe I'll take the first one, if you want to take the second one. So Naresh, I think what you were asking is, in a year or 2, are we likely to see a great big release of provisions if the book doesn't get any worse, and will that then give a boost to capital and returns, et cetera. Correct me if I'm wrong on that. Look, for the time being, thinking beyond a year or 2 from now, I think that's perhaps a bit premature. I think we need to work through what's in front of us today. But we are working to form where there are credit events, and we have some concerns about a name, we will make the appropriate provisions. You then have to put that through to the recovery teams and work those loans through. That can take some time to do that. Yes, Paddy just noted before that actually, our coverage, including collateral, is also very strong, and that is factored in, in the recovery process as well. Also, over time, the mix of the book will change. So we will recover some, and then there'll be some more that may need to go into Stage 3. Obviously, we keep you updated quarter-to-quarter. But at this point in time and just the uncertainties out there, we're not sitting on large surplus provisions that would be releasable in a year or 2. We would be delighted if, eventually, that became the case, but that is not the expectation at this point in time. Shayne, could you...

I think -- let me add to that, Patrick, I would say, when you're looking at securities, an interesting one, but we -- I wouldn't say we ignore, but we significantly ignore it, given you're in a market where property is not easy to sell at a reasonable price, and you're doing an NPV on those property values, hence, why you end up taking a significant amount in coverage ratios if you're being prudent. So I think that -- do I see us dropping our coverage ratios to meet the market? Frankly, I would hope that I'll see other banks increasing their coverage ratios to close the gap on us because I think we're being very prudent in how we've managed it. On Liv., it's now got over 400,000 customers. I won't tell you how much money it makes, but it does make money. So to be profitable for a digital-only bank is just about exceptional globally. Where do I see it growing? We have launched it in Saudi. We would love to launch it in Egypt. We are investigating to launch in Egypt. So as a platform, it's proved very good for us on customer acquisition. And remember, one of the reasons that we launched Liv. because we had a missing demographic in our customer base. We had a shortage of youth, up-and-coming executives, et cetera. We didn't have that demographic heavily in our portfolio. So that has filled that gap, and it's done it well. I think the next progression for us is really getting straight through loans on to Liv. I think that's an important thing. If you look at a lot of the digital banks around the world, the issue they have is they're deposit-heavy and loan-light. And therefore, their capacity to make money is inhibited. And certainly, that's what we're doing with Liv. We're starting putting our leaning propositions on there. And that's actually quite interesting because to me, what we want to achieve at Emirates NBD as in here and at Liv. and at EI is a lot of straight-through digital loans. And I think that is -- that sounds easy. But actually, until you get the digital transformation that we're going through at the moment, that is not so easy. Because customers want -- they want to key in their own loan information and they want an answer immediately and they want the funding immediately. That's not an easy technology piece or risk piece to do. We're quite advanced in getting some of this stuff done. But I think it also makes a huge difference to your cost base. Now you would think about what banks traditionally do around the world is, the market starts improving, the economy starts moving forward, customer demand becomes tight. We all go out and hire a whole bunch of new salespeople, the middle offers, the back offers and then the economy turns and then we fight, fight, fight to get back to the required cost-to-income ratio, improve it. It's just like a wheel with cogs. We keep going round and round in circles. What digital loans will enable us to do, and some of the best banks in the world are doing like 50% onboarding, that -- we'll be able to, one, reduce our cost structure; and two, give us that financial flexibility in how we invest. So I think the next drive for us on digital is really going to be around loans. Deposits are much easier. Obviously, I think the important thing for me on Liv. was, besides the demographic and the customer acquisition, it was the experimentation capacity that it offered us. So online accounting, that started with Liv. A lot of it is [ sandbox ] we use, we started with building. So it gives us a really good experimentation platform to use it, understand this stuff and are probably a lot more sympathetic to it than some of our other client base. So I think we're very happy with how it's progressed. Competition, we're always open for competition. We do have a head start on the competition. We'll see what offerings they've got when they come along. But we have built -- we're now about 85% cloud-native, right? By the time we get to the year-end, will probably impact the third quarter of this year, we should be 100% cloud-native. That gives us the same capacity as a digital start-up, a fintech. And that's why we've been driving this transformation. We're just about finished. We've probably got 9 months to go, and that's going to give us a lot of capacity to do different stuff, including -- I often describe to the Board, I say, "We've built a car. We've got an engine. We haven't got the wheels and the steering wheel yet." And what that gives us is the capacity to do is then start building those ecosystems that we want to do. It starts giving us the capacity to do a lot of work in advanced analytics that we haven't been able to do. So the next legs of our growth journey around digital are going to be quite different to building the infrastructure of what we've done historically. That was a long answer to one short question, sorry.

Much appreciate your insight, Shayne.

I'm conscious of people's time here. There's a few more questions, which I quickly want to clear on the -- coming in on the web, and then we'll see if there's any further questions. So let me just run through this. In terms of fee income, we don't give guidance on fee income. And Patrick has outlined the guidance that we have given. So in terms of the margins and the expectation of mid- to -- low to mid-single-digit loan growth, you can infer from that the expectations around the net interest income for 2021. And there was a question on are we derisking hospitality because of the reduced land and hospitality services. You can see in our financial statements where we have increased, where we have decreased. The land that we do is risk-based -- risk priced on a risk basis, so there's no -- we're not negative on any sectors. We look at it and charge the relevant and appropriate cost of risk. And there was a comment about lower recoveries. Again, you will have seen that there were lower recovery. It's fair to say that we do look to exhaust every means possible to extract value, only write off if we believe that there is no further value to be extracted from a loan.

But we would certainly like more recovery. We're working hard on it. And as someone else pointed out earlier, we do have quite substantial collateral on many of this stuff. But again, typically in -- both here and in Turkey, the collateral real estate and shifting real estate a decent price per month is not that easy.

And then just a final question on the way about the -- how the pandemic has accelerated digitization and do we see fewer branches in the future. We did conduct an exercise, a branch review, post the closing of branches temporarily. And give -- looked at how people's and customer behavior has changed, and there were some branches that were closed last year and did not open when others did open, and we continue to review the demand for the branches.

But I would add to that, that I think the nature of branches is changing from transactional to more advice-driven as we go forward. So footprints are shrinking, numbers are shrinking as we go forward.

Simon, is there any further questions on the line?

We have one further question queued over the phone. So are you happy to take?

Yes. Yes, so that's going to be the final question given the time. Thank you.

Certainly. So we'll now move to our last question over the phone, which comes from [ Varun Kamaraj ] from SICO Bank. Please note, Varun, we're not receiving any audio across your line. You may be on mute.

I think he asked a question before, actually. Only he didn't drop.

As we're not receiving any audio from this line, Mr. Nelson, I will remove it. We have now no further questions queued over the phone, sir.

If there's no further questions, I'd like to thank you all for your participation in today's call. Hopefully, we've answered all your questions satisfactorily. Tough year 2020, but I think we came through with very strong capital, strong liquidity and, importantly, strong coverage ratios for any future events. So I think we're extremely well positioned, in my opinion, as well as any bank in this region. And I think we're in pretty good shape for any recovery that comes forward. And again, thank you for your time. Thank you for joining the call. Thank you for your interest in Emirates NBD. Hopefully, you're all customers. Thank you.

Thank you, Mr. Nelson. Ladies and gentlemen, 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 be available on the Emirates NBD website next week. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.