First Abu Dhabi Bank P.J.S.C. (FAB) Earnings Call Transcript & Summary

Good day and welcome to the First Abu Dhabi Bank for Year 2019 Results Conference call hosted by Citi. This call is for analysts and investors only, people of media and press may disconnect. Today's conference is being recorded. At this time, I would like to turn the conference over to Rahul Bajaj. Please go ahead.

Thank you very much. Good evening, good afternoon, and good morning, everybody. On behalf of Citi Research, I would like to welcome you all to First Abu Dhabi Bank Full Year 2019 Results Call. With us on the line, we have James Burdett, Group Chief Financial Officer; Karim Karoui, Group Head of Subsidiaries, Strategy and Transformation; and Sofia El Boury, Head of Investor Relations. I'll now hand over the call to Sofia to commence. Please go ahead, Sofia.

Thank you, Rahul. Good afternoon. Good morning, everyone. Thank you for joining us today to review FAB full year 2019 financial performance. You would have received all our disclosures this morning, including our deck, which is currently available on the Investor Relations section of our corporate website as well as on our app. And a replay for this call will be available shortly after the call. So from FAB senior executive team, we have with us today, our group CFO, as usual, our group Chief Credit Officer, our Group Chief Risk Officer as well as our group head of Subsidiaries, Strategy and Transformation. So as usual, we'll be going through the presentation and then answer your questions during the Q&A session. With this, I'll pass it on to our group CFO, for the presentation.

Thank you, Sofia, and good afternoon, everybody. Thank you very much for joining FAB 2019 results presentation. Most of you who have listened before, you will know, I'll skip through the slides pretty quickly. I'll label each slide as I go through it, and then we'll hand over for Q&A at the end. And as Sofia mentioned, a number of my colleagues are here to help answer any questions that you may have. So starting firstly on Slide #3, which is the key performance highlights for the bank. You can see we had a solid set of results, particularly in, I guess, what's becoming an increasingly challenging environment. Those results are in line with the guidance that we put out to the market. Our impact for the fourth quarter was $3.1 billion, which was up 5% over the prior comparative period, bringing total year-to-date profit to $12.5 billion, which is 4% up over last year. And you'll see as we go through the presentation, that most of that growth was driven by revenue growth, which is up 4% over the prior comparative period. We also continue to focus on shareholder returns and maximizing shareholder returns. And you can see our return on risk-weighted assets has improved by about 10 basis points to 2.56%. At the same time, we've been very efficient with our allocation of capital, where you'll see from the presentation, assets are up some 16% year-on-year, but our risk-weighted assets are actually down 1.5%, which has led to this improved return on risk-weighted assets. Our return on tangible equity remains within guidance, at just over 16%. And the proposed dividend for the full year is 74fils, which is flat to last year and represents a 5% yield at current share price. At the same time, we're doing all of this and executing on our strategic agenda, we've expanded in those markets, we said we would. We now have 3 branches in KSA. After a 2-year period of integration, we've invested a significant amount of money in digital capabilities, our product offerings, and in general, trying to improve the customer experience to give us both revenue and cost synergies, and we've made some good progress on that. And in fact, in terms of the cost synergies, you'll see we sit here that we've met our full run rate target that we put out to the market, which is $1.5 billion in sustainable saves going forward. In terms of the future, we believe we're well positioned relative to our peers. We have a very strong balance sheet. Our key differentiator is our proximity to Abu Dhabi. We believe GDP formation will be government-led. And based on our strong track record of execution, we think we're well positioned going into 2020. So turning to Slide 4. Just looking at how we performed against the guidance we put out to the market. You can see against most indicators, we performed in line with guidance. Profit coming in at mid-single-digit, at around 4%. Cost of risk was stable, at 48 basis points throughout the year, which was below the guidance of 55 to 65 basis points. And as you'll see, the guidance for this year in 2020, we think it'll normalize back to 55 to 65 basis points. Return on tangible equity, I've already talked about, at the bottom end of the range of just over 16%. But our core equity Tier 1 significantly ahead of the guidance we put out to the market, at 15.2%. Again, puts us in a strong position for the growth in 2020. Jumping to Slide 5. This just shows the net profit bridge to get to the AED 12.5 billion. And as I've already iterated, most of the growth was through operating income, which is up AED 800 million over last year. Most of that growth within CIB. And within CIB, we had very good metrics around balance sheet growth and growth in the various product lines that you'll see coming through. Personal banking growth was flat, but we have to keep reminding ourselves that we've tightened risk appetite, so there were negative headwinds from '18 going into '19. And flat is actually a good result, given that the market actually contracted. So despite the 16% loan growth, RWA is contracted, which led to a superior return on risk-weighted asset performance. On Slide 6, just looking at the capital generation, you can see 2.54% of profit generation. So our organic growth and our ability to generate organic capital remains very strong. And you can see the core equity Tier 1 ratio vis-à-vis last year at 15.2% versus 14% last year. Once you take out the proposed dividend, we are left at 13.5%, which is a very good result going into next year 2020. Slide 7, just to give you some flavor on the execution of our strategic agenda. The business momentum remains very strong in terms of growth. And when you go through the presentation in detail, you'll see a number of metrics that have improved considerably. So just to call out a couple of those. CIB renew up 11%, global markets up 30%, assets up 16%, CASA up 9%. So all those sort of areas that we're looking to focus growth, looking very good. And as I said, in personal banking, we remain flat with those headwinds and despite a shrinking market. We're also investing in transformation. There is a cost uptick you see coming through the numbers. We're investing both in terms of revenue productivity by enhancing the customer experience through digital, through improving customer journeys. That's all about the revenue productivity play, and we're also investing in back-office automation, where we're looking to automate end-to-end processes to improve the customer experience, but also improve our cost-efficiency ratio. And we're looking to continue to invest into 2020 as well. In terms of leadership and strength, we are a key enabler of Abu Dhabi's economics growth and stimulus plans. You can see that coming through very loud and clear in the numbers, where a significant part of the growth was government- and GRE-related. We have the market-leading franchise in the market. We have the most diversified portfolio and the biggest international reach of our competitors. All of this, plus a strong balance sheet means, again, as I reiterate that we're strongly positioned for next year. Turning to Page 8. Just to give you some flavor of some of the improvements we've made in that digital investment that we've made. Just to give you a bit of the flavor, I'll highlight some of the statistics. So 50% increase in mobile engagement. That's a massive effort coming off the back of integration. Our Net Promoter Score, which was pretty low, and we know, and we acknowledge that, has steadily improved every single month throughout 2019. Those transactions that we've migrated to digital channels, the transactions on those have increased by fourfold. We've redesigned a number of customer journeys, and we're leveraging the MIS to enhance sales productivity. And when you take out some of the one-offs you can see in our personal banking business, that sales productivity has improved over the last 3 quarters. Turning to Slide 9, which just shows balance sheet growth. As I said before, very significant growth, up 16% or AED 55 billion year-on-year. It should be noted that there was a significant one-off transaction at the end of the fourth quarter to the tune of around AED 80 billion, which was a one-off short-term facility, which has in fact, been repaid in January. So ex that, the growth was around 7%, which is very favorable compared to market growth of around 3%. Customer deposits were up 12% or AED 54 billion year-on-year. That's across all segments, not just government; government GREs, corporate and personal banking. Our CASA's up 8%, and year-on-year that translates to AED 14 billion increase to AED 174 billion, which we're very proud of. We've increased, significantly, the number of PPA mandates that we've put out to the market. And that's helped us drive a liquidity coverage ratio at 129%. Page 10. On the net interest income, down 2% year-on-year. As you know, with us, it's a very mixed bag. So a strong balance sheet growth, plus the benefit of the 2018 rate hikes flowing into 2019, was broadly offset by NIM compression in CIB, risk appetite tightening in personal banking, and significant increase in government deposits, which as you know, we placed with the ECB, where the corresponding income is represented in the non-fund income line. In terms of the fourth quarter, you can see a reasonably significant drop-off that primarily relates to the 3 rate cuts coming through in the fourth quarter versus the prior 3 quarters, plus a lower interest in suspense versus third quarter '19, and translates to a NIM reduction of about 7 basis points Q-on-Q. And as you can see there on the bottom of the page, we've, again, articulated the impact of every 25 basis points, if there's no offsetting action, equates for AED 270 million. In terms of noninterest income, significant growth there, we're up 16% year-on-year, which translates to incremental AED 1.1 billion over the prior comparative quarter. Fees, however, are down 7% year-on-year, and that mainly relates to trade fees over the last prior comparative period, mainly because it's been non-economical trade for us, where the spreads are so low and the mandatory central bank provisions means the business is not attractive to us from a shareholder accretion perspective. In terms of the FX and investment line, significant growth, mainly out of global markets, which is 43% year-on-year. Just sort of breaking that down a bit, trading incomes up nearly 100%, sales activity on the back of our ever-increasing sales franchise in CIB is up nearly 40%. Then we had a number of AFS gains on liquidation, all generating next figure of AED 4.1 billion for the full year. In terms of Q-on-Q growth and the FX and investment income line, that's mainly as a result of some AFS gains we've made opportunistically in the fourth quarter. Turning to Slide 12, just looking at the costs. You can see a significant reduction in direction costs as we've guided the market. That's broadly offset by increased depreciation as we now depreciate the integration. Assets plus investment in digital and now international franchise, mainly Egypt and KSA, coming through. So overall growth, AED 170 million, up 3% year-on-year. Cost-to-income ratio at 26.8%, just outside the range that we guided mainly because of the weakening of revenue as a result of the rate cuts coming through in Q3 and Q4. Just one more point I want to make on cost leadership. We do have a number of initiatives to drive further cost efficiencies, both locally and internationally that we're working on at the moment. Turning to Slide 13. In terms of asset quality, top left-hand side, the cost of risk remained pretty stable, at 48 basis points, similar to full year 2018. So full year provisions at AED 1.843 billion. In terms of the NPL ratio, you can see it tick up a little bit to 3.2%. But the coverage ratio, as you can see, has dropped considerably, and that's mainly the result of the write-off of a number of accounts that were fully provided. And I think it's worth pointing out at this stage that we're comfortable with the coverage ratio at somewhere between 90% and 100%, because this is cash covered nonperforming loans, it doesn't take into account collateral. And I think the other point I would make is that it was abnormally high as a result of PPA exercise on merger and also the IFRS 9 provisioning. So we think the normalized level is now around 90 to 100 basis points, along with the cost of risk being around 55 to 65 basis points. In terms of the NPLs themselves going from AED 12 billion to AED 13.5 billion, that primarily relates to a couple of large accounts that have been downgraded to NPL status. On Page 14, just looking at the outlook. Clearly, there's some uncertainties out there in terms of the 3 rate cuts flowing into bank's results into 2020. We have estimated in our outlook one more rate cut towards the end of the year in 2020. There's clearly softness in the property market, softness in the non-oil GDP sector, but that's offset, from our perspective, by significant government stimulus, the result of the expo and so on. So our strategy execution continues in the same range as the Investor Day we put out at the same time last year. That is, we will maintain cost discipline. We will maintain risk discipline. We will continue to strengthen our leading position in UAE. We believe there's significant upside, both from the CIB space and the personal banking space, where we're under-penetrated, and we know we can enhance our cross-sell and return on equity. . And we'll continue to accelerate growth in those markets that are strategically important to us, such as KSA and Egypt. At the same time, we will continue to invest, but our investment is very disciplined in the sense, we're investing in revenue productivity and cost efficiency. So to the guidance on Page 15. In terms of loan growth, we think it'll be broadly flat, but again, remember, the AED 30 billion one-off in the fourth quarter. So once you take that out, it's going to be high single digit, which I think is the way you should look at it from an averaging perspective when you're looking at your return metrics. In terms of revenue growth, we're seeing low- to mid-single-digit. We believe we have a significant ability to offset the impact of the rate cuts through data cross-sell, through targeted growth in certain areas, personal banking momentum and so on. Cost-to-income ratio, it will slip a little bit to 27%, as we invest for the future. But obviously, that investment is to give us revenue productivity and cost gains in the future. I've already talked about the risk metrics. We think the cost of risk will normalize around 55 to 65. I think the 48 basis points was abnormally low on the back of the IFRS 9 implementation as well as the PPA. NPL, as we're saying below 4%, we think it will be somewhere between 3.5% and 4%. And in terms of the profitability metrics, return on tangible equity of 15%, Basel III core equity Tier 1 above 13%. But I think the important point is, we remain firmly committed to meet our medium-term financial aspirations, which are listed below on Page 15. So just to wrap up on Page 16, before we go to Q&A. Solid performance in the first year of transformation, and let's not mistake, the transformation was significant. The integration was significant. There were some teething problems. We've improved every quarter in our personal banking franchise throughout 2019. We have a diversified business model, which I think gives us a competitive advantage. We're bankers to the Abu Dhabi government. We think a lot of the GDP formation will be government-led. And with our strong balance sheet rating and good management track record, we think we can outperform our competitors and deliver on that medium-term guidance that we put out to the market. So look, with that, I'll thank you all for listening, and I'll hand over for the Q&A.

[Operator Instructions] We have no questions at this time -- I do apologize. We will take our first question from Chiro Ghosh of SICO.

This is Chiro from SICO. I want to get an understanding of the loan appetite in the market per se. So fourth quarter, even if we remove the -- or like, ignored the one-off large -- short-term facility which you built, if you can get me a sense of what is the borrowing appetite, like, especially from the private sector?

Yes. Look, we see a lot of the pipeline at the moment being government-led, as I've said before, the GDP formation, I think, is mainly government, GRE public sector entity on the back of the stimulus. So that's by far and away our largest growth -- area of growth. And we think that will be the biggest number in terms of balance sheet movement going into 2020. I think in terms of the personal banking market, we think the market will be broadly flat year-on-year. I don't see a lot of growth in that space.

In terms of the private borrowers on the corporate side and the investment cycle is not really fully kicked in as yet. So I think as the investment cycle kicks in, potentially, there is an opportunity. But I don't think we would take that to be a big number in 2020. I think what James says is correct. It is going to be government-led, and this is what we are probably going to get.

So overall, your outlook on asset quality would also be fairly good, right? Would that be a fair assumption?

Yes. We see asset quality NPL is between 3.5%, 4%; coverage ratio 90% to 100%; cost of risk, 55 to 65 basis points. Whilst those metrics are a little bit higher than last year, last year was abnormally low across those metrics because of the impact to -- follow through impact of the purchase price allocation and the IFRS 9 exercise.

We will take our next question from Shabbir Malik EFG Hermes.

First question on your credit quality. I think you talked about, if you look at the NPL formation this quarter, it seems quite sizable. And I think you talked about a couple of large accounts driving that. And I think in terms -- there is another disclosure in terms of restructured loans and there was also a meaningful increase in that. So if you can give us some comments on what drove that -- those increases in both the NPL and the restructured loans, maybe some color on the sectors that have driven that increase. And do you -- how do you see this trend changing in 2020?

So I think on the -- I'll take the NPL formation question first. So I think, as James highlighted at the outset, quarter 4 saw a few large names contribute to the NPL formation that you've seen in the numbers. And I think that was, again -- I mean, in terms of, obviously, a quarter-on-quarter movement that looks like a high number, but in the overall context, I think it just recognizes there's a couple of large names as part of the new process of recognizing these names, given where they were, and given our view of those names going forward. So in a sense, if we chose to recognize those at the back of a certain process that was ongoing in terms of trying to reprofile and restructure that. And at a point where we said the right thing to do was to classify them as an NPL, that's what we did. So it's, again, I don't see anything other than this being part of our BAU process. It's just that these 1 or 2 names relatively contribute to that large number. Obviously, belonging to the construction and the real estate sector.

And in terms of the -- do you see this trend continuing going into 2020? Maybe not completely going into stage 3, but maybe an increase in stage 2 loans that would still be negative for cost of risk or provisioning?

Yes. So again, I think, as highlighted in the opening session, our outlook remains soft for 2020, unless, of course, the wheels really start spinning, driven by government spending towards the second half of 2020. But save for that, if the outlook remains soft, obviously, we will continue to see headwinds on how corporate balance sheets evolve through this period. And what mitigates us, particularly as FAB, is the fact that we continue with our strong target market focus with a large parts of growth coming from government GRE, M&A. So we have a sort of a built-in mitigant to the asset growth and quality story. So I think we stayed within the guidance numbers that have been put out for 2020, despite all of that.

And one final question on your noninterest income, particularly on FX income, that's been pretty strong this year. Do you see that as more sustainable? Or there are certain one-offs which could lead to lower FX income in 2020?

Yes. So the component factor that particular line is, the sales activity that global markets conducts on behalf of the CIB clients, that was up considerably. And in fact, we're looking to grow that considerably. There was an element that's related to trading, not significant. So we think that's relatively sustainable because when you look at our value at risk versus the size of our balance sheet, we're actually relatively risk-averse. So putting a little bit more risk to work, I think, makes a bit of sense to us. So that's sustainable. For overall, yes, I think it's very sustainable. The one factor that will alter that is the ECB trades. So if we are to see, for example, and I don't know this at all, but if the government deposits were to go out, then the ECB placements would go out. We would see a commensurate increase in our net interest income. And an offset in non-funds income relating to that, which I think we've explained many times in the past. So that's the only real wildcard that the level of government deposits.

And in fact, in terms of these cross-sell, as you can see, we have put out balance sheet over 2018 and 2019. And a lot of the cross-sell we hope that will follow in 2020. So that will be probably one kicker, which will happen in this space.

All right. If I may, just one more question. In terms of your digital transformation, particularly on the retail side, how much progress have you achieved so far? When do you think you will be at the right level in terms of having the right digital capabilities?