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

Ladies and gentlemen, welcome to the Emirates NBD second quarter of 2023 financial year results call and webcast by analyst and investors. Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should disconnect immediately. I'll now pass the call over to our host. Mr. Shayne Nelson, Group CEO of Emirates NBD.

Thank you, Alex. And welcome to our first half results call. There are a few points on transformation, I want to cover before running through the main highlights of the outstanding first half results. Firstly, we are now celebrating the group's 60th anniversary. This occasion marks an incredible journey from a local bank with 1 branch to a major international bank with nearly 900 branches employing over 30,000 people serving 20 million customers including countries. As the sector transition is away from the role of a traditional banker, we are recognized as a leader in talent development, empowering staff to shape their own careers, and transition into new roles. We successfully implemented our biggest ever IT transformation. We are now one of the few banks in the world to be 100% cloud native. Our best in class IT architecture enables us to launches new products and services with tremendous agility. In the last quarter we launched 10 new products and services, including carbon trading and real-time effects. We are currently rolling out our ENBD X, a complete revamp of our banking app with an enhanced user interface. This transformation is meeting the changing needs of customers. UAE's national energy strategy expects up to AED 200 billion of investment as it triples the contribution of renewable energy by 2030. As UAE hosts COP28 later this year, ENBD is playing a major role delivering ESG solutions to customers to help them meet their Net Zero ambitions and sustainability goals. We're shaping our ESG framework, integrating ESG best practice into all aspects of our business and aligning to national goals, including the UAE's accelerated emission reduction targets. Given the success of our transformation of talent, IT and culture is feeding -- as we celebrate our 60-year anniversary, Emirates NBD was named Best Bank in the UAE and Best Bank in the Middle East at the recent Euromoney Excellence Awards in 2023. The bank was also named Middle East Best for Digital and Best Domestic Private Bank by Euromoney. In terms of the operating environment, GCC economies remain resilient against a weaker global backdrop and higher interest rates. Our research team revised this year's forecast for UAE GDP lower to 2.9% on the expectation of lower hydrocarbon production, although we revised up our forecast for non-oil growth to 5%. We expect considerable investment in renewable energy in the coming years to meet UAE's ambitious targets. Other economic sectors such as tourism are flourishing with Dubai tourist numbers recovering close to pre-pandemic levels. In the wider MENAT region, Egypt made successful asset sales reflecting their commitment to revamp the economy. And in Turkey, we saw interest rates increase and a partial unwind of regulations. The strong regional economy helped us deliver the highest ever half year income and profit of any bank in the region. There are many other highlights which underline our key strengths. All businesses delivered higher income and profit. Retail lending increased by a record AED 12 billion. Corporate lending closed key deals across the region despite intense competition, underlying our regional franchise and enabling an upward revision in loan growth guidance. ENBD grew deposits by AED 53 billion in the first half, including a hugely impressive AED 37 billion of low-cost CASA. We now have a 1/3 market share in all UAE credit card spend and close to that level on debit card spend. Global Markets and Treasury delivered nearly AED 2 billion in profit. DenizBank continues to deal remarkably well with a challenging operating environment, adding AED 1.9 billion to group profit. Emirates Islamic had its best ever half year adding over AED 1.2 billion to group profit. ENBD's investment in technology, AI and advanced analytics is driving new customer services and products and propelling future business growth. The balance sheet surpassed the AED 900 billion milestone for the first time ever. We look forward to the COP28 in the UAE. ENBD is delivering exciting ESG solutions to customers as their Net Zero ambition and sustainability goals drive further economic activity. To sum up, ENBD delivered another record set of results built on a leading regional franchise, state-of-the-art IT infrastructure an adaptable and enthusiastic workforce. We are forward-looking and well placed to harness the power of generative AI to further enhance ENBD's operations and enhance productivity. The UAE's ambitious ESG national goals provide customers and ENBD a virtuous growth opportunity. So the future looks bright at Emirates NBD. I will now hand you over to Patrick to go through the results in more detail. Over to you, Patrick.

Thank you, Shayne, and a very good afternoon to all of you. Just running down the H1 summary financials on Page 2. Total income of AED 21.3 billion is up 50% year-on-year. Within that, both NII and NFI are up substantially. Net interest income increased with our efficient funding base benefits from higher interest rates. All business segments are performing well with strong volume growth contributing positively to interest income. Retail lending had a record half year and corporate successfully closed some key transactions to lower repayments in Q2. Nonfunded income grew by AED 2.1 billion to AED 6.9 billion. We saw a strong growth in client business flows such as customer remittance, FX and interest rate hedging, increased local and international card business in ENBD and Deniz and increased trade finance. Turkey also had lower swap funding costs, boosting NFI relative to last year and the last quarter. Costs increased 34% year-on-year, supporting very strong business volume growth, particularly in retail and accelerated investment in our digital capabilities in the international network. The cost income ratio was 25.6% for H1 is comfortably within long-term guidance, but more on that from Paddy shortly. Payments allowances are down significantly by 50% year-on-year. As expected, and as I signaled in the last few quarters, strong recoveries in both UAE and Turkey came through in the first half. This gives us a very strong profit before tax of AED 14.9 billion, which is just over $4 billion, up 80% year-on-year and a AED 12.3 billion profit after hyperinflation and tax which is up 130%. We have issued very clear full year guidance on NIMs, loan growth, costs and cost of risk, whilst we are really delighted with the first half results, we did benefit from strong nonfunded income and credit recovery. Looking forward to the second half, the same level of nonfunded income may not be repeated and we expect some compression in margins from Turkey and a higher cost of risk. So if I may encourage you to look at the full year guidance parameters rather than simply annualizing this very strong first half profit. Looking very briefly at the quarter-on-quarter numbers on the same page. Net interest income is up by 1% as loan growth and stable margins at ENBD offset the decline in DenizBank margin. NFI is up 10% from higher FX and derivative income from DenizBank and lower swap funding costs. Expenses are 7% higher due to business-driven staff costs and to some extent VAT associated with higher business volumes. As of now, we anticipate the new UAE corporate tax that will be effective from -- for ENBD from 1 January 2024 to be at a rate of 9%. That could increase subsequently should OECD members agreement on minimum tax rate of 15% be implemented in countries within our footprint. We'll keep you updated should that change. In the bottom summary table you can see the balance sheet metrics all in good shape with assets, loans and deposits are all growing. Capital, liquidity, and credit quality metrics are considerably stronger than 12 months ago. Given strong loan growth in the first half, we have revised loan growth guidance to high single digits for the full year. Now turning to net interest income on Slide 3. The bottom charts show that margins improved by 110 basis points year-on-year, helped by improving loan and deposit mix and higher interest rates, NIMs are down 18% in the second quarter as expected due to lower DenizBank NIMs. The first half NIM of 3.96% is within our guidance range of 3.8% to 4.0%. I expect that NIMs will trend towards the lower end of guidance due to a combination of lower DenizBank NIM, partly offset by favorable CASA behavior, healthy loan mix and the potential for UAE interest rates to remain higher for longer. Of course, we'll keep you updated each quarter as these main NIM drivers evolve. Slide 4 shows that fee and commission income is up by 12% year-on-year with a solid trend of quarterly growth mainly from increased local and international retail card business, in both ENBD and Deniz, strong investment banking revenue and trade finance growth. Other operating income in Q2 2023 is significantly up by 54% year-on-year due to higher customer remittance volumes and FX, additional corporate hedging activity and derivative income from hedging and swaps relating to DenizBank. As I mentioned earlier, Turkey had lower swap funding costs, boosting the NFI relative to last year and to the last quarter. In net P&L terms, however, this derivative funding cost has really switched to net interest income as DenizBank raised more Turkish lira deposits rather than swapping euros and dollars to Turkish lira, which in turn partly contributed to lower NIMs in Deniz. Over the last 4 or 5 quarters, around 80% to 90% of FX and derivative income was client flow. But in Q2, nonclient income rose with greater mark-to-market gains from market volatility around the Turkish election time. Some of this may reverse in future quarters or at least not recur. On Slide 5, we see that gross lending increased 5% during H1, helped by a record of AED 12 billion growth in retail and -- AED 14 billion net growth in corporate lending on strong origination with fewer repayments. DenizBank loans declined in dirham terms due to currency depreciation, but they grew their local currency book by 24%. So still strong local business momentum. Total deposits increased AED 53 billion in H1, up 11%. Within that, CASA is up another AED 37 billion. The ability to attract and retain CASA remains one of the NBD's core strengths. CASA represents a healthy 61% of total group deposits despite higher interest rates, which gives a lower cost of funding. Corporate and government-related deposits have increased in H1 reflecting their good financial health. But this can be seasonal and may reduce in future if these deposits are deployed in projects to support further economic development. Turning to Slide 6. We see that the NPL ratio improved by 0.4% to 5.6% during first half, helped by strong recoveries in both UAE and Turkey. These recoveries also meant the annualized cost of risk for H1 was 41 basis points, substantially lower than the 108 basis points for the whole of 2022. The gross cost of risk, excluding recoveries, was slightly lower than last year. Our cost of risk guidance was 50 to 70 basis points is higher than the actual first half as we may not realize the same level of recoveries in H2. However, corporate recoveries can be more lumpy and it's harder to determine exact timing. Coverage rose by 2% to 147% during the first half and slightly down in Q2 as any inflow of new NPLs typically has less initial cover versus the higher coverage of recovered loan. Paddy will now take us through the remaining slides.

Thanks, Patrick. On Slide 7, we see that the cost-to-income ratio rose slightly to 26% in the second quarter from 25.3% in Q1. Staff costs increased year-on-year to deliver strong business growth and drive underlying earnings, coupled with human capital investments in digital and international to deliver future growth. Other costs increased due to VAT associated with higher business volumes, higher service, legal and professional fees, and an increase in social contributions. We expect this year's cost-to-income ratio to be just under the 30% area. Slide 8, funding and liquidity shows that the group continues to operate with very strong liquidity with an AED ratio of 79% and an LCR of 217%. Given the high rate environment, we are able to deploy excess liquidity and attractive yielding, high-quality debt securities. As with last quarter, we made additional disclosure on Page 11 of the financial statements, which shows the unrealized loss on our AED 118 billion investments measured at amortized cost is AED 3.3 billion, and this equates to about 57 basis points of capital. In the first half, the group issued AED 9 billion of term debt, which more than covers 2023's total maturities of AED 8.6 billion. DenizBank successfully rolled over their midyear syndicated loan and upsized this as they attracted new investors and they also issued another diversified payment rates transaction for over $0.5 billion with a weighted average life in excess of 4 years. Capital adequacy on Slide 9 shows that the common equity Tier 1 ratio strengthened to 16.6% in H1 as AED 8.9 billion net earnings more than offset a 2% increase in risk-weighted assets. The common equity Tier 1 ratio, excluding the ECL regulatory add-back was 16.1%. RWAs only grew by 2% compared with 5% lending growth as new corporate lending is very high quality, resulting in a lower risk-weighted density. On Slide 10, we see that RBWM income improved 40% during the year. It was a record half year for retail lending which grew AED 12 billion. The retail deposit gathering engine continued in H1 adding a further AED 24 billion of deposits. ENBD X, our enhanced mobile banking app has been rolled out, and the Liv. brand is being refreshed. CIB delivered a 36% increase in income and this along with significant recoveries boosted profit by 116%. CIB continues to roll out additional products and services, including new global custody services, and easier access to trading on the Abu Dhabi Stock Exchange. Business Online was extended to both India and KSA. Emirates Islamic's results were reported in the respective retail or corporate sectors. However, it is worth noting the 71% increase in EI income, helping deliver a record net profit of over AED 1.2 billion. EI is the publicly listed company and the financial statements are available on the website. Global Markets & Treasury delivered an outstanding performance with half year profit reaching almost AED 2 billion. Net interest performance jumped on higher income from balance sheet positioning and an increase in investment income. Nonfunded income was higher on a strong trading and sales performance. DenizBank income was up 15% and coupled with significant recoveries helped grew profits to $1.9 billion. We have a couple of extra slides in the appendix containing more granular detail on the dollar convenience translation. With that, we'll open up the call to questions. Alex, please go ahead.

[Operator Instructions] Our first question for today comes from Waleed Mohsin from Goldman Sachs.

And congratulations for a very strong set of results. Three questions, please, from my side. First, if you could comment on the direction of the net interest margin for the domestic business. Is it fair to say that margins domestically have peaked. And from here on, we would see us gradual decline. So that would be the first question. Secondly, wanted to get your thoughts on capital levels at DenizBank. As you alluded, there is a change in regulation in Turkey with some of the prior regulations being unwound. And as a result, rates are going up, the currency has depreciated, which all have implications for DenizBank's capital. So wanted to get your thoughts on how you see the cap levels. And if they are adequate as they stand. Also wanted to get your thoughts on the upgrade that you made to loan growth guidance. Any particular sectors where you're seeing strength, which are -- which have led to that change in guidance, because historically, what we were seeing was that although the economy continued to remain strong, we were not seeing that translate into credit demand given that corporates were readily cash flushed. And my fourth and final question is on IDBI, if there's any update that you can share on that bidding process? That would be very helpful.

Maybe I'll tackle the first 3 of those and then ask Shayne for -- to deal with the fourth one there. Just on the direction of NIMs for the domestic business, has it peaked? As we all know, the rates went up 25 basis points yesterday. So that may give some upside. You'll notice in the detailed or in the appendix, we've actually split out the margins by ENBD and Deniz. So you can see there for Q1 and Q2 the margin at just over 390 basis points was quite stable for the first 2 quarters, having benefited from the rate rises through last year. So has it peaked? There may be some upside, but also a big dependency on that is the behavior of CASA and whether we see more migration to term deposits. The market is still quite liquid. So we haven't seen that at the levels that we might have expected when we were heading into this year, where there would be quite a reasonable assumption as rates peak that we might see that migration and therefore, they're implicitly increasing the cost of funding somewhat. Capital in Deniz. So yes, from a subsidiary point of view, Deniz itself doesn't actually have a significant impact at all on the group capital base because as you get Turkish lira depreciation while you might have a negative impact on the numerator, you also have a benefit from essentially lower risk-weighted assets on the denominator. And in fact, what we can find is that quarter-to-quarter, sometimes there's a small benefit when there's a period of depreciation. But I think more to the essence of your question is more domestically in the local capital base. So they do have double-digit CET1. We keep a very close eye on that, obviously, as the Turkish lira depreciate any foreign currency risk-weighted assets they have and essentially goes up higher, but they can manage that and pull on levers as and when they need to as well. So that's well in hand. Loan growth, corporate sectors I think for the first half, we have seen particularly strong growth across 4 corporate sectors and across pretty much all of the retail personal lending, whether it's credit cards, auto mortgage. But on the corporate side, one of their key strengths has been around transport and communication. The other is trade, financial institutions and also management companies, i.e., more like conglomerates, et cetera. So they're probably the standout factors where we have seen growth through the first half.

I'll just add to that, Patrick. One of the things we're seeing with the property market, as we've discussed previously is that because of the market is so strong, presales are also strong, and therefore, we're providing guarantees for the escrows rather than funding the actual development themselves. So that does take some of the -- probably the historical loan demand we would have seen in the property sector out of the equation for a lot of the larger developers who have good brand and brand recognition and good projects. However, the flip side of that is those escrows accounts that we provide the guarantees are for -- are with us, and that gives us sticky liquidity that comes with those escrow accounts. So we lose on one side on the lending to the property sectors, but we actually, on the flip side, on the CASA side, we actually get the benefit for that. So I think from that perspective, yes, we fit, it'd be better to have at us, whereas on the lending side, but actually the flip side is we're getting on the CASA side. On the IDBI question, I'm going to give you the stock answer for this one, Waleed, which is basically we haven't made any announcement and we are aware of what our obligations are into these DFM and the regulators. We're constantly evaluating opportunities. We obviously have the capital base and the liquidity to make acquisitions. And we continue to look into markets like Egypt, Turkey, Saudi and India, as we've said previously.

Got it. That's very helpful. Maybe just a follow-up on the DenizBank comment. So on your base case, as things stand despite reversal of some of the regulations rates going up lira weakening, on your base case, you do not -- do you have a scenario of any need to inject capital into DenizBank as it stands or for DenizBank to raise capital?

I mean we're very aware of all the different variables that can increase their capital base and may decrease it, and we're aware of the sensitivity, both locally and at a growth level. And we manage that on a -- through a business-as-usual basis.

I mean, Waleed, on Deniz, the group attends their ALCO session every month. And part of that is the capital management. And we -- I think the biggest impact you're always going to see on Turkish capital is the foreign exchange loans. We're very tight on foreign exchange loan growth in Turkey -- for the obvious reasons. One is around the currency and two, is around the capital. So we do a currency sensitivity given the loan mix we have as to where it will be plus obviously, loan growth. So we monitor that very closely. And at this stage, no requirement.

Our next question comes from Naresh Bilandani from HSBC.

It's Naresh Bilandani from JPMorgan. Please, not HSBC. Shayne, Patrick. Paddy, it's Naresh from JPMorgan. And congrats on the results. Just a few questions from my side. So one is the scope for continuation of strength in FX and derivatives income. Now, this is currently 20% of your total revenue, so quite a sizable number for us from a modeling perspective. It would be keen to know how should we think about this going into the second half. You did mention that -- similar strength may not continue. But I'm just trying to understand if you could please, during the presentation, you did provide some insight on what drove the strength. And you said that the bigger portion that did come from mark-to-market gains in Q2. Would be very keen to understand to what extent should we think of this as being correlated to a depreciation in the TRY. And is that a fair way of thinking? And any insights that you can provide on what could be a number or the size going into the second half, that would be super helpful. That's the first question. The second one is on your RWA density. And just you did mention that, yes, the growth has been towards high-quality corporate loan growth. But then all the factors that one could think of would sort of like intuitively tell you that the risk-weighted assets should be -- the density should be increasing because your sovereign book is maturing, loans are growing in both the corporate and the retail book. So clearly, there should be an increase intuitively in the RWA density, but actually, it's decreasing. So if you can please give some insights on what is helping this reduction, again, that would be great. And the third question is on your outlook on the sovereign repayments. Have we reached the bottom of the repayment cycle? And -- or do you reckon there could potentially be still some risk again on this line, assuming sort of like the tax collection efforts kick starts with -- on a greater size in starting early next year. If you can please share some insight there, that would be great.

All right. Naresh, welcome. Let me see. I'll tackle those from the top there. Just on the NFI. Okay, let me unpack that a bit. I think the slide -- switch back to Slide 4 there. You're right, it's been a significant step-up in the last couple of quarters. I think pretty much every quarter, I have been doing this presentation. There's been a weighted attribution of the variability to DenizBank and the last 2 quarters probably not too different. What I want to emphasize though is that underlying those numbers is a rarely strong client flow business. In ENBD, we're seeing strong FX customer-driven flow business quarter-to-quarter growing. And even in Turkey, their client FX business has been very strong as well. And actually, in Q2, around the time of the election, the spreads on spot FX transactions just got wider and wider. They probably have narrowed a bit more. So we won't see that again through the second half probably. But I did say earlier in the opening remarks that typically in the last year or so, the average sort of quarterly client income has been 80% to 90% of that FX, that dark blue FX and derivative income line. So -- and then in Q1 this year, that was probably between -- sort of between 80% and 90% of the $1.4 billion with client flow related. And then what we saw in the second quarter was a step up on some of the gains in Turkey, particularly as there was a sharp depreciation of the lira around the time of the elections as well. So that's one of the things where banks typically, if they're positioned correctly, we'll make money in that sort of event. So there was quite a strong pop-up on the any open position that we would have had in Turkey. So I think out of that AED 2.1 billion between 60% and 70% of that would have been underlying client flow. So if you want to use that as your base, it's not a perfect guide as to what might happen in the second half because you may still see some upside or even downside reversal from any previous quarter mark-to-market gains from Turkey. So it might then diminish that a bit, but that should give you an idea of what a reasonable underlying client business looks like. Just on the second point, risk-weighted asset density. I mean, it's a mix of a lot of moving parts in there. So for example, when the CRR went up. So the reserve requirements went up in April, that meant assets switched out of risk-weighted bonds into 0 risk-weighted government bond when we originate new corporate business, the weighting on that is going to depend which end of the PV curve you are? Are you at the strong end with the GREs that might be risk-weighted at 20% or other private companies that might be at a 100%. So it's really going to be quite a mix as well. And another substantial part of that for this quarter was the Deniz FX translation. So I think that was down AED 10 billion as well following the 28% depreciation of the Turkish lira. So lots of moving parts in there. And sovereign repayments you can see consistently since Q1 2020 that the trend has been downwards. There was a small increase in Q1, which was just the timing of cash flow. But you can see on Page 5, let's come back up on the screen there, AED 113 billion from Q4 end of last year, went up to AED 116 billion, it's now back to AED 112 billion. So that trend seems to be continuing, but we can't give specific guidance on whether we think it will be up or down. You just need to judge that on the trend that you've seen.I think that was your 3 questions.

Is it -- that is correct. Just the point on the tax collection, do you reckon that could still potentially continue to be a risk on this line?

Well, the government finances are in very strong shape. So it's up to them what they then do with that, whether it's investment or debt reduction, et cetera. So I can't really otherwise comment on that.

But I think most of you live in Dubai and you see the strength of the economy at the moment is it's firing on all cylinders everywhere. So -- and that's translating into our results. So I think the government's financial position is obviously strong in the UAE and Dubai so...

And once again, congrats on the results.

Thanks, Naresh.

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

First of all congratulation on good set of results. My first question is related to like ENBD recorded like AED 6 billion of profits in second quarter, while the increase in equity was only AED 2.6 billion. So if you can please provide some insight into this notable difference between equity and net profit. It seems like a positive impact of like DenizBank operation on P&L has been offset by higher currency translation losses on balance sheet. Please confirm if my understanding is correct.

Yes, Chander, thanks for the question. I would point you to Page 4 of the financial after the call, you can have a look at that. But yes, we have our P&L earnings and then in the other comprehensive income, we also have the impact of FX, depreciation on our structural investments in both Egypt and Turkey. So that reduces that sort of net equity contribution amongst a number of other things that are also shown in there along with hyperinflation and whatnot.

Yes. And my second question, related to DenizBank NIMs. So if you can provide the guidance on DenizBank NIMs, especially in the context of monetary tightening like we have seen a sharp increase in interest rate from 8% to 17% and expectations of that like it's going to further increase. So if you can provide some color on DenizBank NIM, that would be really appreciated.

No, certainly. Actually, just the previous page, I think Page 12 is the Dirham equivalent. Yes. So actually, what we've put up on the screen is the EMBD versus DenizBank NIM. So we exited last year with Turkey having NIMs just under 9% at Q1 this year. It came down to about this 4.5 -- 4.6% or so similar to Q1 last year, and now it's come down to 3.4%. Now that is the impact of a number of things. On one hand, there's been the regulation on the pricing of assets. So there were certain penalties for lending at rates over a certain amount. So that compressed the gross yield on your asset side. There's also a requirement to have a 60% Turkish lira funding base. So there was competition for deposits, that put the cost of funding up. Also, any CPI linker income with lower inflation through the first half also meant that income credit was a little lower in the first half as well. So I mean the monetary policy at the moment is transitioning and some of the regulatory rules have been adjusted. So we've already seen that the ability to price the assets higher is starting to come through. The requirement on the Turkish lira deposit base is starting to be lower as well. So for the next quarter, I would expect the margins in Turkey to continue some further compression and then it does take time even if you get into a positive situation where your asset pricing is higher than your cost of funding for new vintages of origination that can take time for that to come through in the overall margins as well. So there may be -- if the monetary policy continues along its current trajectory, there may be some margin pickup in the -- towards the end of the year.

And certainly, we are seeing the new economic team making adjustments to interest rates and the maximum we can charge has gone up to what 25, if my memory serves right. So we're seeing that negative spread in NIMs that was there for a while, contract significantly. So I think you've also got up to a situation where the new governor just announced their forecast for inflation, which for the first time, it's been stated out 50%. So I think that also helps on our inflation-linked bonds, which will actually flow in through into NIMs as well.

Sorry, Chander, just one other point. As Patrick mentioned, when he was talking about the NIM guidance, that's all baked into the guidance of 3.8% to 4% but with the expectation that we will land at the lower end of that expectation.

So this overall group forecast for NIM is already incorporated for DenizBank NIM compression?

Yes, that's correct. Yes. It's a consolidated view.

Okay. Okay. My last question is related to corporate tax. As you mentioned, like corporate tax will be like 9% for ENBD starting from beginning of 2024, and it will gradually increase to 15% in line with global practice. So for a modeling perspective, how should we -- how much corporate tax we incorporate for the like in the medium term?

So for next year, it's more likely to be around that 9% for it to be 15%, the OECD countries have to actually implement that.

And I think the biggest stumbling block at the moment is stuck in the U.S. Senate is my understanding for the ratification. In fact, I think Canada is saying they're going alone. So for it to get a global OECD agreement, they need the U.S. politicians to agree, which, as you know, in the U.S. is one of the easy thing to get agree on anything. But I think at this stage, we're looking at 9% -- but I would think it would be quite normal to have an expectation in the UAE that when OECD does go to 15% that the UAE for multinationals and companies like ourselves will move to 15%. That would be my anticipation. I can't mind read the government, but that would be in the back of our mind for our forecasting. And the reason I would say that is because if we don't -- if a multinational doesn't pay 15% if they're paying 9% here, they'll have to pay the top up somewhere else. So the UAE models will get the revenue income for where that property is earned rather than have another jurisdiction pick up that difference between the 15% and the 9%.

And just to add to that, the European Union wouldn't be implementing this in any case until 2025 or the U.K. So and that's part of our footprint. So I would be thinking about 2025 at the earliest -- of course, if it is earlier, we'll be sure to let you know the quarterly updates.

Our next question comes from Rahul Bajaj of Citigroup.

This is Rahul Bajaj from Citi. I have 2 quick questions, actually. The first one is on your unfunded exposures. I see last couple of quarters, we've seen decent pickup in provisioning for unfunded exposures. In fact, almost equal for 1Q and 2Q. Just wanted to understand what is driving it? And is there a change in how the bank provision for this particular item? Linked to this, on your cost of risk guidance and you said you expect a pickup in the second half. I just wanted to understand to what extent the pickup in the second half on cost of risk is driven by less recoveries versus any specific stress that you see coming out of higher interest rates. So yes, is that also a factor for you not changing your cost of risk guidance. So that's kind of my first set of questions. The second one is on DenizBank. Just quickly on -- if I look at the [ AED ] loan at asset sequential trends, they're down quite meaningfully. How should I think about the strategy at the local level? I mean, to what extent is this FX related? Or is there a strategy to grow to go slow on DenizBank business from the top? Any thoughts there would be appreciated.

Sure, Rahul. Let me pick those up. Just on your point about the unfunded provisions just to give everyone else on the call, a point of reference, I think you're talking about [ Note 15 ] which just shows that we booked AED 536 million for [ that ] in the first half. And I think we also discussed this in Q1 as well, but it has gone up from Q1, it's about AED 290-odd million, and it has gone up a bit. So look, the increase for that is the combination of a few things, partly updating of our ECL models which I think I noted in the last quarter plus the growth in our unfunded exposure and the composition and mix of the portfolios and sectors as well. See you got to remember these models as forward-looking. So it's not just about looking at buoyant economies today that has a number of variables that get factored in for some years in advance. So that's a factor as well. So -- you'll also notice in our accounts that contingencies and commitments have also been growing in the last few years. I think by the end of 2021, we're at AED 116 billion, we're now at AED 131 billion. We do count that [ AED 536 million ] is part of our overall cost of risk in the 41 basis points, just so you know. So we haven't excluded that in the risk that we're facing. And then I think that segues a bit into the -- you're asking about the guidance for the full year on the cost of risk. So -- the main driver is indeed expected lower recovery level. So in the detailed accounts in the Note 23, I think it is, you can see that we recovered AED 2.2 billion in the first half, and that compares with AED 1.1 billion in the H1 of last year. So if we -- the P&L charge went down from, what, AED 1.9 billion last year to AED 0.9 billion for the first half of this year. So even with the guidance we've given of 50 to 70 basis points, if you took 60 as mid, mathematically, you can calculate that the guided cost of risk for the second half is around 80 basis points, not too bad, considering the pattern that we were showing for the previous 3 years. And that would also imply an H2 charge of something like AED 1.8 billion or something like that, which would be similar to last year's H1, if I can just round that off like that.

And I'll just add that One of the things is, I suppose, is a bit unusual about our bank compared to some of our competitors is we're so highly covered in stage 3 in high 90s that anything that we work through, basically, we're getting a write-back. So I think with the way the property market is obviously, some of these problem lines have probably collateral. We are pushing our workout teams to close out some of these problems as quickly as we can given how robust the property market is and where prices are, we're pushing like how to get these things finalized. Now the problem with, as you know, with problem loans is you don't know when the -- when a property is going to sell. You don't know when you're going to get the legal approval to go for it. So there is a bit of a time drag on when -- can you get this stuff through. So it's pretty unpredictable. Are we hopeful we could get some more recoveries in the second half? Of course, we are. Are we pushing for them? Of course, we are. But we wouldn't bank on that when we're giving you guys what our cost of risk is. I think there was quick -- there was another quick -- Deniz wasn't it?

Yes. Couple of them -- or did I miss...

Our next question comes from Shabbir Malik of EFG Hermes.

Congratulations on a good set of results. A couple of questions from my side.

Shabbir only good?

Great set of results.

Thank you.

Thank you.

A coupld of questions, please. So this year, UAE is hosting COP28. So -- and we're seeing a lot of -- you've talked about real estate sector, but also, you're seeing a lot of construction activity taking place. So are these emerging as growth themes for the bank like are you seeing any sustainable increase in demand for sustainable financing, demand from the construction sector for loans? Is that something that you've seen in your business. My second question is...

I'll take that -- can we take that one?

Sure.

So I'd say on that, certainly, in the power side, we are You're seeing quite a lot of stuff that's happening in Saudi and the UAE and also the demand coming forward, the UAE announced that $200 billion additional. So from that side, yes, sustainable finance from there -- will grow, I think, quite substantially, both from Saudi and from the UAE. We see clearly our pipeline there. On construction, not so much at this stage. We are seeing some green buildings. And in fact, ourselves, we've got gold lead on a few of our branches. So we are seeing improvements in client expectations and behavior when it comes to greening their buildings. But would I say in the construction industry at the moment? I'd say no. We, as a country, and we as a bank and our customers need to do a lot more work, I think, in the building and construction area given the emissions that do come out of the steel components and the cement going into these properties. So I think there's still more work to do, I think, from ourselves, from government and from our contractors and developers.

What I meant with the construction sector is that generally the activity, for example, there were some reports of restarting the Jebel Ali Palm. So broadly speaking, the construction sector has -- I think there's some anecdotal evidence of a pickup in that in that space. So is that translating into loan growth for the bank, not just green construction, but generally speaking.

I mean contractors for us as an industry is -- we do -- we obviously do contracting finance. We have quite a few contractors on our books. But we're also quite I wouldn't say risk adverse, but we're risk cautious on that sector. Contractors historically, in both Saudi and the UAE, I think as a risk profile has not been a great experience for banking -- the banking industry as a whole, not just us, but lots of other banks. Whereas the margins have been historically very thin. What we are seeing now, I think, with the contractors is a better management of their margins. And because there is fewer contractors around now, that I think they have the capacity to price far better than they have historically. So I think there is some -- we are seeing some loan growth in that sector. But would I say it's huge? No, because we're quite cautious on what we'll do. It's not a sector of industry that we'll take a massive amount of risk on because historically, it hasn't been a good sector from a return on risk for us.

Great. Great. A question on mortgages. So mortgages in the UAE are floating rate, and we've seen interest rates gone up so sharply. Now I appreciate that property prices have gone up, but how are you managing potentially cash flow issues for the client because interest rates have gone up too much and maybe it's becoming a little more challenging for them to repay the loan. Is there -- are you seeing that in your portfolio? And if there is this case, then how are you managing that?

We're still seeing quite robust demand for mortgages -- new mortgages within the portfolio. But as you know, in the UAE, 60% or 70% of transactions seem to be cash. So the demand for property versus the demand for mortgages is less. I think the good thing at the moment in the UAE is, if clients are in distress, there's an easy solution. They can sell. So we're not seeing -- and they're selling for profits. It's not that they're selling and losing money on the transactions. So I think we're in a privileged position where there is an easy way out with clients with stress. But we're not seeing substantial stress in our mortgage portfolio at all. It's -- would you ask me if it was surprising? My answer would be, yes, I think it's actually quite surprising. But we are not seeing that stress within our mortgage portfolio at all.

Yes. And finally, if I look at your capital position, it's become exceedingly strong. Are you comfortable having a relatively bloated capital base, let's say, if you don't find the right deal with the right price or would you be open to maybe change a bit more in cash dividends?

It's hard to say, yes, you described it as a bloated capital position. But look, I think the reality is we obviously have a very strong capital base. We obviously have an increased capacity to pay dividends. And I think this sort of level of capital base certainly makes a lot of our return metrics. Even though our return on equity is extremely high even with our bloated capital base. Certainly, it is not at the level that we would like to maintain going forward if we don't find something to acquire or if the Board decides to increase dividends at the end of the year.

[Operator Instructions] Our next question comes from Aybek Islamov from HSBC.

All right. I think we had already a very long Q&A session. So I think one area I just wanted to ask about is retail segment, right? So -- and in the retail segment, what I see, it looks like you are really boosting your provisions at the time when you're reversing your recovery, your provisions in the corporate, you're boosting your provisions in the retail and the cost of risk, if I'm correct, close to [ 3% ] in retail. At the same time, there is a slowdown in retail loan growth. Can you explain to me what's happening in the retail segment? Do you feel that the segment is at the peak and you're just taking the opportunity to be cautiously -- for cautious countercyclical provisioning in retail that's my first question.

I think I'd say on that one. All of the above. I mean we did -- in the first half, we have seen AED 12 billion of growth in retail. So we're not seeing a slowdown in growth in retail. We're seeing an acceleration of growth in retail, and we're taking market share. And also, obviously, the population is growing, which is holding substantially. But also remember, right? When you're doing ECL models, we're very heavy credit cards, yes. So given the nature of risks in credit card, if you're building up that revolver book your ECL being forward-looking is going to build as well as you grow that book. And as I said earlier, 1/3 of credit card payments and nearly 1/3 of debit card payments are of Emirates NBD. So that book is big. And as we keep growing it, which we have, that has an ECL transaction. And it also has a charge, right? Because we are -- do we have losses on that credit card? Yes, but the spreads on the -- so large and the risk-adjusted yield is very, very strong for us. So you are seeing, as we're growing, you're going to see that ECL. And are we being conservative? Absolutely. You know we have always been very conservative on how we provision.

Okay. Very helpful. And next question I wanted to ask you about the real estate sector, right? So you mentioned on the call that you're guaranteeing escrow accounts, escrow deposits, which are coming in as prepayments. Payments for the new projects, right, under construction properties. So where else the strong real estate activity is manifesting itself in your balance sheet, apart from CASA deposits apart from the strong deposit flow? Any other areas there, yes.

Well, I think on CASA growth, it's been pretty much across the board. We're obviously seeing a strong CASA growth in corporate. We're seeing strong CASA growth in GREs. And we're seeing strong CASA growth in retail and SME. So it's pretty much across the board. We have got a situation in the UAE, where the economy is robust. We're getting population growth, and we're benefiting from that. And we'd like to think we're the go-to bank, certainly in Dubai for new -- population moving into the country, new businesses being established. And we're continuing to see, you have very strong results. Again, if you'd ask me, would we have seen more switch into term deposit? Well, we are seeing switched into term deposits from existing customers, but we're also growing our CASA deposit faster rate than that switch. So we're sort of benefiting from that because even FDs now, we can make them profitable, right, with our investment side. So I think we're benefiting just from the strong liquidity in the country and our capacity to attract that liquidity. And this is not sort of like it's happened by accident. We've been talking about our focus on CASA now for years and years and years because we always saw it as once we saw rates go up, we would be the beneficiary of that. And it's not without cost. We pay our staff sales incentive to grow that CASA and to get new accounts that develop CASA for us. So it's not an accident that just walks in the door. It's also a lot of feet on the street, marketing, plus, obviously, our digital capabilities now ease of opening accounts makes it that we do attract CASA growth from other banks and also from new population growth.

Super. Excellent. And one last question. You spoke about construction that you're cautious on lending for the construction sector, if I understood you correctly. Now obviously, there are developers who are government-related entities would you be still cautious in this case? That's one part of the question. But secondly, you could also be lending against projects, construction projects, which are guaranteed by the government.

Sorry, can you just -- when you say -- you cutting off here between developers and contractors.

Well, I guess, yes, I'm mixing 2 things, right? So are you lending to developers or there could be projects where developers can guarantee them and these projects are executed by the construction companies. So there could be 2 ways to participate in the construction boom. One is funding projects, which are guaranteed by developers, but done by the contractors and the second one is lending to contractors directly. Are you -- I understand you're not doing lending to contractors, but what about project finance.

Okay. If you look at our numbers, our exposure to real estate lending is down. It's about from AED 48 billion to AED 45 billion. So that's coming down. And some of that is from what I said earlier, it's that the big developers of this world are pre-selling things like hot cakes and they're using the escrow account to fund the development. And we provide the guarantee to the developer, right? Contractor is a different piece of the puzzle, right? The contractors are the ones doing the work, building the building, all these villas or whatever they're doing. So that, to us, is the more risky piece. And historically, that has been because margins in that sector have been rock bottom. They've been too low and a lot of the contractors were relying upon variations to make good profitability out of the development rather than the base margin of the development itself. That works well if everyone agrees on the variations, if they don't agree that it might not work out so well for the contractors. So are we banking contractors? Absolutely. We bank contractors, but we are also very risk cautious on which contractors will bank and what developments that we would back them into. And obviously, the paymaster is one of the key issues for us, have they got the right paymaster, the developer, with that contractor.

Actually over -- I have some questions on the web. So if you any anything further I'm happy to follow up with it. Okay. Thanks. I'll just run through some of the questions that have come through on the web. Turkey Central Bank normalization of rate is that going to hurt DenizBank NIMs? I think Patrick gave a very clear answer in terms of there is some further DenizBank NIM contraction backed into our overall guidance trending towards the lower end of guidance. Can you confirm the proportion of corporate and real estate loans are backed by property collateral? Certainly, for mortgages, retail mortgages, that would be the -- within retail, that would be backed by REIT property. In corporate, there -- some of the loans will have collateral property -- collateral backing them. And if you look at our coverage ratio, for example, our coverage ratio, including collateral, for example, is closer to 200%. So there is -- of course, there is property collateral there, but it will be on a case-to-case basis. Guidance for cost-to-income ratio for 2024? We've issued no guidance yet for 2024. And given the high capital, would you consider increasing the dividend payout ratio in years to come? Again, that is a decision for shareholders and the Board and reviewed closer to the annual dividend declaration. And following the recent UAE Turkey agreement worth over AED 50 billion. Do you expect more business between for ENBD? Thanks to DenizBank. We do absolutely see as an opportunity, and we very much welcome increased trade times and flows between Turkey and the UAE.

And I think on that one, if any UAE investor is looking to invest in Turkey, who do they talk to? Us. Because we're the go-to bank for those discussions because we have a substantial investment in Turkey. And we know the market well. And we have an excellent management team there to assist them.

Yes, in terms of mark-to-market potential impact on DenizBank's investment book. Of course, that's something that we look at and monitor. Again, do we anticipate a temporary relaxation of regulations in respect to that mark-to-market. I mean we have seen an unwind of some of the regulations. The regulators there are cognizant of the number of regulations and as interest rates have increased, we have seen a [ partial unwind ] . So that, DenizBank is in good shape, as we said, in terms of capital. And a couple more questions -- in terms of -- Patrick, maybe you could help me with this one. More color on the provision reversal in Turkey. There's been a provision reversal for 2 consecutive quarters. Any more color on that?

So you can see in the comps, we have the AED 2.2 billion of recoveries about for the first half, about AED 0.8 billion of that relates to Turkey. So they've got a net credit of AED 0.6 billion. So net-net, they took AED 200 million of charges otherwise.

And then a question...

I'd say on that is from memory, from last time I looked at the peer comparison, in Turkey, we had these top coverage for Stage 3 in the market. And again, the financials for Turkey are transparent. They're publicized on the website if anyone wants to have take a big dig into the financials of DenizBank in Turkey. But I think certainly it's being so highly provided, helps us when it comes especially property collateral in Turkey because in dollar terms for good quality property in Turkey, it's doubled in price. If you're in Istanbul or Bodrum, those sort of areas, properties doubled in price in dollar terms. So that also helps with our recoveries in that market.

And then in terms of the impact on potential drop in interest rates, are we doing anything to protect against that. Of course, I mean, predominantly, we are a floating rate bank but on the periphery, we can take -- we have been taking action. If you look at the treasury income, for example, with the investment book and they're able to invest in longer-dated securities, particularly at these higher rates and age as well to some extent. But we are over AED 200 billion. We're an AED 800 billion balance sheet. So we can't hedge the whole thing. And again, given the benefit of the CASA, ultimately, we are benefiting from that from a higher rate environment. And the last question we have is in terms of potential M&A activity in Turkey, given that our Turkish acquisition has done so well. Is that something that we would look at further. And I'll let maybe, Shayne answer that. Before Shayne answers that, the very final question, in terms of the movement from Stage 2 to Stage 3. There's movement throughout all the different stages. There is natural movement even though we have had significant write-backs and recoveries. Of course, there will be some new movements. They are quite granular. I wouldn't say it relates to one specific case. So Shayne just back to you in terms of M&A activity, would -- is turkey something you would consider.

I think the answer for Turkey is if there was a small medium bolt-on, yes. I don't see at the moment, we do a large scale additional acquisition in Turkey. But small bolt-on, I think, would be doable, if it made sense financially for us. But I think the -- we are -- rather focus would be on Egypt, which -- we're too small in Egypt, which I've said to the divested community before. We -- it's quite a small place for us. We'd love to grow more on an acquisition in Saudi. But I think the issue for us on Saudi is that, that 40% threshold in Saudi is a difficult one for us. We are very clear that we must have a Board and management control and be more than 51% and the right price before considering any acquisition and that 40% does provide an inhibitor for a Saudi acquisition. And then India, we've talked about -- it's a market we've been growing in. We've opened another 2 branches last year, up to 3 now, and that market has been good for us. And we also get a lot of cross-border business actually from India. And there's no Saudi banks, for example, in India and no Indian banks in Saudi. So that gives us that capacity as well into cross-border. And we're seeing good growth in India to Turkey, India to Egypt, for example, as we working those cross-border pipelines a lot better these days.

Thanks.

Shayne, there's no further questions.

Well, if there's no further questions, I'd like to thank you all for participating in today's call. We delivered a very strong set of results, and we're even better, very excited about the opportunities in the coming quarters. Now I hand you back to Alex to provide details in case you if you any further follow-up questions and to close the call. Over to you, Alex.

Thank you. For any further questions, please contact our Investor Relations department. These 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.