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

Ladies and gentlemen, welcome to the Emirates NBD 2021 First Quarter 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 will now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.

Thank you, Alex, and [Foreign Language] to you all. Let me start with a quick economic update before looking at the group's performance. The global economic and political landscape has changed dramatically in the first 3 months of 2022. In January and February, many countries started to fully open up following COVID restrictions. This led to global inflation reemerging as demand picked up with oil and food prices increasing. Labor shortages emerged as companies scrambled to hire staff let go during the pandemic. Central banks identified the need for interest rate rises to control inflation. Then in late February, the conflict in Ukraine led to tragic loss of life and created additional uncertainty on hydrocarbon and wheat supplies, which further fueled energy and food costs. While higher oil and food prices pose upside risk to inflation globally, the increased oil price will generate budget surpluses within the GCC economies. Our research team revised 2022 GDP forecasts upwards for the GCC, factoring in increased hydrocarbon production. It expects real GDP to grow by 5.7% in 2022 for the UAE, up from 3.8% last year. The Kingdom of Saudi Arabia economy is expected to grow 7.7% in 2022 from 3.2% in 2021, also uplifted by higher oil production and prices. Egypt and Turkey are expected to face increased current account deficit in 2022 as food and energy imports costs rise, inflationary pressures continue and earnings from tourism may be impacted by the conflict in Ukraine. Against this background, I am very pleased that the group announced an 18% jump in profits to AED 2.7 billion. Looking back in history, if we exclude exceptional items, this is a record quarterly profit for the group. Let me pinpoint some of the highlights for the quarter. We are proud to have played a leading role in the DEWA IPO, delivering customers a fully digital platform, enabling a seamless paperless journey from on-boarding and subscription through to payment. This demonstrates the innovative, agile and can-do attitude of the group. Lending grew by 1% during the quarter, with Emirates Islamic lending growing by 6% and retail registering another record quarter. This loan growth reflects the more optimistic economic outlook across our footprint. The deposit mix continued to improve, with CASA growing by AED 18 billion. This is a record for any quarter, and CASA now represents 64% of total group deposits. We've started to see the initial benefits of higher interest rates. Given the clearer picture on future interest rates, we have increased our margin guidance by 15 basis points. This has enabled us to refine our cost to income ratio guidance as well. Non-funded income also grew, helped by an increase in transaction volumes and growth in customer foreign exchange and derivative business. In fact, 3/4 of foreign exchange and derivative business came from Emirates NBD's underlying clients business. International operations contributed 37% of total income in the first quarter. DenizBank's AED 625 million that added to the group profit, and its profitability was stable year-on-year despite the currency depreciation. We published our ESG report in February and reaffirmed our commitment to adopting ESG best practices across the group. This report details many positive achievements, including reducing our environmental impact through a reduction in greenhouse gas emissions and lower energy and water consumption. There were other notable social and governance milestones. In the first quarters, we are committed to increase percentage of women in senior management to 25% over the next 5 years. Shareholders elected 3 new directors, including the group's first female Board member. Our advanced analytics initiative is well underway, with 4 exciting use cases scrutinizing the 21 million daily customer data points to identify untapped customer service and revenue streams. These strong results demonstrate the resilience of our diversified business model. The positive outlook enables us to invest for the future in our international market and digital capabilities, supporting our next stage of growth. I'll now hand you over to Patrick to go through the results in more details. Patrick?

Thank you, Shayne, and a very good afternoon to all of you. I will start with the summary performance for the first quarter of 2022 on Page 4 before looking at each component in more detail. We'll also be covering the revised guidance on margins and the cost to income ratio that Shayne mentioned. So just running down the results table. Total Q1 income of AED 6.4 billion was up 3% year-on-year. Within that, both NII and NFI are up year-on-year; net interest income was up 4% on an improved loan and deposit mix as retail lending delivered another record quarter and strong CASA growth further improved funding costs. Non-funded income was up 2% year-on-year, helped by an increase in the local and international card transactions that travelers used for many customers. We also saw an increase in foreign exchange and derivative income as customers took advantage of favorable rates to repatriate money and clients also hedged against rising interest rates. Quarter-on-quarter, total income was down 2%, as the one-off gain from the Dubai Bank disposal last quarter was not repeated. Costs increased 5% year-on-year due to higher staff costs that are helping drive income growth and our investment for the future, particularly in our international network and digital capabilities. Impairment allowances are down 20% year-on-year, reflecting the improving operating environment, with the cost of risk at 116 basis points near the middle of the guidance range. So overall, net profit for the first quarter is AED 2.7 billion, a strong increase of 18% year-on-year and 36% quarter-on-quarter. Just touching on a few of the key balance sheet metrics. Loans increased by 1% with another strong quarter for Emirates Islamic and retail financing, which grew by 6% and 4%, respectively, while DenizBank's net loans were up 11% in Turkish lira. Deposits grew by 3%, with CASA growing a record AED 18 billion in 1 quarter, and capital remained very strong with a CET ratio of 15%. And the bank maintained excellent liquidity, as demonstrated by the LCR of 157.4% and the advances to deposits ratio of 90.7%. During the first quarter, the NPL ratio increased by just a couple of basis points. But when rounded, that pushed the overall ratio up to 6.4%. But let's look at these components in a bit more detail. Turning to interest -- net interest income on Slide 5, the bottom right chart shows the margins improved 14 basis points year-on-year, helped by loan -- retail loan growth and high levels of CASA. NIMs were broadly stable over the previous quarter as the benefit from rising interest rates has yet to fully feed through. I mentioned last quarter that once we had a clearer picture of the interest rate landscape, we would update our NIM guidance. We have revised our full year NIM guidance up by 15 basis points to 2.7% to 2.8%. This incorporates a further 150 basis points interest -- increase in interest rates, which is assumed to be spread fairly evenly through the remainder of the year. So a total of 175 basis points for the whole year. This guidance also factors in some offset for tighter loan pricing, reflecting the competitive market landscape. As I mentioned last quarter, we disclose our interest rate sensitivity in the full year account, so if you wish to take a different view on rising interest rates, you can factor that into your analysis. Just turning to Slide 6. Slide 6 shows that the group continues to operate with strong liquidity. We have AED 68 billion of liquid assets, which covers AED 11 billion (sic) [ 11% ] of liabilities and 14% of deposits. The ADR ratio improved this quarter from strong deposit growth, and the drop in the LCR ratio is simply a function of a greater deployment of excess deposits in high-quality liquid assets at the year-end and more deployment in higher yielding in the bank this quarter, coupled with the higher modeled outflows given the significant increase in CASA. As with the capital markets in general, we are -- we have been relatively quiet in respect of term funding issuances in the first quarter. We have just under AED 10 billion maturing for the remainder of 2022. And on average, we issued AED 22 billion of term debt in each of the last 4 years, but this excess issuance in recent years really gives us the ability to choose when to come to market. On Slide 7, we see that gross lending increased 1% during the quarter, with EI's lending growing by AED 3 billion or 6% and retail registering another record quarter for lending, also growing by AED 3 billion. This loan growth reflects the more optimistic economic outlook across our footprint, particularly in the GCC. DenizBank's loans and deposits both grew by 11% in Turkish lira and were also up 1% in dirham terms despite the currency depreciation during the quarter. Emirates NBD's deposit mix continued to improve with CASA growing by AED 11 billion during the quarter, more than replacing AED 7 billion of fixed deposits. This is a record quarter with CASA now 64% of total deposits, so well placed for rate rises. The bottom right chart shows the progress we're making on improving the diversification of the loan book across product and geography. On Slide 8, as mentioned earlier, the NPL ratio increased by a couple of basis points, which saw the ratio rounded up to 6.4% for the first quarter. The annualized cost of risk for Q1 of 116 basis points is near the midrange of guidance, and it is lower than the 124 basis points for 2021, the 163 basis points we saw in 2020, and it is now similar to the pre-pandemic 117 basis points we recorded in 2019. DenizBank's 294 basis points cost of risk for the first quarter is lower than the 343 basis points for 2021, and Emirates NBD's 67 basis points cost of risk was stable compared to the 83 basis points for last year. Coverage overall rose by 1% to 128.5%. And the chart on the bottom left shows that Stage 1 and 2 ECL allowances and coverage remain broadly stable. Stage 3 ECL allowances increased AED 700 million in Q1, increasing the Stage 3 coverage to a very strong 92.6%. I'll now hand you over to Paddy to take you through the remaining slides.

Thanks very much, Patrick. Slide 9 shows that fee and commission income was down 14% year-on-year in the first quarter, mainly from Turkish lira depreciation and partially offset by higher income from increased retail debit and credit card business at ENBD. Other operating income was up 30% year-on-year due to higher retail foreign exchange volumes and increased derivative business as clients hedged against raising interest rates. Three quarters of foreign exchange and derivative income was generated by ENBD. We may see some moderation in the strong FX and derivative contribution from ENBD in subsequent quarters given the very strong flow in Q1 from customers and clients taking advantage of weak currencies and rapidly changing interest rates. Other operating income was lower quarter-on-quarter as the earlier quarter included a AED 0.3 billion gain from Dubai Bank. Moving to Slide 10, operating costs and efficiency. On Slide 10, we see that the costs increased 5% year-on-year in Q1, driven by higher commission incentives and helped -- which helped drive underlying earnings. Staff costs were also up as we hired for future growth, particularly in our international network and digital capabilities. Other costs were lower quarter-on-quarter, reflecting the typical seasonal cycle with higher campaign spend in Q4 coupled with lower legal and regulatory service fees this quarter. Stronger income gives us more capacity to invest in international expansion and analytics, and in view of the anticipated rate rises and even factoring in further investment, we are able to refine our cost to income ratio guidance back to our longer-term target of being within 33%. Capital on Slide 11. Slide 11 shows the common equity Tier 1 ratio was down by 0.1% to 15% in the first quarter as AED 2.7 billion of retained earnings largely offset the impact from currency translation, the reduction in ECL add-back as it is phased out by 25%, and the 3% increase in RWAs as excess liquidity was deployed in higher-yielding assets that attract a higher risk weight. The common equity Tier 1 ratio was 14.6%, excluding the ECL regulatory add-back. Turning to divisional performance on Slide 12, we see that RBWM income improved 16% year-on-year, helped by AED 2.4 billion growth in lending and AED 9.3 billion growth in CASA. Retail has approximately a 25% market share of debit and credit card spend within the UAE. RBWM introduced a number of successful products and services, helping them maintain their position as the leading retail bank in the UAE. CIB income declined 9% year-on-year on lower lending balances. Profitability was boosted by higher fee income and lower provisions. EmCAP remains very prominent in the capital markets and helped ENBD play a lead role in the DEWA IPO. EI income grew by 14% year-on-year with strong growth in both financing income and non-funded income. Financing and investable receivables and deposits grew by 6% and 9% respectively during the quarter, with strong CASA growth pushing EI's CASA to 80% of total deposits. Global Markets & Treasury net interest income jumped year-on-year on higher income from balance sheet hedges and an increase in banking book investment income. Non-funded income grew 31% year-on-year. The trading desk had a strong quarter with notable success from the rates, credit and foreign exchange trading desks. Sales and structuring desk enabled clients to lock in favorable borrowing costs and exchange rates across a range of currencies. DenizBank is covered on Slide 12 with further detail on Slide 13. The 11% year-on-year drop in income in dirham terms is a result of currency depreciation. Loans and deposits both grew by 11% in local currency and 1% in dirham terms during the quarter. Slide 13 shows that DenizBank added AED 629 million to group profit, and its profitability was stable year-on-year despite the currency depreciation. DenizBank's cost of risk improved to 294 basis points in Q1 from 343 basis points last year. With that, I'll pass you over to Shayne for his closing remarks.

Thanks, Paddy. And to summarize, excluding exceptional items, this is a record quarterly profit for the group. The 18% jump in profits to AED 2.7 billion is driven by higher net interest and non-funded income and lower provisions. Lending grew by 1% during the quarter, reflecting the more optimistic outlook across our footprint. The deposit mix improved further with CASA growing by a record AED 18 billion. We have started to see the initial benefits of higher interest rates and raised our margin guidance by 15 basis points. International operations contributed 37% of total income in the first quarter with DenizBank's profit stable despite the currency depreciation. We introduced many product upgrades, including a state-of-the-art fully digital IPO platform. With that, I'd like to open the call for questions. Alex, go ahead, please.

We will now begin the question-and-answer session. [Operator Instructions] Our first question for today comes from Waleed Mohsin from Goldman Sachs.

Three questions from my side. First, on loan growth. So obviously, very pleasing to see the momentum on the retail business. I want to talk a little bit about the corporate lending outlook. When we see your disclosure, there is obviously a repayment from the government, and I just wanted to kind of get your outlook on how do you see the corporate book shaping up. Which sectors are you seeing demand? Is there any demand? And how do you see the corporate loan origination phasing out during the year, especially in the domestic business? So that's the first question. Secondly, on Turkey. A number of changes in the last quarter. It seems the FX guaranteed scheme is working in Turkey, or at least until now, with the strong level of de-dollarization during the quarter. If you could just talk about some of the trends that you're seeing in terms of asset quality for the business as well as your expectations around any rate hikes in Turkey given that inflation is running north of 60%. And my last question is on your provisioning charge. So, pleasing to see a strong recovery write-back in your ECL, which is expected in such a strong environment. Just want to get your thoughts on which sectors are these recoveries coming from?

Waleed, Patrick here. Maybe I'll start with that first question just on loan growth. You're right, 1%. That's broadly within our guidance of low single digits, and it's good to see that growth within retail and EI as well. More specifically to your point around the CIB outlook, you'll also see in our disclosures that we have got some good traction in the GRE space, so we were able to increase our lending there. So that was a particular success in the quarter. So -- and I think, just in the wider market, we have seen some progress in the manufacturing sector, trade finance, particularly on both on balance sheet and in contingent transport and communication. So we are seeing some progress in those spaces. I think there's still an element of the message we had for last year in the corporate space, that in the private sector it is going to take more time for reactivation of large-scale projects beyond working capital, et cetera, before we see stronger growth in that sector.

I think on asset quality for Turkey, I think I've said it before, this deal was a long time in the making and we managed to look through the books more than twice through the cycle before we closed the transaction. So we knew the book pretty well. I think it's fair to say that we haven't seen -- we've seen very little new problem line formation coming out of Turkey. We have increased our buffers there. Again, in the first quarter, you'll notice in Turkey we increased our provisioning levels. And I think Stage 3 74%, isn't it?

Yes.

74%?

Yes.

So I think we've been very prudent on Turkey on that side of things, making sure. And remember, when we took over Deniz, Stage 3 was in the low 50%s. So we've bolstered. The coverage ratios up substantially since we've had the bank, including Stage 2. So I think from an asset quality perspective, even though we did bolster the first quarter, we're still in bps down in charge. I think on expectation of rate hikes, one thing I would say is that there is a difference between the official rate and what's being charged by banks in Turkey. There is a differentiation there. I don't expect an official rate hike to come soon. From all the messages that our people are giving us there, I think that -- I don't see they will decrease it, but I certainly don't think at this stage they will increase it.

And Waleed, just on the third point you had around impairment, just to give a little bit more color. Obviously, we've made clear that this level has come back to that mid-level of guidance. There's no individually significant items within there, but you always get a flow rate coming through from retail ENBD, Emirates Islamic, et cetera. And then on the sort of CIB side, overall, we've only seen a very small net inflow to the nonperforming loans of just AED 300 million or so. So the charge for the year is really an element of the inflows, building up the buffers in the ENBD, as we do for the existing stock. And also, just as Shayne mentioned, just within Turkey, we do maintain a cautionary stance and we have been building up the buffers there as well, so that's another factor. As Shayne mentioned, we're up to 74% coverage on Stage 3. Otherwise, within the ECL models, et cetera, the macroeconomic variables have been relatively stable for the last 2 quarters. They were quite positive through the back end of last year and I think pretty stable. Okay.

Alex, we can take the next question.

Our next question comes from Nida Iqbal from Morgan Stanley.

I just wanted -- my first question is on the NIM side of things. Can you just please remind us of your NIM, since...?

Sorry, Nida, it's very -- would you mind speaking...

Hi. Can you hear me now?

Yes, that's much better. Thank you.

So my first question is on the NIM sensitivity. If you can remind us of your NIM sensitivity for every 25 bps increase in rates and, in particular, how that changes with each incremental rate hike? So for example, the first 100 bps versus the next 100 bps. The second question is on loan yields, and if you can just give some color on what competition is like? And just trying to get a better understanding of to what extent the higher rates will be passed on to loan yields. And then my third question is on the Non-Funded income. FX and derivative income has increased quite significantly in the last 2 quarters. How sustainable is this, and how should we think about it going forward?

Thanks, Nida. Just working through those from the top. Just on the NIMs, to keep it super simple. We actually disclose in our full year account the sensitivity. So I think it's Note 46 or thereabout. And it shows that for 200 basis points it would be an uplift of about AED 3 billion. So breaking that down, long story short, into 25 basis points, expect between AED 30 million to AED 33 million per 25 basis point uplift. So you're able to then, whenever the rate rise comes in, yes, okay, it has to be the next month when repricing, et cetera, comes through. But however the phasing pans out, that's a pretty good rule of thumb for you to use. On the second one, yield competition. Actually, on the retail side, that's had good momentum without necessarily having to give up significant yield. On the CIB side, yes, it has been more competitive on the credit spreads and the overall yield from that perspective. But with rising interest rates, it is more effective to give up some of that spread so that you build the assets, and when the base rate part of the interest rate calculation comes through, you do get that overall lift in the gross interest yield. Non-funded income, sorry, which part did -- were you saying was specifically elevated?

The FX and derivative income?

Yes, yes. So on FX and derivative, through the quarters, I remember we were sitting here at this time last year, where actually a significant part of that, the -- if we are just looking at Page 9 of the deck, for example, the 585, a fairly big part of that was related to DenizBank and the events after their interest rates had gone up and the governor was dismissed and what happened to the curves and et cetera. And some of that then unwound through Q2 and Q3. We saw a bit more volatility in Q4 with DenizBank, but the notable change in Q1 this year is that we have really quite strong underlying customer flows within that. So that includes the retail ForEx, the interchange fees on foreign cards and remittances and payments, et cetera, and also in our group treasury. The Global Markets team was very positive there. Also with clients hedging interest rate risk, it was really strong. And I think, as Shayne mentioned earlier, that something like 75% of that is underlying ENBD client flow business. So that's generally the sort of potted history by quarter over the last year.

Just a follow-up on the Non-Funded income and the fee and commission income this quarter, which is affected by the Turkish lira depreciation. But would it -- it would be helpful to get a sense of what the underlying fee and commission income was for ENBD, if possible, the growth?

Yes. I think -- so the total Non-funded income, if you take the total and take off the Deniz numbers, so it was positive. So it has been -- it is up year-on-year, but that's sort of the detail that we would have to take offline.

Our next question comes Aybek Islamov from HSBC.

So I have a couple of questions. The first one is, I noticed in the financials that you restated your sovereign loans in the fourth quarter of last year. So you restated them down. So why this restatement, and does it also impact your regulatory reporting to the Central Bank in terms of your sovereign exposure relative to your regulatory capital? What could be the implications of that restatement to your loan growth going forward? That's my first question. Secondly, on the provision coverage. You already elaborated on that quite a bit. But on Stage 3 coverage, I noticed that you increased it already to 93%. Can it go above 100%, Stage 3 loan coverage? And how comfortable are you now with the coverage of Stage 3 loans generally?

I certainly hope the coverage ratio doesn't go above 100%. I mean if you look at it with -- Aybek, with our security, we'd be pretty close to 200%, actually. So I think even our Chief Credit Officers are running out of places to increase the provisioning. I think we're in a very strong position in our Stage 3, and we make no apologies for that. We run a conservative organization. So if you look at it across Stage 1, 2, 3, even across the whole region, on DSO, we're the most conservative bank when it comes to that. And for us, we like to build these things up not only in the bad times, but the good times, so that it gives us the firepower if anything happens to still continue to grow in new markets. So I think we're in a very strong position. But I certainly -- I would hope we don't go over 100% because I wouldn't see any rationale for that.

And just one further point to that, Aybek, is given the guidance as to the cost of risk we have given you, it will take quite some time to get to 100%. So it's not really the intention to -- there's no target to get to 100%. Just on your first point about restatements there. There hasn't been a restatement. I'm not quite sure which line you're looking at specifically. Is it sovereigns in Note 6?

Yes. I mean, where you show the breakdown of your loan portfolio by segment or by sectors.

Yes. Okay. So that includes the government whose finances are in good shape. So we have seen some repayments in the quarter. So the change in the numbers is from repayments, not from any sort of restatement.

Okay. And just one more follow-on question, if I may. In your bad asset charges, so I think in this quarter, your bad asset charges there about AED 1.4 billion and there is a AED 400 million or AED 411 million of other provisions. Can you give some color like what these other provisions related to?

Sure. Thanks. It is a quarter-end buyback. We do have some assets that are held in the center, partly -- there are certain legacy assets that are really not held in the business segment, and so there are some provisions against that. And there is an element of credit risk identified during the period-end close that hasn't has yet been allocated to the segment.

Our next question comes from Chander Kumar from Al Ramz Capital.

My first question is regarding DEWA IPO. Since ENBD played a leading role in the DEWA IPO, so when should we expect fee income to be recorded, I mean, in which quarter? And secondly, how does the evolving situation of the capital markets in Dubai impact your fee income going forward?

Yes, Chander, thanks, Patrick here. Look, we don't give specifics on individual transactions. The IPO itself closed in what is now Q2, I suppose. You don't have to believe everything you read in the media of how much these amounts might be, and it takes time after an IPO to close out what the actual amounts are.

Specifically, I think just for the analysts, historically, there's no correlation between what U.S. investment banks get for an IPO and what GCC banks get for an IPO, that the fees aren't even comparable. So I don't want to comment on any specifics, but don't get carried away with some of the headlines that you've read in some of the press, because companies in this region do not pay anywhere near what an investment bank, for example, in the U.S. would expect from an IPO in percentage terms. On capital markets, certainly, we're obviously aggressively trying to get into every potential IPO, not only in Dubai, but right across the region. So at the moment, it's a very, very busy area for the guys and gals, they're working pretty hard. But once it's publicly announced as to which deals we win, we can actually go public with it, but obviously, we can't do that before we're allowed to say which ones they are. But would I be confident we'll get more IPO activity in 2022? Absolutely. But remember, even the IPOs you've been reading about in the press that may or may not come, they're nowhere near as big as DEWA. I mean DEWA was a monster. And it was one of Dubai's crown jewels. So I don't expect we'll get something like that in this year. It was a great deal. But we wish -- there was more of them, but I don't think there's going to be anything as nearly as big as DEWA.

Okay. So my second question is regarding this NIM guidance. As you said that the NIM guidance has been revised by 15 basis points, and now you are expecting 150 basis point interest rate hike in 2022. So I just wanted to confirm whether this 150 basis points is the total, your expectation for the full year, or is this incremental on top of 25 basis points already increased in first Q?

Yes. Just to clarify that for you. It's a total of 175 basis points for this year. So a 25 basis we saw in March, and so another 150 expected. That's our base assumption. I know others will have different views than that. Views can change from week to week and day to day.

I mean I remember when we were drafting our budget for this year, and we build in a 25 basis point hike and people were calling us aggressive for 25 bps. And now it -- certainly looks like that was a pretty conservative estimate. So times change pretty rapidly. Obviously, if the Fed brings forward 50 basis points up front, obviously, that's hugely beneficial for us if they do that in the July, no, June -- sorry, May review. So I mean anything that upfronts the rate increases is obviously hugely beneficial for us, and then flows, obviously, on an annualized basis, into '23.

Okay, fine. And my last question is regarding this DenizBank. DenizBank core income actually has decreased both sequentially and as well as annually, and it also impacted a lot on equity and book value per share because book value is consistently declining from a few quarters due to current devaluation impact of DenizBank. So I just wanted to know the -- your future strategy and outlook for DenizBank going forward?

So can I just clarify the first part of your question. What did you say had decreased sequentially?

Total because this currency devaluation impact is impacting on your overall book equity. So as a result, book value per share is also declining due to this devaluation impact, right? So it's impacting both now because our core income is also down and it's also impacting on balance sheet. So any guidance going forward for the DenizBank?

Sure. Sure. Look, just you can see the earnings in there at AED 629 million is slightly less than this time last year and multiples of almost about 4 of Q4. So the underlying earnings in lira and even after the translation at a weaker exchange rate is still strong. So the underlying P&L performance is strong. Yes, there is the FX impact on our structural investment position that goes through the OCI account. So that's the original investment, and that's fairly formulaic. So if the currency depreciated by 10% this quarter, it's simple arithmetic of how much that is. So if the currency stabilizes, the more it stabilizes, then earnings can help catch up and recover that from a total net equity point of view. Outlook part, Shayne, any thoughts? I don't think we have any specific guidance that we would give that we know of, really.

We can't. But I think the currency has been fairly stable now for a while. And as an investor, we just like that stability, obviously. But you're right, any depreciation in the currency, our capital CET1 is in lira, and there is an impact of any devaluation on that capital. But when it consolidates into group, it's immaterial. It's a rounding error.

Our next question comes from Shabbir Malik of EFG Hermes.

I think you've partially answered this question, but I just wanted to kind of hear it again, maybe what are the drivers of the negative movement of the AED 1.4 billion in other comprehensive income? I think one is obviously the ERI devaluation, I'm guessing. What were the other bits? My second question, we've heard a lot about inflationary pressures coming through. Is that something that you're seeing in your cost lines and maybe rental, staff costs, et cetera? And could it pose a risk to your 33% cost to income guidance? My third question, again, this is related to lending. Do you see any repayment risk from public sector entities because the cash position has improved, either because the economy has recovered or because oil prices are high and some of the public sector entities, maybe in Abu Dhabi, are more cash-rich, et cetera. So is that something that you see as a risk to your mid-single-digit asset growth guidance for 2022?

Maybe I'll start working through those. Just on the AED 1.4 billion in OCI, there is about AED 300 million from revaluation of the -- of Treasury's liquidity book. So that's just a function of what happened to valuations in the market. We hold these for liquidity. So it's not really a realized loss on that, relatively small overall. And about AED 1.1 billion relates to the translation loss of the structural investment position on Turkey as we were talking about in the previous question. Just on inflation and pressure on the cost to income ratio, look, just with the upside on the interest rate alone, that gave us the comfort to revert to our typical long-term guidance of 33%. And even at that level, there's some additional space for further investments and if there is any inflation to come through. Obviously there is inflation in Turkey. Much of that gets then offset by -- from an FX point of view when you think about it in dirhams. And perhaps we haven't seen so much inflation directly in this quarter, but we are investing in our headcount in the international footprint, digital, et cetera. So that's probably where more of our cost delta is going to. And anyway, within the guidance of 33%, we do have plenty of capacity.

I think the only other thing I would say to that is if you look at the cost, a lot of the cost growth in the quarter, in the staff cost line, we wrote record credit cards, record housing loans, record personal loans. So there's a cost to that. Most of our sales staff are very heavily incentivized versus base salary. So sometimes success breeds increased costs in the retail bank. So we had a cracking first quarter in retail, the best we've ever had in volumes. And on top of that, substantial CASA growth. So I wouldn't want to pull the cost lever on that, given how successful it's been in the last -- certainly the last 6 months. It's been outstanding. And that's not just in Emirates NBD, also in Emirates Islamic, same thing, records across the board in Emirates Islamic. I'd say there's a couple of areas that we are seeing some cost pressures when it comes to staff. Certainly, things like software engineers, a lot of people in the IT/cybersecurity world, they are getting bid up quite a lot across the field. And it's not just banks. It's lots of fintechs, it's government, that area is under pressure. And surprisingly -- well, maybe not surprisingly, things like priority banking relationship managers are also in high demand as banks are rebuilding their sales force in those places. So we are seeing some pressure on staff costs from competition for our people. We're handling it fine. But I'd say that there is a ramp-up of employment as other banks and institutions rebuild after letting a lot of people go in COVID.

And Shabbir, just your third question, are we seeing repayments in the public sector? At this point, no, and we're expanding that, and you can see that we've grown our GRE percent from what was 5%, 6% at the last year to about 9%. So we are seeing growth there rather than repayment from funds being strong, whether it's in the oil sector or what have you.

Alex, I think we have one more question on the lines, and then there's been some questions come in, written questions, so I'll take those after the final verbal questions.

Our next question comes from Naresh Bilandani from JPMorgan.

It's Naresh Bilandani from JPMorgan. A couple of questions, please. One, it would be very helpful if you could please comment on the sustainability of the strong CASA growth that you've enjoyed in the first quarter. I'm assuming these would have some impact from the funds coming in from the DEWA IPO. If you could please comment on the underlying sustainability and how the expected behavior in a rising rate environment, that would be extremely helpful. That's the first one. Second is, could you please share some more thoughts on the loan growth trend? The repayment, I assume -- that we have seen from the -- within the sovereign subsegment, was that expected and tested within your annual guidance, or -- I'm just trying to get a sense of if there's any underlying drivers that you are seeing that could support the growth in your guidance as we move forward into the second quarter. It would also be very helpful if you could please throw some light on the trends that you've seen in the mortgage book specifically, that would be great. Third is, Shayne, if like each time, if you could please provide some updates on Liv.? What progress have we seen on the platform? Any further progress on the product offering from the platform? That's the third question. And, sorry for a bunch of these, but one last one would be on the general impact from the Russia/Ukraine situation. We've seen -- we've definitely heard in the news lines of the influx of expats. I'm just trying to understand how, if any, should this reflect into the domestic economic trends and specifically on ENBD's franchise into the longer term? That would be very helpful if you can throw some light there.

Do you want -- should I do the first two first, and then...

Then I'll go after.

Okay. Actually, just on the CASA side of things, Naresh, yes, it has been very strong, but also looking back in the last 2 years, we have also had what were previously record levels of CASA growth and the evolution of the total CASA for total deposits. As interest rates go up, you might reasonably expect the fixed deposit rates to go up and some elements of CASA to moderate from that perspective. It was particularly strong in this quarter, a combination of factors, whether it was the campaigns that we've been running may have been an element of deposits being made prior to the DEWA IPO, but not specifically because of that. Also on the corporate cycle, where corporates build up cash reserves before they pay their annual dividends, for example. So it's just a range of factors. Nothing really specific. But we're very pleased that we are seen as the go-to place for deposits. Now there probably is a lot more liquidity in the market. So we don't know what the overall market is going to look like until everyone else releases their results, I guess.

Well, I think the other thing, just Naresh, on that is that we do model CASA behavioral scores. So I think we do actually run sensitivities on historical trends when rates have come back and what sort of shift we expect from the CASA the term deposits, et cetera. So would I expect, as rates rise, do we get a shift from CASA to other investments? Absolutely. Because there will obviously be a propensity to get a better yield versus having no yield by shifting it -- or very little yield -- shifting it since COVID. So I do expect we'll lose some. But I think the modeling we've done, it's not massive. It's not massive.

And just on your second question, just on government borrowing. I think I touched on this in an earlier question, that the government finances are in good shape and the repayments are viewed positively. The government has been reducing its balance every quarter for the last 2 years since Q1 2020. So if the finances -- I can't really give you any sort of projection on what that might look like. The finances are in good shape, and that's really up to them.

And this was factored -- sorry, pardon me, this was factored into your guidance when you set the annual guidance? Or was this an additional development after you set your full year guidance?

Yes. So even with the reduction in the balance in Q1, you can see our overall lending is up 1%. There may be ups and downs through the rest of the year, but we have kept our sort of low single-digit guidance in place for now.

I mean, Liv., Naresh, we're up to 50,000 in UAE and about 90,000 in KSA. Actually, on Liv., I've asked for a strategic review of Liv. And I'll give you some of the reasons. Some is exactly what you're asking about, what product should we be launching. But even the target market, which was largely built for Millennials, and Millennials are now at over 40 at the top end of the range. So just looking at the whole target market. And one of the big things we'll be doing this year is not only revisiting the strategy around it and products, but also the build. Liv. was built on our old architecture. So we're doing a full complete rebuild of Liv onto our new cloud-based architecture. So we are looking to really ramp that up and improve the product offering, but also the usability of the whole project. So given where we are now, we're 95% cloud-native now, that won't take us that long to rebuild it onto the new platform. On Russia/Ukraine, there always seems to be a lot of great stories in the press around this and the wire services in particular. But we have not seen a massive increase of either Russian accounts being opened nor balances flowing into our bank. Are we seeing an uptick? Yes. Is it substantial? No. So I don't know what to answer to -- would I see -- Russians have always been big property investors in the UAE, and I've certainly seen some numbers in the press where they've gone moved from #7 buyers to #5. We would treat those people as normal customers if they're investors or they've got permanent residency here, providing they are not sanctioned. And we adopt all U.S, U.K., European, U.N and, obviously, UAE sanctions. And we would not bank anyone that's sanctioned. And that's largely driven by -- we have to clear dollars. We have to clear euros. We have to clear pounds. And we do follow the rules and regulations of all those clearing countries that we do business with. So I think we're being quite conservative on we would not open a sanctioned Russian account, period.

Thanks, Naresh. There's been a few questions come in on the Web. Let me quickly run through those. Shayne and Patrick have answered most of them. [ Varuna ], they addressed your question about -- Patrick addressed your question about sovereign lending. [ Vijay ], you asked about is there any financial impact transitioning from LIBOR to SOFR. No material impact has been experienced or is anticipated. That project is well underway. In fact, we've issued quite -- when we do issuance now in terms of capital markets, it's SOFR that we quote rather than LIBOR. You also asked about higher interest rates. Patrick mentioned -- sorry, the impact of higher interest rates on the bond portfolio. Patrick mentioned about the AED 300 million. If you look at ourselves compared to some of our peers, we don't tend to have as big a bond portfolio as some of our peers, and so the rise in interest rates you would expect to have a relatively smaller impact on ourselves. We talked about the drivers for CASA. And [ Sandeep ], you asked about the OCI. Again, that's been addressed. And the final question, Sandeep, do higher interest rates pose a risk in terms of servicing ability on mortgages? Certainly, all -- that's something that we monitor very closely, all the early alerts metrics that we have and monitor. There's been no substantial deterioration from what we would normally expect.

I mean the only thing I would add to that as a caution to the market would be, obviously, if you -- I don't think it is going to affect villas or apartments. But I think some of the commercial, where you're seeing yields of 6%, 7%, once you start seeing rates rise substantially and the margin on top of those rates, I think banks are going to need to look at their customers very quickly to make sure that the repayments structure they've put in place with clients in the better times when rates were really low are still applicable now when rates rise significantly and the yield will only just cover interest or maybe a piece of principal rather than more aggressive amortization of the loans. But if we look at our book on our average loan-to-value ratio in the corporate space, it's quite conservative, as it is in the home mortgage market. So if there's no further questions, I'd like to thank you all very much for being on the call. I hope you enjoyed it. We always enjoy interacting with you all. And thank you for some very good quality questions that you asked today. Hopefully, we answer them well for you. And if not, there's always Paddy, you can reach out to get further information. So thank you very -- thanks very much, you all, and we'll speak to you next quarter. Cheers.

Thank you all for joining today's call. You may now disconnect.