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

Ladies and gentlemen, welcome to the Emirates NBD Results Call and Webcast for the Third Quarter of 2024. Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should now disconnect. I'll now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.

Thank you, Lydia, and welcome to our results call covering the first 9 months of 2024. We've maintained a very strong operational performance from the first half into the third quarter. We delivered a AED 5.2 billion profit in Q3, which brings a total profit for the first 9 months to a record AED 19 billion. There are many highlights in our outstanding results. The record profit was driven by a 9% increase in lending in 2024. We've been investing to generate new sources of income and success is evident with the growth in net interest income despite interest rates starting to fall. A growing trend in fee and commission income as new products are introduced and more service benefits from straight through processing. Emirates Islamic continues to be a real engine for growth, delivering a record AED 2.5 billion profit for the first 9 months with customer financing growing 24%. All business units achieved an outstanding performance. Retail grew its loan book by AED 27 billion. The digital wealth management proposition is really gaining traction with mutual funds now available in addition to equity and factional bonds, helping grow volumes over fivefold in the last year. Assets under management across the group now exceeds USD 40 billion. Corporate originated AED 70 billion of gross new loans delivering landmark sustainable deals across the network, leveraging the group's growing regional presence. NCAP occupies impressive league tables for bonds, loans and IPOs. Global Markets and Treasury broadened investment opportunities for customers with factional bonds and Sukuks and expanded commodity product suite and rapid turnaround of FX customer requests. And East Bank continues to play a key role in supporting the Turkish economy, injecting fresh funding into key sectors such as agriculture and SMEs. Our growth in the Kingdom of Saudi Arabia is a real highlight. We have now 19 branches and 59 ATMs, driving 49% loan growth since the beginning of the year. On the back of the strong regional demand, we revised up our loan growth guidance. Net interest margin improved to 3.75% in the third quarter as DenizBank NIMs continue to improve. CASA grew strongly in the third quarter, not only in escrow, but across corporate and retail accounts. We have implemented Gen AI across our operations in partnership with Microsoft. We have harnessed new revenue stream by deploying AI and machine learning to analyze customer behavior and efficiently predict the new -- the need for FX and trade products. Gen AI is streamlining the customer onboarding process, significantly reducing manual intervention to improve the extraction of relevant information from documents. We have also enhanced our AML processes with machine learning to monitor and detect suspicious activities. Other highlights include further progress on ESG. We have the highest number of lead platinum-certified branches of any bank globally. We now offer sustainable fixed products -- fixed rate products. We're the first bank globally to publish an SLL bond framework fully aligned with the new ICMA/LMA guidelines. We have introduced new product and service launches such as paperless smartGUARANTEES and real-time payment tracker for business customers. We're pleased with the positive credit rating upgrade action for both Emirates NBD and DenizBank back. In summary, the group continued its strong financial performance into the third quarter and our investment in the network and digital are really starting to bear fruit. We are well placed to benefit from the strong regional economy and new sources of income will help offset the impact of falling interest rates. I will now hand you over to Patrick to go through the results in more detail. Patrick?

Thank you, Shayne, and good afternoon, everyone. Just to reiterate the strength of our results for the first 9 months of 2024, all business and product lines continue to perform very well. We have updated some guidance, which I'll come to. But first, let me take you through the summary results and then we can dive into a bit more detail by component. Starting with the performance summary on Page 2. You can see our business momentum from earlier quarters has continued into Q3. Group's ongoing investment in the UAE and the region is delivering at both the top and bottom lines. Total income of AED 32.9 billion for the first 9 months of 2024 is broadly flat year-on-year, and Q3 is up quarter-on-quarter. Within that, net interest income increased 7% year-on-year on the back of a very strong 11% increase in assets, which has more than offset margin contraction. Quarter-on-quarter, NII was also up 7% helped by 3% loan growth and an improvement in margins at DenizBank. As usual, we split out the contribution from ENBD and DenizBank in the appendix on Page 11. Non-funded income is lower year-on-year, but our customer and client fee and commission income has grown extremely well. The overall decrease relates more to DenizBank's variable nonclient income, which I'll go into more detail shortly. Costs have increased 16% year-on-year, supporting strong volume growth across all businesses. There is also the inflationary impact of DenizBank's cost base and accelerated depreciation of some IT systems as new completed IT projects come online. The cost-income ratio at 29.4%, however, remains well within guidance. We have registered an impairment allowance credit in the first 9 months of AED 1.3 billion on the back of cash repayments and recoveries. In Q3, we had a AED 0.9 billion charge, equating to a 63 basis point cost of risk. Given the lower likelihood of further recoveries in Q4, coupled with the effect of high interest rates in Turkiye, we have revised our full year cost of risk guidance to a 10 to 20 basis point charge. More detail on that shortly. This gives us a very strong profit before tax and hyperinflation of AED 24.6 billion and a AED 19.0 billion bottom line profit, which is up 9% year-on-year. Turning briefly to the results for the third quarter. You can see that income grew 7% over Q2, which helped deliver a AED 5.2 billion profit despite higher costs and a net impairment charge. This quarterly profit is flat to Q3 last year. In Q4 last year, our profits were lower than Q3 as a result of higher cost of risk. Given this year's cost of risk guidance, we may experience a similar pattern in the final quarter of this year. In the bottom, the summary table, you can see the balance sheet metrics are in great shape with total assets and deposits, both growing by double digits in the first 9 months on strong underlying business momentum. Capital liquidity and credit quality metrics all remain robust. Now turning to net interest margins on Slide 3. The bottom left chart shows that margins tightened by 36 basis points year-on-year, mainly due to higher funding costs and competitive loan pricing at Emirates NBD. And year-on-year, DenizBank's NIM were lower with the higher funding costs after the significant rate hikes. For Q3, NIMs have improved 10 basis points to 3.75% as we anticipated back at the half year, we are seeing the upside in DenizBank margins come through from asset repricing with some offset from ENBD due to lower EIBOR rates. We expect NIMs to finish the year near the lower end of our guidance range as any further gains in DenizBank NIM margin are likely to be offset by the impact on ENBD from last month's 50 basis point cut and potential further cuts. Thinking ahead to 2025, our research team expected further 225 basis point cuts this year and 525 basis point cuts next year. We currently don't expect any rate cuts in Turkiye this year. Of course, we will update you at year-end with NIM guidance for 2025. Just moving to Slide 4 and non-funded income. Net fee and commission income year-to-date is up 46% year-on-year and with a very strong trend of quarterly growth across almost all of the group's customer-driven businesses. The increase in fee income as per the bottom left chart is substantially higher -- substantially higher investment banking activity, increased loan volumes higher retail card spend volumes at both ENBD and DenizBank with the added impact of higher interchange rates in Turkiye. The chart at the bottom right shows that other operating income has a really stable client and trading flow income component of around AED 1 billion to AED 1.2 billion per quarter. This relates to businesses such as retail remittance, FX trade flows and client hedging. Non-client-related income is lower year-on-year, mainly from nonrecurrence of very strong mark-to-market gains last year around the time of the elections in Turkiye and higher swap funding costs this year after the rate hikes to 50%. On Slide 5, we see that gross lending increased 9% during the first 9 months. Retail had its strongest ever 9 months, adding AED 27 billion in loans. Corporate also had a very strong period with AED 70 billion in gross lending. There was strong financing demand across most industry sectors throughout the region especially manufacturing, trade, transport and communication, utilities and conglomerates, which more than offset sovereign and other scheduled repayments. DenizBank also has strong loan growth, up 29% in local currency terms and up 11% in AED terms with regulations favoring a pivot towards sectors such as agriculture. KSA is benefiting from the network expansion, registering an excellent 49% loan growth so far this year. We have revised our full year loan growth guidance to low double digits following the strong growth so far, the continued positive economic outlook and further announcements on infrastructure investment. We are, however, mindful of the abundance of liquidity in the UAE which can lead to competitive loan pricing, but we maintain our disciplined approach to pricing for risk. On the liability side, total deposits increased AED 60 billion, up 10% year-to-date. Within that, strong demand for CASA, not just from escrow but from proactive initiatives within corporate and retail have helped maintain the group's CASA ratio at 59%. This is a very healthy ratio when you bear in mind that DenizBank's CASA ratio is typically around the 25% to 30% mark. So ENBD's CASA ratio is in excess of 65%. On Slide 6, we see the NPL ratio improved by 0.7% to 3.9% year-to-date, reflecting the continued trend of strong recoveries that we have seen in recent quarters and an increase in the lending denominator. On the bottom right, you can see that Stage 2 loans also improved by 0.7% to 4.6% and during 2024 as a result of repayments and staging transfers. Overall, this has contributed to the AED 1.3 billion cost of risk credit. In Q3, we had a AED 0.9 billion cost of risk charge as there were lower recoveries and repayments of stage 2 loans in the first half. Last quarter, I signaled the possibility of some further recoveries to come through in Q4. But as a matter of timing, we may not see that materialize. We are also seeing higher DenizBank delinquencies with the very high interest rates. As a result, we have revised our cost of risk guidance to a 10 to 20 basis point charge for the full year, and this implies a final quarter cost of risk charge of around 150 to 190 basis points not, too dissimilar to the Q4 of the last 3 years. As I mentioned, NPL ratio is 3.9%. We've maintained guidance at 4% to 5% given the possible higher cost of risk in Q4 that I've just noted, and that's without any write-off of loans older than 5 years. Paddy will now just take us through the remaining slides.

Thanks, Patrick. On Slide 7, we see that the cost-to-income ratio at 29.4% is comfortably within guidance as we continue to invest for future growth. Staff costs increased to drive business growth and to invest in human capital for future growth in digital and international, including the branch expansion in KSA coupled with an inflationary impact from DenizBank's cost base. IT costs increased year-on-year as we continue to invest in our market-leading technology solutions. Depreciation is higher on accelerated depreciation of some systems being replaced as part of our ongoing technology investment program. Other costs are higher as some seasonal costs come through in Q3 with professional costs higher in relation to our advanced analytics project. And we expect this year's cost-to-income ratio to be closer to the 30% area. Slide 8 shows that the group maintains very strong liquidity with an ADR ratio of 77% and an LCR of 194%. We have refinanced AED 23 billion of term debt in Sukuk so far this year, which more than fully covers 2024 maturities. The bulk of this year's remaining maturities is DenizBank's 1-year syndicated loan, which they are currently working on. Next year's maturities are comfortably within our normal issuance capabilities. We published a green bond report, which shows that within the first year, we've already allocated over 95% of proceeds to qualify on projects. We also became the first bank globally to publish an SLL B framework under the new ICMA/LMA guidelines. On capital adequacy on Slide 9, it shows that the common equity Tier 1 ratio strengthened in the first 9 months to 15.5% as retained earnings more than offset a 15% increase in RWAs. The increase in credit RWAs is from strong retail and corporate loan growth. The group continues to operate with healthy capital. On Slide 10, we see that RBWM income grew 11% year-on-year with the highest ever revenue, strongest ever loan acquisition and a substantial growth in balance sheet. Lending grew by an incredible AED 27 billion in the first 9 months, and we enjoy a 1/3 market share of UAE credit card spend, which grew 17% year-on-year. AUMs grew by an impressive 50% year-on-year, reflecting ongoing success of our wealth management strategy. CIB delivered an excellent 49% increase in profit on higher -- on profit before tax on higher income and healthy recoveries. Non-funded income grew 18% due to higher lending, a strong contribution from investment banking and improved cross-sell. Corporate lending grew 10% in the first 9 months, driven by AED 70 billion of new lending across our network. CIB continues to grow CASA backed by the group's market-leading and best-in-class digital escrow capabilities, including APIs and virtual accounts. Global Markets and Treasury delivered another excellent performance, generating over AED 2 billion of income in the first 9 months. Net interest income continues to be strong at AED 2.1 billion despite the general increase in cost of wholesale funding and term deposits due to higher interest rates. Trading income remained robust, and sales delivered strong results driven by new products and expanded commodity offering and innovative structured solutions for clients. We launched an enhanced FX process, providing competitive rates and rapid turnaround for customers. DenizBank delivered a AED 1.1 billion in profit in the first 9 months, providing fresh funding to the Turkish economy. We do have an extra couple of slides in the appendix containing more granular detail on the dollar convenience translation. And with that, we can open up the call for questions. Lydia, please go ahead.

[Operator Instructions] Our first question today comes from Shabbir Malik with EFG Hermes.

I have a couple of questions. The first one is around costs. So when we look at your staff costs, is it possible to give a mix of fixed versus variable costs? Trying to gauge if revenue comes down next year, how much can cost adapt to that? So that's my first question. The other question I have is regarding your strategy, international strategy, any update or change of thinking on growth plans for India or any of the other international markets? And finally, your segment note, when I look at that and look at the margins for retail or the retail segment over the last couple of quarters, they have been trending lower. I think if I look at NII to assets, for retail in 3Q versus 2Q, they're down about 37 bps, a bit higher than what is observable for the corporate segment. So if you can shed some light on that, why is retail margins coming down faster than corporate margins. And finally, just a big picture question on digital banking and neobanks, how big of a challenge are you seeing in this space? So there's some new buy now pay later companies coming up as well. Interested to hear your views on those.

Shabbir, Patrick here. Welcome to the call. Thanks for joining. Maybe I'll just take the cost item and then the retail segment margins and maybe Shayne can think about the digital in India. Just on the costs and the -- you mentioned staff costs specifically. The costs have risen principally from the investments we've been making to drive volumes. And you can see in the top line and in the balance sheet, that is coming through very nicely. Inevitably, as you go through a year, you get flow-through from the timing of hiring plus any increments, et cetera. Overall, in the costs also. We have some of the -- we did have an item where we have to write off system that haven't been fully amortized with new ones that are coming online. So that doesn't necessarily happen every quarter. Plus we have been investing a lot in technology. It's not all just CapEx. So yes, with CapEx, you get an increase in depreciation or amortization, but there's also an OpEx element associated with that. And then you're also really asking about what can be done? How much of that is fixed or variable and whether anything can be flexed? We are very mindful that we are actually operating at a very lean cost income ratio in the first place. We've guided to around 30% in the UAE. The cost income ratio is actually lower than that. It's at the 30% principally from the investment we're making around the region. And we also have some inflation coming through from DenizBank where Turkish lira inflation is rising at a pace faster than the FX depreciation. So those things are really all accumulated from -- to increase the cost base 16% overall. But we're very conscious about managing the cost and we have seen through history, whether it was the end of 2019 or through the pandemic, when we need to manage the costs relative to income if it is coming -- likely to come down, that is something that we have shown that we can do and we do, do. Just on your retail segment point, there's nothing really specific around the overall margins on the retail side, inevitably, they actually have a higher yield on their products, whether it's personal loans, credit cards, auto mortgages is somewhat lower, of course. So I think that's partly just timing and mix rates had been rising through to last year and then has started coming down. So there's no really specific thing about that other than timing, Shabbir, I would think. Shayne, do you have any comments on the other 2 questions around.

I always got comments on lots of questions. I think on the cost growth, what I would say is that one of the things we wanted to do as why did we invest heavily into Saudi when we did and with the commensurate cost increase. And I'll sort of try to weave this into also the international strategy was that we saw there was a market there that we could grow quite aggressively. And we have 49% growth year-to-date in lending there. That's a pretty outstanding achievement, albeit off a low base admittedly, but it is quite sizable what we've grown. So I think we wanted to get that growth into our back pocket as quickly as we could when rates were either rising or stable so that as rates started to come off, our asset build was such that it could offset some of that decrease in spreads as U.S. starts reduced rates, which then flows into us. So I think from a cost and a growth, we specifically said to you that we were going to go invest heavily into some of these offshore markets and even onshore market to drive asset growth and liquidity. And we've been quite successful at that, as you can see from our numbers. To Patrick's point, those who have been covering us for a while, twice, we've taken out 1,000 headcount if we needed to. But at this stage, we don't see that requirement. But certainly, from our perspective, our cost management has been historically very good, and we will continue to go down that path. On international strategy, obviously, Saudi, we still haven't finished there. There is going to be some more cost growth in Saudi. We've got another 4 or 5 -- 5 branches to go. We're up to 19 now. We'll probably be at 21 by the end of the year, we think. And so it'll be a bit more cost growth in Saudi as we complete the rollout of the network there. If you remember, we got 24 licenses given to us by summer. So we're the only foreign bank there that's got that many licenses. And we are actually now the largest foreign bank in Saudi by assets. I'm not cutting HSBC because they've got an investment, it doesn't consolidate. So we've done a good job there. But to be honest, if we are 5x bigger, we will get to the lower pecking order of the local bank. So there's still a lot of growth opportunities there. Obviously, Turkey, we've been growing quite well, especially in the agri and SME segments. And Egypt is doing quite well. And obviously, UAE itself has been driving quite well. On inorganic, no new news to tell you, except that the markets that we've -- I spoke to you before that we're very interested in inorganic plays with spare capital would be Turkey, Egypt, Saudi and India. We're aware of our regulatory obligations. If we have something to update, we will give that update. On digital banking strategy, well, if you look at where we are, we now have the top-rated app in both Google and Apple Stores for the country. We've come a long way. We've gone through a complete transformation of our architecture. We're 100% cloud native and we're -- and you -- I hope a lot of you are using our app. Maybe not the Citibank and the HSBC coverage guys. But hopefully, using our app. And you'll see that we continue to add features onto the app, including now mutual funds on top of a lot of the other stuff we've done around wealth. So that's growing really nicely. We're watching the space closely, but we're attracting clients, not losing clients to the competition. We're certainly ready, if any of the muted -- we hear rumors other players some offshore may come into the country, but we're ready for them. We think we've got the technical capabilities and now the apps to compete head-on-head with anyone that comes in. I think we're very close to being best-in-class with our apps these days. So I think digital's strategy for us, it's now a bread and butter. And as we're driving more advanced analytics and AI into it, I think they're also -- we can improve also not only the customer experience, but also some of the fee income that we drive off things like wealth. That was a very long answer to your question, Shabbir. Next one, please, Lydia.

Our next question comes from Rahul Bajaj with Citi.

Rahul Bajaj from Citi here. I have 2 -- 3 questions actually, if I may. The first 1 is on margins. So you mentioned, Patrick, that in the fourth quarter, we'll probably see the headwinds from rate cuts domestically being largely offset by tailwinds coming from Turkey, if my understanding is correct. So basically thinking about flat sequential margins in fourth quarter, how should we think about margins as we progress into 2025 as rates begin to come off in Turkey, should this kind of offset work in 2025 as well, where in Turkey cost of funds going down will more than offset or largely offset the asset yield pressure that will come domestically? Or do you think one side will be bigger than the other? So that's the first part of the question. The second 1 is on the repayments that we are seeing, the sovereign repayments that we've been seeing for last so many quarters. Just wanted to understand, I mean what will take these repayments to kind of stop and that specific part of the portfolio to begin to grow again. We're seeing some of the Abu Dhabi bank -- Abu Dhabi based banks continue to strongly grow their sovereign portfolios or government-linked portfolios, but a kind of opposite trend is being seen in Dubai. So one, what is driving this difference. And what will take this to change? Are you expecting a change there? That's the second one. And third and final quick one. This one is on any update you might have on the 15% corporate tax from next year. Is that coming through? Is that finalized? Or is it still work in progress? Those are the 3.

Yes. Thanks, Rahul. Thanks for joining. Just going down those, just on margins, Q4 DenizBank versus ENBD. We think DenizBank, the repricing is pretty much completed. We discussed that a bit at the half year. And I think we said we were sort of around 2/3 of the way through that, just given the duration of the book. So I think they will flatten off. It's pretty stable cost of funding there now in the mid-40% range. You can originate new lending in the mid-50% range. But obviously, there's still some of the book that can reprice if it's on the retail side, and it's got a duration of longer than 6 months or a year, for example, as opposed to corporate lending that's typically 3-month repricing. So it would really take looking into 2025 for Deniz for rate cuts. If we see any rate cuts, that would, in the near term, be positive for them because the cost of funding will fall faster than the asset repricing. So the inverse of what we've seen over the last 9 months. And then on the ENBD side, we've seen the downward trends in the margins since around Q2, Q3 last year. That's pretty similar to any other international markets when the rates are falling. So for the fourth quarter, I think it will be pretty neutral and flatten off, and that's why we sort of updated the guidance to be more towards the lower end, not right at the bottom. Obviously, there are some variables that can and often do happen. I think the 50 basis point cut was more than we have been expecting when we did the first half results. We had, at that point, I think I said we're expecting around 2x 25 basis points and then I've got off to a fast start. So that will put a bit more pressure than we were expecting at the half year on the fourth quarter. But the good news is we have seen that upside in Turkey come through. Obviously, we'll come back in January and update the guidance for the full year. But I hope -- and I think in the past, we have given you the overall sensitivity for a 25 basis point cut, which is around USD 140 million or just over AED 510 million per 25 basis point CASA, the Fed rates and the EIBOR rates on an annualized basis. So whatever you have as a view on interest rates, you can work that into the model. Just on sovereign repayments. I think at the peak, that was at around AED 160 billion, now down to AED 62-odd billion, so almost down AED 100 billion in the last 5 years. Look, we -- again, you will see in the notes to the accounts, we saw another AED 4-or-so billion reduction in that. That seems to be the trend at this time and the repayment schedule. How Dubai and the UAE choose to fund further investments, whether it's infrastructure, drainages, airports, I think that remains to be seen about what channel will be used, whether it's some of their existing debt facilities or through GREs that are involved in that. So that's something to watch for, but it may not be specifically through us and the sovereign exposure that we have at the moment. Just on the 15%, it is -- you should assume 15% for next year. It's more a question of whether we pay the difference between 9% and 15% to a European country or pay it to the tax authorities in the UAE. That's just the way that works. So 15% it will be. It's just a question as to who you pay it. So it's safe for you to put 15% in your model.

Yes. The way the tax is working, the Pillar 2 tax is working, is that even if you paid an average tax rate of 15%, it's every entity. So even, for example, if we pay higher taxes in, for example, Austria, Germany, Turkey, Saudi, et cetera. If you're paying less than that within the UAE, you would have to pay that 9% to 15%, that 6% difference somewhere else. In our case, it would be Austria because that's where we have an operation that would qualify under the Pillar 2 European tax regulations. So -- it's a matter of for us is that we're budgeting 15% because we're going to pay 15%. The question is, will it be with the UAE? Well, we know no more or less than you do on that, but we're certainly being budgeting for 15%. And I think your model should say 15%. And I would be very surprised, given that someone like us would have to pay the difference to Austria, I'd be pretty surprised if the government wouldn't prefer the money in their pocket in the UAE. So I think I'd be very -- in my opinion, I'd be very surprised if the UAE doesn't enact Pillar 2 tax of 15%, very surprised because it's just companies that they own like ours, well, 56% owned, you would be an outflow of tax to another jurisdiction where we didn't even earn the money in that jurisdiction. They've already paid their tax. Lydia, next.

Our next question comes from Olga Veselova with Bank of America.

I have 3. The first one is again on net interest margin for ENBD, excluding Deniz. I hear your logic that there was margin pressure coming from lower IBOR, but we were also looking at your interest rates on deposits, interest rates were going down in line with IBOR. So what exactly is causing erosion of margin for Emirates NBD excluding Deniz. And to what extent this erosion has been coming from expansion in Saudi? So this is my first question on margins. The second question is, could you possibly give us some update on the status of consultation paper about changes in NPL regulation potential changes in NPL regulation in the UAE. And third, what would be your fair assumption for cost of risk for Turkey in the next several quarters given that the asset quality has been deteriorating?

Olga, Thanks for joining. Let me just canter through those ENBD NIMs. That's really entirely a function of the strength of our CASA funding base with almost 60%, we have one of the lowest cost funding bases in the country. That means when IBOR falls, the assets reprice and on the corporate side, it's a 3-month repricing, plus you've got any surplus liquidity and bonds. That happens a lot faster, whereas much of your funding cost is not falling because it's already near the bottom. So it really is as simple as that. The erosion is not coming from KSA. We don't provide specific margins by country. But actually, our lending growth the 49% that's been very strong is substantially all private sector. So the sweet spot has been in the middle of the PD curve, where you can actually price for risk, get a good margin, get the ancillary business. So it's not erosion from that. It's more a function of the extremely strong CASA ratio that we have. So our margins have been significantly higher than most of our competitors. But with that rate sensitivity and the rates come down, yes, our margins will come down because we're not so reliant on term deposit funding. Just on the second one, NPL rates from the Central Bank, no news to report on that. I'm afraid at the half year, we gave an indication of what our NPL ratio would be just coincidentally if we were to write off any of our loans over 5 years. And at that point, we said the NPL ratio would be around 3.6%. Portfolios move over time. I think the NPL ratio would be a little bit lower than that now given changes, but no news to report. Cost of risk -- sorry, Turkey, yes. So just with the high 50% interest rates and over the last -- well, gosh, it has been over 6 months now, more than -- through 6 and 9 months through that rate cycle, we are seeing more pressure on the retail side. It's not extreme, but it's also comparing to a period where in both ENBD and Turkey, we're seeing very strong recoveries and historically low levels of cost of risk. So in a way, our cost of risk is more normalizing. When we bought DenizBank in 2019, we actually hit the -- we hit the impairment line fairly hard with them, but we're experiencing almost 400 basis point cost of risk, then it was coming down to the 300, 200. So the costs for Q4, for Turkey, we'd probably see it very similar to the Q3 level and we don't split that cost of risk out specifically. But you can see the impairment numbers on Page 11 of the deck.

I mean my comment, Olga, would be I'm pleasantly surprised at how little the deterioration has been. I'm admitting there's deterioration, right? Don't get me wrong. But in any market that I've worked in historically, when you get rates go -- retail rates are over 60%, right? And yet the book is held up, in my opinion, unbelievably well given where rates have gone. And it does -- it reflects the resilience that Turkey has as an economy, but also the individuals, as you know, Turks are very big gold buyers historically. So it just seems to be -- it doesn't operate in -- from my experience, how I would expect the market operate when rates have jumped so massively so quickly. You had a credit card and it was at 18% and now its 60%. It's like a massive increase in those service levels, but the books held up, it might be extremely well, albeit with some deterioration but not nearly as much as putting on my old Chief Risk Officers hat would expect.

That's great. Can you clarify your answer to the second question. What is the status of this process [indiscernible]?

Could you repeat that, please, Olga?

Yes. Apologies. So just for a better understanding, you have -- this is about the second question, consultation paper about NPLs. What's the status now? Have you provided the feedback and the work continues or this has been pushed aside for some time by the regulator?

Olga, you know we can't possibly comment on the regulator with any new rules that they're publishing, right? When the regulator is ready to publish a rule, they publish a rule. But what we have said to you is that if they apply the rule that you all think they're going to apply, the effect on us is negligible. And in fact, NPLs will drop a little bit. But when you've got -- I think UAE Stage 3 is it must -- it's like 100, right? Stand-alone, right? It's 100. So it's super close to 100, right? So the effect on us when you've got such Stage 3 coverage and Stage 2 over 25%, the effect on us is like zippo. I can't speak to the other banks, but for us, this is not a material change if and when it comes. I'm sorry, but I can't help with your modeling on the other banks.

Lydia, are there any more...

Our next question comes from Jon Peace with UBS.

So I appreciate that you'll give 2025 guidance with the full year results, but I just wanted to ask some questions anyway about next year. So firstly, it's great to see the higher loan growth guidance as you push on loan growth to hedge against lower rates, would it be feasible to see again a repeat of high single-digit, low double-digit growth in 2025? And then my second question on the cost of risk. You said part of the change in the Q4 guidance was a delay to recoveries. So again, if we push those through into 2025, should we potentially anticipate the cost of risk next year being well below the through-the-cycle rate?

Jon, yes, thanks for that. You're right, we will come back and update the guidance more specifically in January. I can't give specifics on the pace of growth through next year. But from a UAE point of view, we're still expecting to see GDP at around the 5% to 6% area. Yes. So from a research team. So still strong economic growth in the UAE. There's nothing to suggest that there would be a significant slowdown in demand even through the higher interest rate cycle on the retail side, we have seen every quarter, there will be a month with a new record of origination of lending across all of the 4 main credit products that they have. We're seeing a resurgence in demand on the corporate side in both the private sector, which has been good and continued demand on the GRE side as well. So the momentum should stay there. We have to work hard at that. It's very competitive, a lot of liquidity in the market. We are disciplined about maintaining the price for risk. So it's not lending, just to put it on the balance sheet at any costs you have to have the margin ancillary and returns on the capital as importantly on that. So we maintain discipline but otherwise, the economically the outlook is looking quite positive, I guess. And just on the cost of risk.

I mean as long as the UAE continues its strong population growth, which they're forecasting and obviously delivering on, we would see there's more population, more banking requirements. So -- and we've got a relatively small market share in a place like Saudi, which we're growing quite well. And I think as Turkey turns the corner, again, I think there's a lot more growth opportunities in quite a few areas. The corporates will come back, the middle market, the SMEs will come back a lot harder, but pretty hard when rates are -- the base rate is 50%. So pretty hard to be swallowing a lot of debt in Turkey with those sort of rates.

And Jon, just on your cost of risk, recoveries, there's no -- they're not linear in timing. There are recoveries in every quarter. It's just that in the first half, we have seen some exceptionally strong recoveries. A number of them have been recoveries from 10-year-old facilities that had a repayment schedule on the tenth anniversary, so through '23 and '24, we saw more of those and augmented also by Turkiye also experiencing very strong recovery, both of those built on the back of the very strong property markets in both the UAE and Turkiye as well. That continues. But it's not -- the NPL book, you can see is starting to shrink. There's AED 20 billion in there. The vintage of that is getting shorter and shorter. And through-the-cycle, doesn't mean for next year, we would be less than the through-the-cycle range. Not necessarily, I think what it means is, I think, really a range, we would estimate it being sort of 85 to 125 basis points but we'll be able to firm that up a bit better when we come out in January. I don't think there's going to be some big lumpy ones in Q1, Q2 last year.

We wish. But the reality is, Jon, the stock and trade for those workouts has dropped dramatically.

Our next question comes from Aybek Islamov with HSBC.

Yes. Yes. Thank you all for the conference call and your answers so far. I think I would like to ask a couple of things, right? First one is your return on equity, right? It looks like in the third quarter, your ROE is at around 22%, 23%. And obviously, it was quite high last year for obvious reasons. Keeps around 34%. But obviously, as Turkey is normalizing as UAE margins are kind of coming under pressure with rates, and we expect more rate cuts and Turkish margins, as we explained earlier, will eventually also go lower. Like where do you see your normalized return on equity, right? That's my first question. And I think secondly, in Saudi Arabia, I believe this is the first time that you were like ramping up your growth in the Saudi market, I mean, so actively. Is this correct, right? And I think with regards to that, what are your thoughts about the credit quality of these loans, your creditor rights? Because in Saudi Arabia through-the-cycle, has that habit of discriminating foreign lenders versus the domestic onshore lenders, right? And I've seen it with other banks in the Gulf in the past. So how do you see your creditor rights, the quality of these loans should economic activity in Saudi Arabia continued slowdowns or slows down basically? That's the second question, yes.

Aybek, maybe I can tackle that first one, and maybe Shayne will have some comments on the second one. Just on the return on equity, you're right. A return on tangible equity is around the 24% mark. So extremely strong by any international standard. And from last year, I think we're around the 27%, 28%. Yes, rate cuts are coming, but we have been investing in the underlying client business to build volumes to offset that. To us, that's the best hedge we can have, build volume to build returns even though it is on a lower rate. You can see the strength of our non-funded income has been growing very well, and that really reflects partly the investments in our sales team, but also the depth of our client relationships. So we are very conscious of that and working on that. And you mentioned Turkey NIMs through next year. As they cut rates in the near term within the first 6 months of that if it's significant sharp cuts that has a net benefit to us and then the margins may tighten if monetary policy has settled down, inflation or what have you, but that will take some time to complete that program. So the cost -- the return on equity ultimately is an outcome of our earnings and our equity base. So we'll have to see what that looks like through next year. And I think you'll probably have a better idea when we refresh guidance in January. So that's the first one. KSA, Shayne, around -- I think that was extensively around private sector.

Yes. I mean I think the first thing to say is we're not a new entrant in Saudi. This is our 20th year in Saudi. So I think we're not a baby in the wood, so to speak. And we've always had a lot of Saudi clients within the UAE as well. So I acknowledge that market is pretty deep. From a risk appetite perspective, it's no different sort of risk appetite we'd have in Saudi that we would have in the UAE with structural loans, covenants, pricing, return on risk capital. So I think from a risk management perspective, it's got very similar attributes that we've seen in the UAE, both in retail and in corporate. So we're comfortable where we are with the growth we've had in Saudi. We haven't done a lot of what I would say is the top end of town in Saudi because a lot of it are PIF related, which is very narrow fees and pricing. And the majority of the ancillary goes to the local banks. So I think you've got to tailor your needs for what your return dynamics can be in a market like that. Not that we don't love PIF, we love PIF. But on the same token, it's a matter of can we get a decent return on capital there? So I think from a book perspective, we're comfortable with where we are. We think there's a lot of growth. Obviously, in Saudi, there's a very sizable lending demand. And actually, with liquidity not that great there, the banks are having to raise a lot of money offshore to bring back to Saudi because you've got -- deposit growth is nowhere near the same as lending growth in Saudi. So there's an opportunity for growth for us there at the moment, and we're taking it.

Thanks, Shayne. Thanks, Aybek. I'm very conscious of time. There's a few questions that have come in on the web, which I'll just do a quick wrap up on. Shayne, I may ask you to answer the last one, but let me just go through the various questions. So there's been a question about the pivot away -- the increased density of risk-weighted assets, that's absolutely right. As government lending, which is 0% risk-weighted has reduced and being replaced by higher risk-weighted lending. And is that -- why is that not flowing through to the margins? Actually, when you look at the year-on-year margin, you can see that loan yields -- the contribution from loan yield is actually up. So the main pressure at the ENBD level that we're seeing is more on the deposits and again, or the funding cost, I should say, and that's really the fact that the CASA -- a large chunk of the CASA is very low cost for us.

But with the RWA effect of the transfer between sovereign and capital.

Okay. Then in terms of agriculture, the -- yes, DenizBank have been very much -- they are the #2 in terms of agricultural lending and have a very good and long track record in terms of agricultural lending, so they are able to price that appropriately. In terms of the mortgage book, about 1/4 of our consumer lending is mortgages. And then the growth in balance sheet lending. Balance sheet lending has gone up by about 12%. So it's actually quite reflective of the growth in lending and the growth in the loan book in general. There was a question on the tax rate. We've answered that. And in terms then of -- sorry, just read this out, main subsegments contributed to the strong loan growth. Again, yes, that's really coming through across all the major sectors for loan -- for retail lending.

Just -- I'll just elaborate on that one if you want. I think if you look at a lot of the growth, it's personal loans, car loans, credit cards, and some mortgage lending. It's basically coming across just about every segment of the portfolio. Our concentration is more on the first 3 than mortgages, but that's really where the drivers are.

Thanks for that, Shayne. And then in terms of depreciation costs, yes, if you look at our slide on cost, you'll see that the depreciation and amortization, it's roughly been about AED 220 million each quarter stepped up to AED 340 million this quarter relating to the increased depreciation. We've talked about KSA. And yes, again, there was a query on the noninterest income. Actually, again, when you look at the trends in foreign exchange and derivative, it's been very positive in terms of core fee income. Most of the volatility, as I said, that we referred to relates to other fee income such as DenizBank, hedges, et cetera, at DenizBank. And then final question is in relation to the Tier 1. Any approach in terms of calling that. We -- again, the decision to call would be made near the time, and that will be based on our capital need and economic -- the economics of it and the reputational considerations as well. We can't give any indication whether that will be called or not called until much near the time. That's it. Lydia, are there any further audio questions?

[Operator Instructions] No further audio questions.

Thank you, Lydia. Okay.

Okay. If there's no further questions, I'd like to thank you all for participating in today's call. As you can see, we continued our strong financial performance into the third quarter and our investment in the network and digital are delivering results, and we are well placed to benefit from the strong regional economy, and new sources of income, which will offset the impact of falling interest rates. I'll now hand you back to Lydia to provide details in case you have any further follow-up questions and to close the call. Over to you, Lydia.

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 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 very much for your participation.