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

Ladies and gentlemen, hello, and welcome to the Emirates NBD 2022 Third Quarter Results Call and Webcast for Analysts and Investors. [Operator Instructions]. I will now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.

Thank you, Maxine, and welcome to our results call. Before I run through the main highlights of performance, let me first of all touch on the operating environment within our footprint. The outlook for the Middle East remains positive despite the weak global backdrop. Higher oil prices in 2022 have pushed the GCC budget into surplus and strengthened sovereign balance sheets. The bank's research team revised up its UAE GDP growth forecast to 7% for 2022 whilst revising down their next year's forecast of 3.9% on the weaker global black drop, a stronger U.S. dollar and higher borrowing costs. Inflation in many countries continues to remain at multi-decade highs, leading to global interest rates rising at a faster pace than had earlier been anticipated. Egypt and Turkey has seen a strong surge in services inflow and tourism revenue offsetting some of the impact from rising energy costs on the current account deficit. The strong regional economy, coupled with higher interest rates have helped drive profitability 25% higher to AED 9.1 billion for the first 9 months of 2022. This almost matches the full-year profit for 2021. In Q3, we delivered profits equivalent to more than $ 1 billion for the first time in the group's history. This milestone has been achieved without the help of the sectional items. Patrick will provide more details shortly. Some key drivers of the performance include all 5 business units delivered an increase in profit before tax, demonstrating that the group's diversified business model continues to deliver. Strong new lending growth in key sectors, including manufacturing, trade, transport and communications, utilities, and personal lending largely offset a reduction in sovereign lending. Higher interest rates are feeding through to margins, which are trending towards the top end of guidance. Asset quality saw a further improvement in the third quarter with further write-backs and recoveries, helping keep the cost of risk within guidance. Emirates NBD and EI have a combined 30% market share of total UAE debit and credit card spend. That's bigger than the 3 next banks combined. Emirates NBD alone processes 1 million card transactions each day equivalent to 11 per second. In summary, these strong results demonstrate the resilience of our diversified business model and the strength of our balance sheet. Despite global economic uncertainty, we are very well placed to benefit from the positive regional outlook. I'll now hand over to Patrick, who will go through the results in more detail. Patrick?

Thank you, Shayne, and a very good afternoon to all of you. Let me start with the usual summary financials for the first 9 months of 2022 on Page 4. This page sets out the group's results together with the EMBD and Deniz on one page so that you can more easily see the drivers of earnings. So just running down the numbers. Total income of AED 22.7 billion was up 51% year-on-year. Within that, both NII and NFI were up substantially. And as you can see, DenizBank was particularly strong relative to last year, up 52% despite FX depreciation. Interest margins in both ENBD and Deniz have widened significantly. And in a moment, I will elaborate further. Non-funded income was up 52% year-on-year helped by strong customer FX and interest rate hedging. Volume growth in both ENBD and Deniz, wider transaction margins in Turkey, and hedging gains on DenizBank balance sheet. Costs increased 12% year-on-year, supporting very strong business volume growth, particularly in retail, and our accelerated investments in our international network and digital. The cost-income ratio at just over 28% remains well within the 33% long-term guidance. Impairments allowances were down 12% year-on-year, reflecting the improving operating environment and strong recoveries in both UAE and Turkey. The tax charge has stepped up on the back of strong earnings in Turkey. This gives us a very strong profit after tax of AED 11.5 billion, up 58%. The hyperinflation adjustment takes AED 2.4 billion of earnings year-to-date, but as I mentioned last quarter, this is a non-cash notional charge and is fully offset by a credit to equity via OCI, so capital neutral. That gives us a final profit number of AED 9.1 billion, up 25% for the 9 months. And as Shayne mentioned, that is close to the profit delivered in the whole of last year. Touching on the third quarter picture on Slide 5, particularly strong income. NII lifted from rate rises and NFI growth year-on-year from increased business volumes at slightly down on an exceptionally strong Q2. This has boosted the profit of AED 3.8 billion, up 51% year-on-year and 8% quarter-on-quarter. In the bottom summary table, you can see the balance sheet metrics are all in good shape with [Audio Gap] supported by strong recovery. Turning to net interest income on Slide 6. The bottom left chart shows that margins improved 59 basis points year-on-year, helped by improving loan yields at Emirates NBD and strong core growth at DenizBank. The chart on the bottom right shows the margins in Q3 improved by 48 basis points on ENBD's improved loan and deposit mix. DenizBank margins were stable in Q3 as the impact of new regulations designed to encourage lower lending rates have yet to take effect. As recent rate rises continue to feed through despite the competitive market landscape, we see [indiscernible] trending towards the top end of guidance. As in previous years, we will release next year's guidance at the announcement of the full-year results in January. Slide 7 shows the fee and commission income was up 15% year-on-year in the third quarter, mainly from increased local and international retail cards business at both ENBD and DenizBank and strong investment banking revenue. Other operating income was up significantly year-on-year due to higher retail foreign exchange volumes as customers took advantage of strong dollar -- of the strong dollar and increased remittance, a pickup in SME activity and larger gains from DenizBank's balance sheet hedging compared to Q3 2021. On Slide 8, we see that gross lending declined marginally during the first 9 months. A strong government repayments were largely replaced by AED 7 billion of retail lending, AED 5 billion of lending at Emirates Islamic and AED 24 billion of new corporate lending and real lending growth at DenizBank. Strong demand for new lending reflects the current regional economic confidence amongst corporate and retail customers. CASA balances grew in Q3 despite rising interest rates, CASA is up AED 18 billion year-to-date, reflecting strong system-wide liquidity in the UAE. We have signaled earlier that we expect some movement from CASA to fixed deposits as interest rates rise. We are starting to see greater competition for deposits given the overall liquidity in the system, deposit pricing pressure has not yet impacted pricing but may do so in the coming quarters. CASA remains a healthy 63% of total group deposits. And the charts on the bottom right show the progress we are making in improving the diversification of the loan book across product and geography. On Slide 9, the NPL ratio improved by 0.3% to 5.8%, helped by strong write-backs and recoveries in both UAE and Turkey. The annualized net cost of risk for 2022 year-to-date at 90 basis points, is somewhat better than guidance at this stage of the year. We will see how the rest of the year pans out. Coverage rose by 9% to just over 142%. We are conscious that rising interest rates may put pressure on some customers' ability to service loan repayments in coming quarters as a result. And as shown in the chart on the bottom left, Stage 1 coverage increased to 1.1%, and Stage 2 coverage increased to 25.5%, reflecting a movement in the macroeconomic assumptions. These are forward-looking under IFRS 9. So they usually are movements quarter-to-quarter. Phase II coverage increased to 97.2% on write-backs and recoveries. Before I hand over to Paddy, I'll just briefly touch on the hyperinflation slide in the appendix. So let's just jump to Slide 15 for a moment. Thank you. I won't go through the concept of hyperinflation again. Just to highlight or rather remind that the adjustment is really a notional noncash representation of the loss of purchasing power of the net monetary items in DenizBank. Given the offset in equity to this charge, it is capital neutral. And the table on the right side shows DenizBank's profit movements year-on-year before and after the hyperinflation adjustment. Current earnings are actually covering this adjustment. And actually, the reason that they're down on the comparable period is the FX translation from Turkish Iira to AED, which is down around 50%. And earnings would have been around AED 2.2 billion if using the prior year rate. I'll now hand over to Paddy to take you through the remaining slides.

Thanks very much, Patrick. So we'll jump back to Slide 10 on operating costs. As we see that the costs increased 19% year-on-year. Staff costs are higher as we invest in human capital for future growth in digital and international. Depreciation and amortization costs are also higher this quarter, reflecting an increased investment in our digital platform. If we jump to Slide 11 on funding and liquidity, shows the group continues to operate with very strong liquidity with an AD ratio of just over 87% and an LCR well over 150%. And small drop in LCR is a function of a greater deployment of liquidity in higher-yielding interbank deposits this quarter. Debt capital market issuance globally has been quiet so far this year. We issued AED 4.6 billion of term debt in the first 9 months. Last week, we took advantage of favorable market conditions to issue a $500 million or AED 1.8 billion 5-year benchmark bond that attracted well over 100 orders. We have AED 4.8 billion maturing in the remainder of 2022, and we remain comfortable with this given the excess funding issued in both 2020 and 2021. Recent benchmark issues that [Audio Gap] it shows that the common equity Tier 1 ratio strengthened to 15.5%. And in the first 9 months, AED 8.6 billion of net earnings offset a 10% increase in RWAs as we experienced strong new loan growth in retail and a diverse range of corporate sectors. Common equity Tier 1 ratio was [Audio Gap] 15%, excluding the ECL regulatory add-back. And as Patrick explained earlier, the hyperinflation adjustment is capital neutral. Then moving to Slide 13 on divisional performance. We see RBWM income improved 22% year-on-year. It was a record period for card acquisitions, fee income, and balance sheet growth, helped by over AED 6 billion lending growth and AED 20 billion of CASA growth. ENBD combined have a market, a 30% market share of debit and credit card spend within the UAE. Corporate & Institutional Banking profit was ahead of last year despite a small decline in income on lower lending balances. EmCap remains very prominent in the capital markets and helped ENBD play a lead role in recent IPOs. EI's profit was 31% ahead of -- on higher income and lower provisions. Financing and investable receivables and deposits grew by 12% and 16%, respectively. Global Markets & Treasury net interest income jumped year-on-year on higher income from balance sheet positioning, hedging, and increase in banking book investment income. Non-funded income was substantially higher on a strong trading performance. DenizBank's income was up 52% or AED 2.6 billion, and impairment alliances were AED 0.4 billion lower on strong write-backs and recoveries, and these helped offset the AED 2.4 billion hyperinflation adjustment. With that, I'll pass you back to Shayne for his closing remarks.

Thanks, Paddy. These strong results demonstrate the success of our resilient, diversified business model and the strength of our balance sheet. We are focused on investment for the future, supporting our next stage of growth. We are very well placed to benefit from the positive regional economic outlook. With that, I'd like to open the call to questions. Maxine, Please go ahead.

Thank you, Mr. Nelson. [Operator Instructions]. Our first question today comes from Nada Iqbal from Morgan Stanley. Unfortunately, we're not getting any audio from Nada's line, so we'll move on to the next question. And the next question comes from Waleed Mohsin from Goldman Sachs.

The asset quality.

Sorry, Waleed, can you start again?

Can you hear me now?

Yes, we can, Waleed. Thank you.

Perfect. So the first question, I just wanted to continue on the point that you made on the impact of rates on credit losses. So there's been roughly 400 basis points increase in Emirates into bank rate on a year-on-year basis. And I was wondering if you could talk about which sectors in particular, are you monitoring closely where you think or you have already started seeing early signs of stress. That would be extremely helpful. Number 2, when I look at the sovereign exposure, it's down something like AED 39 billion on a year-to-date basis. And if I recall correctly, this is probably relative to your capital. This is perhaps the lowest ratio that has been since the large exposure or government exposure limits came into place. So I was wondering how this will help you in terms of deploying capital because this obviously means that the breach is less than what it used to be and what it means for your dividend payout ratio? Because I've -- in my understanding, this has had an impact on your dividend ratio historically, the breach on the sovereign exposure. And the third and final question, local currency liquidity, as you mentioned, looks good. I wanted to hear from you a little bit on the dollar liquidity. If you could comment on that, that would be very helpful.

Let's start with the stress in the portfolio. To be honest, we're not seeing that much stress on the portfolio. And most of the -- the ECL increase that we did is basically we use a Moody's model for our economic forecast that plugs in. And it's one of those models whether or not you agree with all the assumptions, you can't take it then you have to take the model how it is. And given their economic outlook, there is a deterioration. Therefore, we've boosted that. We have the capacity to do it this quarter. We took it. So that's why you see the jump in that coverage ratio. So we're not really -- it's not that we're seeing substantial impact, but this is forward-looking. So that's why it's plugged into this quarter's results. Where am I seeing some pressures? I'd say not a lot, but where we're being very careful is, one is around commercial real estate. So I think if you think about where Dubai yields where the majority of our real estate exposure is. You're probably seeing 5% to 6% yield on most properties and where interest rates are at the moment and with a margin that starts to put cash flows under pressure for principal and interest. Now, most of these loans are conservative loan-to-value ratios, but there's a cash flow issue. I think that's going to come upon us. So we are proactively looking to reprofile some of those clients to help them through the cash flow crunch that's going to come not because of interest but because of principal repayments that we would have had under the initial structure. So we're proactively going out to those clients, we see there could be pressures in the future to reprofile before there's any problems. I think the other one that we're obviously always concerned about is housing, in housing loans, where rates are affecting, obviously, individual borrowers households. And we may need to do some work around restructuring some of those residential mortgages over time. Again, they're conservatively loan-to-value ratios. But our view is we should always try to help the customer get through this environment until we get to a lower rate environment, which depending on your forecast, we think that rates will start to come off at the back end of '23. And therefore, we can revert to principal interest repayments as those rates start to dissipate. But again, I'll just reiterate, we're not seeing much pressure at the moment. And in fact, if you look at our retail lending growth, it's really strong. So as Paddy said earlier, the volumes were riding in retail are huge. We're taking market share. There's good population growth in the UAE as a whole, and we're getting more and more customers. So we're in a very strong position in the retail space at the moment. On the sovereign, you want to do the sovereign?

Yes. Well... I'll do that too, and I'll let Paddy take the dollar liquidity. You're right. And well, if you see on Page 8 in the loan chart there, we've broken out sovereign there for the first time because of that dynamic of the repayments that are coming through, we also wanted to underline that we have got strong corporate lending growth underlying. So actually, if you strip out the sovereign repayments, the loan growth for year-to-date is around 12% and corporate loan growth is around 17%. It's up AED 24 billion. But your point really is -- sorry, just above that, you can see the overall sovereign is coming down at 38%. And you made a point, yes, as you replace sovereign risk weighting is typically lower than corporate. So inevitably, it gets replaced by higher RWA. But if I'm not quite sure what you're referring to on any limit on the dividend itself. So we haven't had that. So obviously, the dividend is part of a board decision that's made at the year-end, and it isn't tied to any constraint.

Thanks, Patrick.

Whatever it... Sorry... I'll complete my question. Yes. So on dividend, what I was saying was that because the limit is measured as a percentage of total capital and you were significantly above that limit. I think at some point, you were sitting at 240%. That meant that the base, which is capital that you're paying the dividend from was a constraint in terms of how much you can pay as a dividend, not the capital ratio, but the absolute capital level because if you were paying that out, then the ratio come doesn't come down.

I know what you're saying, but that's actually not true. So there was no restriction on that versus -- I mean, any dividend. Firstly, it has to be approved by the board. And you're right, it has to be approved by the Central Bank. The Central Bank has a 50% dividend payout ratio unless you get specific approval to pay above that. But the choice of dividend has always been with the Board.

And you can see with our current earnings per share already, even if you use last year's dividend, the DPR on that is well under any 50% of it. And dollar liquidity...

Yes. Just on dollar liquidity relief. I think the Middle East is undoubtedly a beneficiary of the high oil price. We're even seeing it in credit spreads across the global banking sector, where UAE banks, for example, the credit spreads are trading well inside U.K. and U.S. banks. And as a result of that, you've seen 3 UAE banks come to the market this month to tap the debt capital markets. It is -- there's good days and bad days, and there seems to be a bit of a rush whenever there is a good window. But I think that, again, is reflected that UAE banks were able to come. There was a regional government successfully issued earlier this month as well. So again, I think it is correlated to the high oil price and the benefit that the region is getting from that.

Got it. And lastly, maybe again, I can try on the divi part, so then relative to the -- to your peers, what stops you from paying closer to 60%, which is allowed by the central bank?

The Board decision at the end of each year, and there's always a balance between having a reasonable dividend payout and retaining capital to support growth in the future.

The next question comes from Rahul Bajaj from Citi.

I have 2 quick ones. The first one is on dividend. If I think about your 2022 dividend, should I think about it adjusted? Should I think about your earnings adjusted for the hyper-inpatient charge? Or you will be making dividend recommendation based on reported net profit? Or will it be adjusted for non-cash charge? So that's my first question. The second one is on costs. We've seen substantial cost increases this year in digital investments, et cetera. How should we think about cost growth over the next couple of years? Do you expect the growth rate to subside as we go into the next couple of years? Or do you think this low double-digit growth rate could continue in the near future, mainly because the top line is pretty strong top-line growth. So that's my second question. The third and final one, you mentioned about taking -- I mean, taking special caution around housing loans, residential housing loans, but this is more on more broader retail loans. Are you seeing customers come in to renegotiate spreads that they have with the banks, given that the rates have gone up so much? And I'm not coming so much from a capital -- sorry, asset quality perspective, I'm coming more from a margin perspective, should we expect the impact of future rate hikes to be lower in terms of sensitivity as these customers come and they try to renegotiate [Audio Gap] question.

Let me see if I can take the first 2 first. Just on dividends. The short answer is, no, it's likely to be a moot point actually. So the -- for the first 9 months, for example, even after the hyperinflation adjustment, the earnings per share is with 138 fill, which is similar to the EPS for the whole of last year. So whether you look for or after is a new point. Last year's dividend payout ratio was 36%, and we don't provide EPS guidance and the dividend view at this point because that's something for year-end. And your point just on the costs. Yes, in Q4, there has been an uptick in costs that is supporting sales growth at supporting our investment in digital. There's an element in there of competition for talent. But even so, at this level, our costs in Q4 -- sorry, Q3 are lower than the Q4 2019 level in staff costs and broadly got back to about that level, net income is up significantly. What's going for the next couple of years? Actually, we don't give specific guidance on that. What we do is give you a long-term cost-income ratio guidance, which is up to [Audio Gap] 3%, but we are mindful of ensuring that when we invest and add to the cost, it's generating revenue and shareholder value as well. But what we are also focused on is investing now looking forward into 2024, '25, the point when interest rates may indeed come down. Just on server Shayne, any thoughts on the third point there?

I think the first point I'd make is that if you look at our retail performance, we're 30 days past due, 60 days past, due to 95 days past due, it's relatively flat. And frankly, we've been -- I mean it's been in our budget, to be honest, we were a lot more pessimistic around where we would be at this juncture of the interest rate cycle. So it's better than we're seeing and that we forecast. So it's quite robust. And to be honest, surprisingly robust, better than we forecast. But that doesn't mean that we're not cautious about the outlook. Are we seeing some pressure on corporate spreads? The answer is yes. And corporates are pretty savvy. They know there's lots of liquidity in the market. They know overall, even though our loan growth ex-sovereign has been very strong. There hasn't been a massive amount of loan growth in the system. And therefore, there is pretty robust competition for corporate loans there. In the retail side, we haven't seen a lot of pressure at this juncture on pricing on both sides of the balance sheet, both on deposits and on the lending side. So we're still managing to -- as you see from our results, attracting very strong CASA , very strong cost. I know some other competitors have not been able to do that, but we've been able to attract very strong CASA over the 9 months and even in the last quarter. And that's low cost, obviously, which is also helping our spreads. So I think at the moment, we're in a very robust position. However, we are cautious about the outlook here, as you know, we run the bank very conservatively, and we'll continue to do so.

Our next question comes from Shabbir Malik from EFG Hermes.

Congratulations on a good set of results. I have a couple of questions. My first one is, since now you're seeing some repayments on the corporate, especially on the sovereign side, how do you intend to compensate for that in terms of growth areas? What do you think would be the key growth areas for you to compensate for the potential further repayment that's going to come on the solvent side? That's my first question. My second question is on Turkey. So we've seen almost 2 quarters of provision reversals for DenizBank. I was wondering if you can give us some sense on the provisioning outlook? Or how should we think about provisioning or the underlying provisioning trends in Turkey or in DenizBank in the coming quarters? And also some color on the margins in Turkey, which have been stable in 3Q versus the second quarter? And maybe a question on Egypt. We've seen some devaluation in the Egyptian pound. Can you give us any sense of sensitivity to your earnings or your book value to EGP devaluation? That would be great. And one final question, a bullet point that you've made in your divisional performance, successfully launched a series of UAE strategic investment funds. Can you talk about what these funds are? Is this something that ENBD has launched? Or is it something that you facilitated for the government or for the buy?

Patrick here. Just on your repayment question and what we're doing to compensate, hopefully you can see on Page 8 that, yes, as we have significant repayments, it means we do have to run a lot faster to keep the loans and advances balance growing. But as I said on the earlier question, I think we've been doing a very strong job in doing that across all the business lines, Emirates Islamic, retail, corporate, and which sectors you are specifically, actually, if you look on Page 13, I think, of the accounts, Note 6. You'll see which sectors that we have been growing them. We're also building a pretty good pipeline. You can also see our committed loans is growing. We haven't been growing so much in construction and real estate. We are starting to see some demand there. But I would say the growth and demand is across really all sectors. Just on your second question on Turkey provisioning. You may recall when we acquired Turkey for the first couple of years, we were hitting the provision line pretty hard. They had a cost of risk at the end of 2019 of about 400 basis points came still in the high 300s, 400s through 2020, '21. But since then, you'll be able to see that it's coming down fairly consistently. Their cover ratios have been improving. They were around 50% at acquisition. Last quarter, they were just over 70%. And actually, with the repayments they've had, it means that what's being left in Stage 3 actually has even higher coverage. So on a local basis, they're getting to over 80% cover. So we're still cognizant there. In the world we live in at the moment, there are credit pressures. So it's hard to predict exactly where -- what direction the impairment line will take. And on the quarter side, you have to take them as and when they come by quarter. But we're not seeing any particular pressure coming through. In fact, we're seeing more recoveries than anything.

And just on Turkey. The one thing you have seen in Turkey is a substantial increase in real estate prices in dollar terms. It's been substantial there. So I think that's also been helping with the recoveries given how robust the property market is in dollar terms in Turkey versus the returns.

And Shabbir, you also just asked within that same question about margins in Turkey. We have set out on Page 4. You can see the year-to-date margins for Turkey. They have increased significantly year-on-year from 4.2%, 4.3% to 6%. So even though the base rates are coming down, the lending rates commercially have been significantly higher. There is a number of recent regulations that have come in that's trying to reduce the cost of lending for particular sectors and reduce the lending in some sectors as well. They're trying to direct it into the SME and in certain sectors to encourage growth and penalize the others. So while that wouldn't affect this quarter so much, we would expect the margins to have some compression through next year. But we still need to digest all those regulations and see how that pans out because it also depends on the shape of your overall portfolio and they're trying to regulate to change the shape of that as well. So we'll have to watch that space through next year.

And on the Egyptian pound, unfortunately, Egypt is not a material business for us. We wish it was far more material. It's somewhere that I've spoken to you before on the call that we're trying to grow that business as fast as we can organically, but it's also a market that from an inorganic perspective, we're very interested in. We think it's a good market. But the reality is at the moment is that the translation, both from capital or profitability is pretty immaterial to us, unfortunately. I wish it was more material as a business than it is currently.

And Shabbir, just your final question on strategic investment funds. Yes, those were launched by our retail banking and wealth management unit really just to give increased access to the opportunity to invest in IPOs to customers.

Yes. So it's not our money.

Our next question comes from Aybek Islamov from HSBC.

So I think I would like to ask, I guess, a couple of questions. And the first one, I mean, we've seen quite a decent reclassification of some public sector entities in the private sector post-IPO, but the risk-weighted asset-to-asset ratios or risk density of your assets hasn't increased that much. It's quite stable. So how should we think about this risk-weighted asset density, risk asset density? And the second is, will there be any implication of…

Are you talking about capital with the movement from sovereign to...

Yes. Will it trigger increase in risk weightings on these entities, which now are part of the private sector -- but -- and will it trigger repricing of loans as they roll over facilities because they're now private sector entities. That's one question. Second is, I agree with you that your deposit performance is outstanding. In particular, the CASA deposit ratio is holding up really nicely. Can you explain to us what are you doing differently compared to other big banks in this country which are not able to achieve such a strong CASA deposit performance in a rising rate environment? And I think thirdly, when I look at your core business, the retail banking wealth management stands out by a big mile in terms of the NII growth in the first place. So what's driving such a strong performance in the retail? I'm just curious. Yes, that's pretty much it.

Okay. Maybe I'll have -- I think you mean for the first question, just on the reclassification. You're talking about some of the entities, public entities that have IPO-ed and therefore have a different classification, is that right?

Yes, correct.

Or any of those -- if they have changed their status. Where we do lend to those entities, yes, you apply the -- they become GREs and you apply the risk-weighted assets to that. We've set out the walk on Page 12 of our increase in RWA. So just the scale of any of those reclassifications to the extent there are, we are easily able to absorb any of that change in risk-weighted assets. That doesn't mean we were necessarily lending to any of those beforehand, et cetera. So it's all within the mix. So it's not really a significant part of it. And it also depends on the ratings of the entities as well. Just on the CASA, what retail doing compared with others in the bank in the industry, you're right. We do have a very strong and well-established retail business, and that's actually driven the CASA levels to 63%. I think that's one of the best in the market. It doesn't just happen by itself. Part of that is, of course, our strong brand. Sometimes the bigger bank does have its advantages. There has been some population growth and ENBD off than the first choice. We do run campaigns. They're quite well known in the market. So we are investing in that. It doesn't - CASA doesn't just walk in the door. We've also increased our digital marketing. We've also increased our digital capabilities to make it easier for new to bank to join the bank as well, and that comes with our [Audio Gap] through processing as well. And with that, we also incentivize our sales teams, and you can see that within our cost base with some of the staff cost increases. So those things all come together with the right ingredients to give us that step up. So yes.

I'll just give you just one example of how we're doing some things a bit differently. If you go into a branch and ask for credit card, every credit card application will be on the tablet which also has a cross-sell feature into it. So it's not just a pure credit card and the team within that application also has the capability to open you up a check or a savings account immediately. And that's a straight-through process. [Audio Gap] teams on the road have the tablet as well. All our third-party outsourced providers have the top as well. So we've had a huge [Audio Gap] pickup up in volumes and credit cards, just with this technology that the sales teams can give an instant approval at the site that customers house, customers offers immediately. They don't have to shop around. And as part of that, there's also a cross-sell within that. So some of it is around the technology, and some of it's around the incentivization we have. We've historically heavily incentivized CASA growth because for us, it was always something strategically that will benefit substantially when we had interest rate increases, and that's how we've positioned ourselves for a long time. Also, our Wholesale Bank business has improved our cash management capabilities immensely with their online capabilities. So that's also improved. Our wholesale capabilities in the cash management space, which also helps CASA.

And that also answers your fourth question -- sorry, your third question, I think, on retail returns and NII and why that's gone up is because they have that 62% CASA. So they get a higher return on that. And that's the main function of rather than having a higher cost of funding with term deposits. And as interest rates go up, they benefit from that.

Okay. That's clear. And just to clarify, the entities which are now labeled as private sector their high credit rating. Could there be an impact on the lending spreads, can you revise the lending spreads higher going forward? Is that a possibility?

I think what you're saying is until they've got -- even if they're IPO-ed, there's still going to be a GRE unless they're publicly rated -- and to get out of a GRE classification, they need to be investment grade, publicly rated together GRE classification. So they'd still be under your GRE exposure limits.

And then there's a few questions coming in on the web. I'll go to those after the final voice question.

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

And I would like to congratulate the management for delivering a good set of results. So, my question is related to… Hello?

Got you.

Yes. So my question is related to this FX and derivatives gain from last few quarters, we have noticed a sizable amount of gains related to FX and derivatives. So just wanted to check, are these related to Deniz operation or UE operation? And how can we see the trend going forward regarding this FX and derivative gain?

Sure, I'll take that. So you can see on page 7, the trends that we have had over the last 4 quarters, it is strong. That is a mix of ENBD and Deniz. What we have seen through this year has been very strong demand for FX. The levels of FX sales is close to double, I think, what it had been a year or so ago. So that's both from remittances. SMEs are being very active. So with the strong dollar, what we're seeing is a lot of demand by other currencies, while it's in that position. Then there's also -- and then also within Turkey, when it comes to foreign exchange transactions, there's a wider spread that we're seeing coming through the years. In Q3 2021, it was low because there were some reversals of mark-to-market gains from previous quarters when there have been some of the disruption in Turkey and the longer end of the yield curve rose. And therefore, when they were hedging their liabilities, they had some gains that, that was reversing. So you can see we've got a fairly stable FX and derivative line for the last 4 quarter.

So second question is related to loan growth regarding Deniz...

Chander, can you just speak up a way that we're struggling to hear you?

Yes. Sir, my second question is related to loan growth. My question is related to loan growth from DenizBank. So we have seen exceptional growth around 50% growth in local currency. So I just wanted to check on likeable that create asset quality issue in the near future?

We haven't seen any credit quality issues emerging from that rate of growth. You've got to remember there are also an inflationary environment. So yes, you do need to borrow more for the same thing. That doesn't imply it's adding credit risk through that. And as we said earlier, if anything, we're seeing where some of the loan credits have been weaker before, we're seeing with the strong collateral, particularly with property, we're making good recoveries. But we haven't seen any particular issues emerging at this point in time in their credit book.

Okay. So my third and last question is related to loan growth outlook on UAE operation. So if you could provide some color on it.

Well, we did provide -- we provided guidance through the year that it will be low single digits and that's including the pace of sovereign repayments - for the government repayments. That's why it is as low as that when the underlier you can see for yourself on Page 8 is actually up around 12%. So there has been strong demand this year. We'll let continue into next year. We'll update our guidance in January about our expected pace of loan growth. Looking more forward, it might be that with right interest rates rising the way they are, it wouldn't be an unreasonable expectation for the pace of lending overall to slow in the industry-wide regionally, and globally.

I believe, Maxine, that's all the audio questions. We have a few questions. I'm going to run through those. I will ask Patrick and Shayne, maybe to jump in on a couple. But I think we've -- with one question about higher NIMs. Does that higher interest rates will that affect asset quality? I think we've really addressed that, that we're not -- as Shayne mentioned, we're not seeing any pressure yet in terms of asset quality. But hypothetically, you would expect higher interest rates to have an impact and as per the MEVs, et cetera, we have seen an increase in, for example, Stage 1 and Stage 2 coverage. Another question here from Vijay about again, that -- the first part of that in terms of lending appetite, Patrick's addressed that. And also asked about departure from other banks in terms of higher loan impairments. Again, as we said before, we're comfortable with our coverage ratios. So we can't take on behalf of other banks, but we're certainly…

So some of that is the MEV Stage 1 and 2 that we've built in. When we -- at one stage, are we like to see any impact on lending volumes and risk. Well, we've front-loaded it. We've taken that impact in our calculations for Stage 1, Stage 2 in this quarter. So we've built that in for just any deterioration in the economic outlook and consumer behavior for -- that goes through to '23.

And Vijay, you can see the details of that on Note 24 in the accounts.

And your final point, Vijay, in terms of dividends, Patrick did address that earlier. There's one coming up for you, Patrick, in terms of new lending rules in Turkey and how they will affect in its bank once implemented. And the first part of that -- of your question, Marina, we've already answered in terms of the split of derivatives and FX income.

And I think we have answered the point on the lending growth. They are -- the regulations are trying to reduce the lending in the corporate sector and direct it to sectors that they think will generate economic growth. So that's just something we have to manage within the normal course of business. But inevitably, it could slow overall for the industry, the pace of loan growth.

I think -- I don't know if Marina thinking on the net, the new lending rules were the...

What are the new landing roles...

I think I'd say that's probably around the rules that will announce as Friday which is basically a mix between deposit and where you need to put monies.

The one last week was having to hold at least AED 50 deposit in local currency which we were close to in any case. And they have the pace of lending growth anything over 10% for this year and then the interest rate regulation are probably the 3 main ones.

And then final question is on corporate income tax rate -- or the corporate tax rate, the 9% expectation it's going to be 9% starting in 2024, graduating up to 15% over time. Patrick, I think you answered that on the last call.

Yes, that's right. As a large multinational, we -- the 15% would apply to us rather than 9%, 9% will be the UAE base rate unless you are a large multinational, Yes, there's corporate tax in Turkey. So that gets added on as well, and that's coming in 2024 for us. So a year and a bit down the road.

Okay. I believe that's all the questions answered. Final check, Maxine, there's no further calls on the audio?

We have no further questions.

Thank you, Maxine.

Well, thank you very much, and I'd like to thank you all for your participation in today's call, and I'll hand you back to Maxine, our operator, to provide further details for any follow-up questions, and we'll conclude the call. Thank you very much for joining us today, and I hope you liked our results. Cheers.

Thank you. 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 webcast will also be available on the Emirates NBD website next week. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation.