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

Ladies and gentlemen, welcome to the Emirates NBD Results Call and Webcast for the First Quarter of 2023 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, [ Billy ] , and welcome to our results call. We will have a hard stop at 5 to 3:00 because we have one of our competitors down the road that I know most of you want to attend their presentation as well. I will first touch on the operating environment within our footprint before running through the main highlights of what has been a record quarter for Emirates NBD. We delivered record results in a quarter containing a lot of turbulence in the banking sector. SVB collapsed and the Swiss authorities announced that UBS would buy Credit Suisse. There was also a knock-on effect on Tier 1 securities, concerns about unrealized losses on investments. I'm pleased to say that the impact on the group from all these events is limited. The value of strong conservative risk management and healthy capital and liquidity ratios became very apparent during this volatile quarter. Earlier this month, the IMF trimmed this year's global forecast to 2.8%. However, it expects most countries with our footprint, including UAE, KSA, Turkey, Egypt and India to match or exceed this level. In Media Research -- it expects the UAE economy to grow by 3.9% this year, and this optimism is supported by the UAE's PMI registering a 5-month high of 55.9% in March. Recent events in the U.S. and European banking sectors did not deter major central banks from hiking rates in March as inflation remains above target. Liquidity, however, in the UAE banking sector continues to remain very healthy. Our stable and low-cost funding base enabled MSMED to generate over AED 10 billion in income and delivered a record AED 6 billion profit this quarter. This is the highest ever quarterly profit from a UAE Bank. There are many highlights on the results, which underline our key strengths. All business units delivered an outstanding performance, demonstrating the strength of our diversified business model. Retail had its best ever quarter with over AED 8 billion of disbursements. Retail also issued over 144,000 new credit cards last quarter, and that's more than one every minute of every day. Our growing regional presence is helping drive significant income growth across our international footprint, especially in Egypt, KSA, India and London. NCAP continues to play a lead growth in landmark debt and equity capital markets transactions across the region. Global Markets and Treasury delivered over AED 1 billion in quarterly income and profit for the first time with a strong trading performance despite volatile markets. Emirates Islamic delivered a record profit over AED 600 million as they grew income by an impressive 74%. DenizBank dealt remarkably well with the challenging regulatory environment and will be able to increase profitability. Funding continues to be a key strength of the group with deposits growing by an extraordinarily AED 35 billion during the quarter, including AED 19 billion of CASA growth. Despite rising interest rates, CASA accumulation demonstrates a strong market understanding of retail and our corporate customers. Asset quality improved in Q1 with substantial recoveries, which enables us to improve our credit quality guidance for 2023. We continue to invest to deliver future growth with our new products and services rolled out and the international strategy recharge, particularly in Egypt with the appointment of a new CEO and CFO. To sum up, the group delivered a record sort of results. We have a resilient, diversified business model firing on all cylinders, state-of-the-art banking infrastructure and a rock solid balance sheet. We are well placed to empower our customers to benefit from the growth opportunities across our MENAP footprint. I'll now hand you over to Patrick to go through the results in more detail. Patrick.

Thank you, Shayne, and good afternoon to all of you. Now just running down the usual financials on the Q1 2023 on Page 2. Total income of AED 10.5 billion, is up 64% year-on-year. Within that, both NII and NFI are up substantially. Net interest income increased as our efficient funding base benefits from rate rises. All business segments are performing well with continued strong volume growth also contributing positively to interest income. Standout drivers in non-funded income were stronger customer remittance and FX flows and interest rate hedging, increased local and international card business in both ENBD and Deniz, increased trade finance and higher gains from investments and property disposals. Costs increased 34% year-on-year, supporting very strong business volume growth, particularly in retail and accelerated investments in our international network and digital. The cost income ratio of 25.3% for the quarter is comfortably within our long-term guidance. Impairment allowances are down significantly by 66% year-on-year. As I signaled last quarter, we expected strong recoveries in both UAE and Turkey to come through in Q1. This gives us a very strong profit before tax of AED 7.3 billion, up 145% year-on-year and a AED 6 billion profit after hyperinflation and tax, which is up 119%. This is by any measure and an exceptional performance. And as Shayne mentioned, the highest quarterly profit ever delivered by the UAE bank. Looking very briefly at the quarter-on-quarter numbers. Net interest income is down 7% due to lower Deniz bank margins, which I'll touch on shortly. However, ex-Deniz, NII continued strong growth with the flow-through of rate rises and volume growth. NFI is substantially up from higher FX, property and investment gains. Expenses are lower due to marketing seasonality over the previous quarter. Actually, while I'm on this page, I should point out that we have added a subtotal of profit before tax and others as a key performance metric in anticipation of the introduction of corporate tax, which for us starts from 1 January 2024. We still await confirmation on whether the 15% rate for larger companies will apply, and we'll keep you updated. In the bottom summary table, you can see that the balance sheet metrics are in good shape with assets, loans and deposits all growing. Capital, liquidity and credit quality metrics all considerably stronger than 12 months ago. Turning to net interest income on Slide 3. The bottom chart shows that margins improved by 145 basis points year-on-year, helped by improving loan and deposit mix and higher interest rates. NIMs down 35 basis points in the first quarter due to the regulatory impact of DenizBank NIMs, which quickly reverted back to similar levels seen in Q1 of last year. The 4.05% NIM in Q1 is trending towards our guidance range of 3.8% to 4%. The regulatory impact on DenizBank NIMs has materialized perhaps more quickly than expected. However, CASA remains at 60% of deposits overall, and there is a possibility of another rate rise in May. So when we condense the upside and downside drivers, we have maintained our NIM guidance, we keep you updated each quarter as the mainland drivers evolve. Slide 4 shows that fee and commission income is up 32% year-on-year with a solid trend of quarterly growth, mainly from increased local and international retail card business at both ENBD and DenizBank, strong investment banking revenue and trade finance growth. Other operating income in Q1 is significantly up by 72% year-on-year and more than double the previous quarter due to higher customer remittance volumes and FX flows, additional corporate hedging activity and gains on property and investments. On Slide 5, we see the gross lending increased by 3% during Q1, helped by a record quarter for retail with over AED 8 billion of disbursements. DenizBank also delivered strong loan growth across a range of sectors, but particularly strong in personal. Corporate lending grew on healthy demand from manufacturing, construction and trade and strong origination volumes were largely offset by maturities. Total deposits increased by AED 35 billion in Q1, up 7%. Within that, CASA was up another AED 19 billion. The ability to attract and retain CASA remains one of ENBD's core strengths. CASA represents a healthy 60% of total group deposits with this percentage unchanged from last quarter despite higher interest rates, which gives us a lower cost of funding. Just to note that from this quarter onwards, we incorporate Emirates Islamic balance sheet and P&L into the respective retail and corporate segments. This reflects better the underlying business franchises and how we manage them. On Slide 6, we see that the NPL ratio improved by 0.4% to 5.6% during Q1, helped by strong recoveries in both the UAE and Turkey. These recoveries also meant the annualized cost of risk for Q1 was 41 basis points, substantially lower than the 108 basis points for the whole of 2022. The gross cost of risk excluding recoveries, was similar to Q4 last year, including an overlay for the Turkish earthquake. The realization of healthy recoveries, coupled with a good pipeline of recoveries in both Turkey and the UAE enables us to tighten our guidance for NPLs to around 6% and lower the cost of risk guidance to 50 to 70 basis points. Coverage rose by 7% to 152% during Q1 with Stage 1, increasing slightly due to the overlay for Turkey. Paddy will now take us through the remaining slides.

Thanks, Patrick. On Slide 7, we see that the cost-to-income ratio improved to 25.3%. Raising income enabled us to proactively accelerate our investment in human capital and future growth in digital and international and drive underlying earnings growth with incentives for sales staff. Other costs decreased quarter-on-quarter as service, legal, professional fees and marketing costs were lower due to seasonality. As we guided last quarter, we expect this year's cost-to-income ratio to be closer to the 30% area. Slide 8, funding and liquidity shows that the group continues to operate with very strong liquidity with an AD ratio of 80% and an LCR of 187%. Given the higher rate environment, we are able to deploy excess liquidity and attractive yield in high-quality debt instruments. There has been a lot of focus in the last quarter on realized losses with some analysts estimating the impact on UAE banks to be between 60 and 120 basis points of capital. Given this heightened interest, we have made additional disclosure on Page 11 of the financial statements, and this shows that the unrealized loss on our UAE 106 billion investments measured at amortized cost is UAE 2.66 billion, and this equates to 0.5% of capital. This is below the low end of the analyst expectations, probably because of the vast majority of these investments are in government bonds. In Q1, we issued AED 4 billion of term debt, including the first public Dirham Sukuk and conventional bonds following the establishment of a local currency yield curve. We have just under AED 6 billion of term debt maturing in the remainder of the year, which is well within our normal issuance capabilities. Slide 9 on capital shows the common equity Tier 1 ratio strengthened to 15.8% in Q1 at AED 5.6 billion of net earnings more than offset a 3% increase in risk-weighted assets. The common equity Tier 1 ratio was 15.3%, excluding the ECL regulatory add-back. And our first call on additional Tier 1 securities is 2 years away in 2025, and any decision would be made much closer to then. Turning to the business performance. Slide 10 shows that RBWM income improved 39% during the year. It was a record quarter for loan disbursements and credit card issuance. Retail deposit gathering engine continued in Q1, adding a further UAE 13 billion of deposits. Corporate and Institutional Banking delivered a strong increase in income. And this, along with significant recoveries, boosted their profit by 128%. CIB continues to roll out additional products and services to clients, including new global custody services and easier access to trading on the Abu Dhabi Stock Exchange. Emirates Islamic results are reported in the respect of retail and corporate sectors. However, it's worth noting that 74% increase in income that EI registered, helping deliver a record net profit of over AED 600 million for the quarter. Global Markets and Treasury delivered an outstanding performance with quarterly income and profit surpassing the AED 1 billion mark for the first time ever. Net interest income jumped on higher income from balance sheet positioning and an increase in investment income. Non-funded income was substantially higher on a strong trading and sales performance. DenizBank's income was up 37% to AED 861 million on higher income and strong recoveries. We have a couple of extra slides in the appendix containing more granular detail on the dollar convenience translation. With that, we can open up the call. [ Billy ]. Please go ahead...

Thank you, Paddy. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from the line of Nida Iqbal from Morgan Stanley.

Congratulations on a great set of results. My first question is on the NIMs. The UAE performance is clearly impressive, with NIMs up 46 bps quarter-on-quarter. Would be great to get your thoughts on the outlook going forward. Do you think margins have peaked in the UAE. If you could talk about your expectations in terms of deposit betas in the coming quarters and the potential shift into term deposits versus CASA. And on the same topic, it would be great to get your thoughts on DenizBank NIMs under a scenario of post elections return to a more normalized monetary policy. My second question is on the accelerating investment into international growth. If you can get some more details about how you're thinking about this? And are we talking M&A or organic growth in countries that you have [indiscernible].

Thanks, Nida. Maybe I can just take those points on the NIMs monetary policy, et cetera, and Shayne can have a go at international. Just on the NIMs in the UAE first, you're right, it is up 45, 46 basis points for the quarter. That is a combination of the flow-through from the rate rises last year, so as assets reprice coming through, plus there have been 2 rate rises this year. There is an expected rise in May. Of course, you can never be certain of these things until they actually happen. And what we've also seen really as we haven't seen as much migration from current account, savings account, term deposits. So with our CASA is still at 60%, that means cost of funding has remained lower than we might have expected. So when we set the original guidance earlier in the year, our base assumption is that the rate rises flowing through or in the current year, less any cuts that might have been expected in the latter part of the year would have been offset largely by migration from CASA to term deposits. So really, the guidance that we gave, where we were exiting at 4.4% at the end of last year and therefore, guiding to 3.8% to 4% was largely going to be due to DenizBank and our understanding of the impact of the regulation on both the asset pricing and the cost of funding there. What we've been actually seeing is that the impact on DenizBank has probably come through slightly faster than we were expecting. The net-net, that's really being offset by better-than-expected margin in the UAE given less is migrated to term deposits and get the cost of funding lower. So that's sort of the dynamic there. So even just mathematically in maintaining that guidance, if you take the midpoint of 3.9%, and we did 4.05% for the first quarter implies about a 3.85% margin for the final quarters. Obviously, it's not going to be as linear as that. Just in respect of the Deniz monetary policy and what might happen. Well, let's just see what happens in the elections through May, through mid-May and if there's a runoff there at the end of May. But our base assumptions that we've also been making is, on one hand, if monetary policy normalizes and therefore, rates go up, that will continue to tighten the margin pressure in Turkey, and we've factored that in. if the monetary policy doesn't normalize. That will also have a negative impact on margins because of the regulation on the asset pricing and the cost of the funding. So possibly a similar outcome directionally between those 2 different scenarios.

On the accelerated investment, we were talking organic with that investment. We would hope to have 20 branches opened in Saudi by the end of the year from 8. So we'll go from 8 to 20. We have a significant relocation, refurbishment and opening plan for Egypt to improve that. We also are accelerating some of our investment in technology. we always have -- even though we keep ramping up our technology spend, our demand from our businesses and support units always is far, far greater than the budget allocation. And I think this gives us an opportunity where we are in earnings to accelerate some of that and bring it forward. And we're particularly focused on delivering new customer-facing services. And for those of you at [ bank ] you would notice that we've rolled out our new app recently ENBD X. We now have 250,000 clients onto the new app, and eventually, we'll migrate everyone onto that. But accelerating the services are added to the app, including wealth management services as we go forward. So for us, this is an opportunity to accelerate. And we're mindful -- one of the reasons we want to accelerate is we're mindful that as you would all point out as analysts that rates are likely to drop in '24 and '25 and therefore, ramping up our cost when we have the room is a good strategy for us to bring some of that forward and hopefully thereby increase earnings for future years and build that base as we move forward.

Thank you. Our next question today comes from the line of Waleed Mohsin from Goldman Sachs.

Yes. Thank you for the presentation. And congratulations on the strong and record set of results. Three questions, please. First, on the retail business. There has been strong momentum all throughout 2022. But when we look at the first quarter, there was an acceleration both on the funding side as well as on the lending side. So I'm referring to the strong pickup in CASA generation and then some of the retail disbursements. So if you could kindly talk about what drove the acceleration during the first quarter. That would be extremely helpful. And while you do that, if you could please also touch upon any changes in the liquidity situation in the UAE given the change in reserve requirement ratio back from 7% to 11%. So that's the first question. Secondly, on asset quality. If you could please talk about which sectors drove the recoveries and the guidance that you've changed, is it primarily driven by recoveries? Or would your gross cost of risk guidance also change? So meaning that is it just a mark-to-market on what you've seen in the first quarter? Or are you also changing your forward-looking expectations around cost of risk? And my third and final question, if you could perhaps provide an update on your inorganic growth aspirations, especially given that your domestic business continues to be in a very, very strong footing. You're delivering organic growth in some of the international markets as well. And then the international environment remains quite uncertain. So your thoughts on inorganic aspirations would be very helpful.

Thanks very much, Waleed. Maybe I can tackle the first 2 of those again. Just on the retail momentum, you're right, they're very strong on both the asset and liability side. And I think the business has had a much stronger focus on the asset side in the last couple of years. There are quite a combination of factors behind that, not least the ability for the business to run very strong campaigns and understand its market and how it goes about actually raising those assets and liabilities and the promotion of those. There have been a couple of -- actually, there's been a mega campaign on both the asset and liability side this year alone. So we usually do get off to quite a strong start in the first quarter. There's also net migration to the UAE as well. And as you know, the economy is quite buoyant at the moment. So -- and also probably a fourth component there is the increase of our digital reach means we are able to get a lot more new to bank as well as deepening the relationship with our existing customers. Let's set on the retail momentum side. And the momentum that we've seen in the Q1, we haven't as yet really seen any signs that, that has slackened off. Just on the -- I think you mentioned the liquidity side with the reserve ratio going back up to 11% from 7%. It went down to 7% from 14% at the start of the pandemic, and that was very helpful for liquidity in the market. I think of the net impact for across the UAE is about AED 50 billion from that change in that ratio. We haven't really seen any impact on liquidity in the market from our perspective. We haven't had to start to bid up forward deposits to replace that. In fact, to some extent, with strong liquidity already having to put that the extra amount back into the Central Bank just comes out of other liquid resources. So it's not really tightening the market from our perspective. Just on the cost of risk guidance and the sectors, I think you asked about. So the recovery there has been very strong. This isn't just the recoveries from provisions made in the last year or 2, the financial recovery teams work for many years, sometimes on some cases, and it just happened quite a number of them have been coming through fairly evenly balanced between the UAE and Turkey. And I would say the predominant sector from those recoveries is in the property sector. So in the UAE, some of those -- that some of those have been worked on for a number of years, the property market is quite buoyant at the moment. And now it's the time to be able to realize those recoveries. And the same pretty much goes for the strength of the property sector in Turkey as well.

I mean some of the Turkish properties doubled in dollar value. And I think that's largely led to some of the recoveries. And I think the one thing I would point out to the analysts is you only get the recoveries when you've made the provisions. So you take the pain first to get the gain later on. So with our Stage 3 provisioning, as you've seen with the percentages, it means that when we are working these loans up, we are getting a recovery to the bottom line, which is beneficial to us. I would -- just on the inorganic, I'll take over from that one. In the last 10 years, we've made 2 acquisitions. So we haven't made a lot. We've looked at many and we're disciplined around what we'll buy. And I think as I said to you many times, we have to have 51% control. We have to have board control. It needs to fit into our criteria as to where our customers are going, where are they investing? And importantly, most importantly, is price. And we walked away from many transactions in markets where the price didn't meet our price expectations. So we don't believe that we can, over the medium term, generate shareholder value, and that's accretive to our shareholders, we will not acquire. So we obviously with 15.8% CET1, we have very strong capital position. But in the same time, we'll continue to be disciplined with our capital as we go forward.

That's very helpful. Just one follow-up, please. On the gross cost of risk versus net cost of risk. So is it just a kind of mark-to-market on what you've seen in terms of the guidance change? Or is the gross cost of risk guidance also improving?

Yes. But just remember, we did give you a heads up last quarter that we were likely to have decent recoveries in the first quarter in particular and the first half. So I think we did try to warn you because we did see some coming. So we didn't try to blindside you with these numbers.

Yes. And Waleed, when we started off with the guidance at the beginning of the year, you have some line of sight that you don't have cash in the bank at that point in time. And we have a clearer view having gone through the fourth -- first quarter. So yes, we do have some actual recovery that's closing in on a pipeline as well. So it gives us some more comfort to be able to tighten that guidance. You may recall in the past, we've had a fairly wide guidance, if any, on the actual impairment levels. I think previously, it was 1% to 1.25%, then we moved it to less than 1%. So we do have better line of sight on that now. So it's not just actual plus what we thought in January. We have updated our view on the recoveries, of course, until you actually get cash in the bank, nothing is absolutely certain.

The next question today comes from the line of Shabbir Malik from EFG Hermes.

A couple of questions from my side. When I look at your investment book and compared to the -- some of the other banks in the UAE, you have a relatively high proportion of your investments classified as amortized costs. I just wanted to understand what shapes this decision of making these allocations. And my second question is around the -- if you look at 2024, potentially, there is corporate tax coming in, rates are also potentially going to be lower. Can we see these steps such as your inorganic strategy, growth in Saudi Arabia, expansion of your branch network, investing in digital as potential offsets that can kind of mitigate the impact or maybe will you compensate on the impact of lower interest rates and corporate tax. So those are the 2 questions.

Shabbir, welcome. Just on the investment book side, you're right. We have an amortized cost investment book of about AED 106 billion. So that's about 75%, 77% of our total liquidity book. So there are accounting rules to be able to meet that definition i.e., you hold to collect. So the bottom line is we don't trade our liquidity book. We don't need to. We have a very strong LCR ratio. So that's the way we hold that. So there's nothing really too much to add to that. Different banks have different views on that. And so that's really our business model that we just don't [ treat ] in our book. On your other question, the actual -- I'm not sure if the question was so much about the impact of corporate tax plus lower interest rates and what we're doing about that or whether it's corporate tax specific. But as Shayne did mention before that we are taking the opportunity to invest for the future in new revenue streams and with digital and our expansion. So when interest rates do come down, corporate tax does come along that we have developed other engines for growth as well. I think that was the essence of the question.

I think I'll try to answer it, and I'd say that if you think about what Patrick and I focus on, it's not our day-to-day business. Our focus really -- the 2 of us is '24, '25, '26, how are we going to generate revenue to make up for that shortfall that will come with lower rates. We're -- obviously, we're very interest rate sensitive and every 25 bps is about $100 million. So for us, we're very, very aware of that. And we also know that we want to position ourselves for when those rates logically will come down.

No, that's very good. That's what I was hoping for or kind of the response that I was expecting. And maybe one final point. You said that there are certain regulations which is impacting NIMs in DenizBank. If you kind of -- I think you've mentioned this before, but can you please reiterate what those factors are?

So there are 2 sides of the balance sheet. So on the asset side, if you want to charge an amount over a specific amount and there are different banks and you have to hold government securities, almost as a penalty as a quid pro quo, those government securities won't have a yield as great as that lending. So in essence, the whole book is...

And you're taking the duration risk of...

And the duration risk, correct. And so that means, net-net, if you actually try and land at 25% or 30% that was the rate before Q4 close last year, then you would find that you probably got an even lower yield than if you land at around 20% or lower actually. So there are different gradings of that. So that's what's driving the rates down and it's designed to funnel credit into specific sectors. And then on the liability side, there's specific rules that is trying to, I guess, de-dollarize the economy. So it's discouraging dollar liable foreign currency liabilities, euro is a prominent there. So there are rules to have -- at first that was 50% from the [ lira ] then it became 60% and that will be heading towards 70% therefore banks are having to pay up more to attract [ lira ] funding. So that's obviously going to squeeze the margin on [ the side ].

And then if you don't meet those thresholds of 50%, 60%, 70%, there's a percentage that you have to invest in low-yielding government bonds with that duration risk.

The next question today comes from the line of Chander Kumar from Ali Ramz Capital.

Congratulations on the strong set of results. I have a question regarding FX and trading gains, which increased significantly during the quarter. So can you please provide some guidance on drivers of this increase, were there any one-off gains or nonrecurring items that contributed to this increase?

Sure. I'll take that one. So actually, if we look at Page 4, I guess, this is the deck that sets out the quarterly profile of other income. And I think you're referring to the FX and derivative dark blue bar at the bottom right there. So the majority -- the vast majority of that is client flow business. The mix between ENBD and Deniz changes. The ENBD part of that has actually seen very strong client growth, particularly with spot FX with SME and retail customers plus our corporates that are hedging on the interest rate side as well. But FX has been growing at a phenomenal rate and a substantial part of that, not all of it, is also from new to product customers, customers that haven't been using that before. So about AED 250-odd million of that delta from AED 907 million to AED 1.4 billion is coming from ENBD as a combination of FX and other products as well. Deniz, I think every quarter I sometimes give a positive history of some of the ups and downs of what's making -- what's changing in each quarter. But within DenizBank, the larger part of it is also very strong client flow income as well. They saw foreign currency spreads widened quite significantly in the last year or so volumes are strong, so the business flows are strong. There is quarter-to-quarter sometimes between 100 to 200 max of mark-to-market changes that we've discussed previously in DenizBank, depending on what's happening with their interest rate hedging and the shape of [ the curves ] or whether some event has happened. So a significant part of that AED 1.4 billion is very strong client income growth.

Okay. So around like 70% is from customer flows. So you mean this level of trading gains are sustainable going forward, am I right?

I didn't actually hear that last part. I heard 7...

Is 70% sustainable.

Well, I didn't actually give a percentage. So obviously, the client flow part is what we want to change, but you can get a delta of between 100 to 200 from quarter-to-quarter. So I know the prior quarter, Q4 there, that had a negative delta in DenizBank that went positive. So from quarter-to-quarter, you can get the actual movement can be 100, 200, 300 possibly from quarter-to-quarter. But there is a real strong underlying client flow there. I can't put an exact number on it for you.

I think it's fair to say that the vast majority of our FX is client flow. Yes, we trade, but it's small compared to the total flow, not trading, yes.

The next question today comes from the line of Olga Veselova from Bank of America.

I have 3 questions. One is about your sensitivity of CET1 ratio to lira devaluation, if you can update us or disclose that, that will be useful. Second is we noticed that the volume of sovereign loans went up in the first quarter, quarter-over-quarter. It was a small increase, but still, this is reversal after several quarters of consistent reduction. Can you please comment on that? And finally, the question again on net interest margin coming back to the first question from Nida, I think, 46 bps increase of margin quarter-over-quarter is a very substantial rise. Can you give us your outlook for the next couple of quarters for ENBD stand-alone, excluding Deniz. Do you think that's the peak, the next move will be flat to down or that's not the case?

Just if I -- the -- for that first question on lira, would you mind just repeating that one just so I'm clear?

Yes. So if you can, if you decide to disclose your sensitivity of the group's CET1 ratio to lira devaluation, so let's say, 5% to 10% lira deval, CET1 ratio goes up or goes down by this percentage point?

Yes. Look, we don't have that as a single number for Turkey bps. Across our major currencies, we do look at a 30% shock rate, and that would be something in the range of 20 basis points on CET1. Having said that, what we've actually witnessed over the last 2 years, particularly in Turkey, is that even with the lira depreciation, the denominator of RWA has actually depreciated faster than the numerator. Therefore, it's actually often either had a very small impact on net CET1 a handful of basis points if not a positive impact. So this quarter has been slightly positive net-net on all of that. So the lira thing will relatively stable in the last quarter, but hopefully that gives you a sense of magnitude. Just on the sovereign lending. Yes, so that's more -- we've had an ongoing trend of that going down for the last 2 or 3 years. It's gone up slightly in the quarter. That's just the timing of cash flow, but the overall trend would be down. And the third one, just on the 46 basis points on ENBD stand-alone. So in the back of the deck, hopefully, we're being helpful on Page 13, we've also presented the NIMs of ENBD x Deniz, which is what you're after. So it's gone up from 3.48% in Q4 last year to 3.94%. That's probably better than we might have been expected. -- expecting. There is room for some increase in that if we are able to maintain our rate of CASA versus term deposits plus there is some of the rate flow through still to come through from the 2 rate rises we've seen so far this year and the possibility of one in May this year. If there are any rate cuts later in the year, that's likely to have less of an impact for this year. So a little bit of upside on that, that we think would then offset and mitigate some of the Deniz downside.

Just -- sorry, Billy. We have just under 10 minutes left. I know there's a few audio questions, and there's a few questions on the web. So we did promise a hard stop at 5 to 3:00. So we'll do our best to answer these as efficiently as possible. So please go ahead, Billy.

The next question today comes from the line of [ Jeff Pansuri ] from NBK Capital.

Congratulations on a good set of numbers. Two questions from my end. NPL ratio has dropped from 6 to 5.6 wondering which segments have contributed to this? Is it retail, corporate or Deniz? That's the first question. And can it go down further on the follow-up as well. And the second one is you wanted to grow Saudi number of branches from 8 to 20 this year. What is the current composition of Saudi in terms of the loans to the overall loan book? And where do you want to take it forward in the next couple of years?

[ Jeff], just on your NPLs, you're right, it is down with our strong recoveries. And look, substantially, that is in the property sector, more generically. There are a multitude of other sectors as well. This is where it's been recovering most of all.

I think on Saudi, we don't disclose the specific breakout on Saudi. But what I'd say is we're far too small, is what I would say. In fact, I've been talking to our CEO there with the corporate team out there a few weeks ago. I think there's a pile of corporate counterparties there that we're not dealing with, and we do need to ramp up exposure to Saudi. We are growing our retail book there quite nicely. But I think from the corporate side, there's a lot of counterparties there that we don't bank with that given the liquidity that the UAE has, whereas Saudi has been quite short on liquidity, it has been a bit patchy, that we have got the capacity to ramp up our lending in Saudi. But we're also mindful that unless we can get some ancillary business there, then just pure lending for the sake of lending and Saudi margins are quite fine, doesn't make a lot of sense. So where we can -- it makes economic sense for us, we do want to ramp up our lending in Saudi, especially in the corporate space because I think we're quite like that. If you look at the ambition of the Kingdom and the development that's going on there, it's been quite exceptional. And I think there's plenty of opportunities there for banks like ourselves to grow significantly in Saudi.

The next question today comes from the line of Rahul Bajaj from Citi.

Rahul Bajaj from Citi. A quick one from my side. I see you booked about AED 300 million in credit charge for unfunded exposures. Just wanted to get more color on what these exposures are and, are these kind of one-off charge? Or should we expect more of these in the future? Another question on the same topic, credit charge. You mentioned recoveries were largely in the first quarter. Should we expect more of these recoveries going forward in 2Q and rest of 2023? Or you think the recoveries are largely done? Those are the 2 from my side?

Yes, Rahul. Just the AED 300 million on unfunded quite simply, that's the contingent books been growing very rapidly over the last couple of years, and we've updated our models. So that's really what that's for. And just on recoveries for Q1, we do have line of sight to the pipeline for some more in Q2, perhaps not at the same magnitude. And then H2, we expect is more likely to be at a more normal level.

The next question today comes from the line of Naresh Bilandani from JPMorgan.

Congrats on the results. Three very quick questions, please. One is I know you've not commented on your M&A plans in India and what's been reported in the press. But just for some color there. Would it be possible for you to give us an indication of what is the minimum level of capital that you, over the minimum that you would like to hold at all times during -- at any time when you work through the M&A process? That's one. Second is the FX currency translation reserve. The reserve has -- the negative value has kind of been improving for the past 2 quarters. Would you be able to comment on that on what is driving this improvement? Does this have anything to do with the de-dollarization in the Turkish balance sheet? Is that a fair way to think of this? Or is there another reason there? And the third is just very keen to understand why the change in the segmented disclosure and why are you not disclosing Emirates Islamic separately as a segment anymore. Does this have anything to do with the new tax regulations that are being implemented and the presentation makes any difference?

Maybe I can just work backwards from that. Just on the EI segmentation, that's more a redefinition of how we're managing those businesses, management reporting lines, et cetera. And it also then articulate better when we talk about retail, for example, that includes the whole of the UAE, where EI has a substantial retail franchise here. So if we talked about retail UAE, excluding EI, it's not really giving the full picture of our market share and penetration.

And remember, EI is publicly listed still and has DFM disclosures. So those numbers are relatively available to you separately, if you so require them. So it's quite transparent.

Just on the translation reserve, I think you're lucky in that about Page 7 on the accounts and the currency translation reserve, right? Or are you looking at...

That is correct.

In the OCI, the actual -- so in OCI on Page 4, there's AED 755 million of translation loss, 2/3 of that's probably Egypt for that quarter and the rest is DenizBank with the lira not depreciating so much in this quarter. I think it was down just about 2% or so. And that's down -- the whole overall total is down significantly from the last year or two where I think 1 year, we had up to AED 2-or-so billion going through that.

Pardon me, that was indeed my question. What is driving the improvement overall?

Just less currency depreciation than before. So the lira, I mean they're doing everything they can to prop the lira by nonmonetary policy means. So I think it sort of went from about 18 at the beginning of this year to 19. So it's much less of an impact. So that would have been a much smaller number even if it wasn't for Egypt, which I think there was a much more substantial depreciation through this quarter.

Okay. Just on capital please. The minimum capital.

Which one, sorry, the minimum capital? That's not something that we would say. We have a regulatory minimum capital. If you do an acquisition and you're not meeting your risk appetite over that, then you have to raise capital, but that's discussion for way in the future, if and when anything was done with that. But you can see we've got 15.8% CET1. So extremely strong and a significant amount of capacity.

Thanks, Naresh. I'm conscious of time. I have a few audio questions, I'm very quickly going to run through those and we've answered the first 3 of your questions above, we have answered the fourth question as well, reason for recoveries in Turkey despite difficult operating environment as Shayne mentioned, we're seeing some property doubling in dollar terms there, and that is helping our recovery efforts and in terms of...

Sometimes inflation is good.

Yes. In terms of another question on market share within the UAE, we definitely are taking market share. That is -- not just in retail. Corporate is doing very well. Given the consolidation we've seen in Abu Dhabi Bank and sector, we are seeing improved opportunities to take corporate business in Abu Dhabi. A question on high valuations of banks. Again, Shayne addressed the criteria that we would look at in terms of value determination, and we have that price discipline. So unless an acquisition makes absolute sense both in terms of shareholder value, that was something that we would consider or only consider. High NPLs in Turkey potentially. Again, we've seen with high inflation. We've seen the ability to repay previous loans has been good. And we will just see how it evolves going forward. And then final question on sustainability of NIMs going forward. Again, Patrick addressed that it has come down slightly quicker than we had anticipated, but that's been offset by increased CASA and potential for another rate raise. So net-net, we were able to maintain our guidance. Okay. That's all from me.

Well, I'd like to thank you all for joining today's call and for your questions or as for usual, those are some very good questions. And I'll now hand you back to the operator to provide details in case you want any follow-up questions and close the call Thanks, Billy.

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 and 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.