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

Good day, and welcome to the FAB and the Future of Payments Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ronit. Please go ahead, sir.

Great. Thank you. My name is Ronit Ghose from Citi Research. It's my pleasure to host this call along with Rahul Bajaj. We're both dialing in today from Dubai. Our main speakers on the line, down the road from Abu Dhabi, are Ramana Kumar, Head of Payments and Digital at FAB, at F-A-B, and also Sofia El Boury, the Head of Investor Relations at FAB. Ramana is going to talk us through some highlights and some key points on both FAB's business and broader UAE and international payment trends. You will have the opportunity, if you're listening in, to ask questions. [Operator Instructions] You can either e-mail Investor Relations at FAB or you can e-mail Rahul Bajaj or myself. Please do keep all those questions coming. I've got a bunch of questions I'm going to ask Ramana. You'd be very much welcome to post questions as well. Ramana, thanks so much for joining us.

Thanks, Ronit. It's great to meet everyone. I hope everyone is having a great time. And the markets are up, so it's pretty good news, right?

Everything is going to be [indiscernible]. Some of the things are going to be [indiscernible].

In terms of payments, payments have been going up for a long time in terms of underlying trends.

Absolutely.

And obviously, this year, we've had so many things going on. But before we get into the events of this year, sort of help set the scene in terms of what does digital payments, credit card payments, debit card, other forms of digital payments, what does it look like in Abu Dhabi and the UAE more broadly in terms of penetration ratio, usage stats, so on and so forth?

Absolutely. And I think I want to relate that part with the statement you use, right? Everything is up and payment companies have come back. So if you look at the trajectory post COVID, which are the companies that have come back really fast? It's payment companies. And payment companies, those are structurally important. And I stress on the words structurally important. And the payment companies who -- are overall where people see the importance of why payment companies really bounce back quite fast because they are backbone of an economy. And whether it's up or down, payments have to happen. So there are different types of payments. So coming back to the relevance of UAE as a market. UAE as a market is split into 2 parts. There is a very strong domestic transaction. The market is big. The market is huge. There are large-value government payments. There are big retailers. There are strong SME and MME segment and so on. And given the vibrancy of the country and Dubai and Abu Dhabi, there's a lot of international spend as well that come in and drive the book in the UAE. So if you look at the market traditionally, traditionally, there have been different studies. There is no one yardstick, but I can tell you, there has been different numbers. But relatively, about 40% to 50% was still cash, right, whichever way you look at it, and 40% to 50% were electronic payments. So cash was predominant driver before the COVID struck in the UAE. And there is a segment of UAE businesses who used to accept cash because of the inherent misnomers that they had. Their -- they cannot put the machine, machines cost us and the top of it, keeping cash in hand always helps. What happened after COVID was 2 parts. Of course, the challenge was the international transaction sell. The international -- because of tourism and the travel stopped, normally international duty free, et cetera, et cetera, transaction that happened. But what we have visualized is a massive change in the perception or in the thought process of consumers like you and me. So the merchants who used to accept cash before, who were contributing predominantly to the cash of the country have suddenly come into a situation of survive or death. So the survival meant that they have to provide the consumers with an electronic option. So all these businesses which were very traditional, very old-style thinking and always believe cash is the king, suddenly had customers calling them or telling them, "You either send me the stuff and I'll pay electronic, or I'll not come and do business." So this included the small-scale entities like Baqala, which are like -- I'm talking about stores, the medium-sized supermarket and also some of the large entities who previously believed that nothing would happen to them and anyway the customers would pay cash because they are either -- they have no other options. But today, there are customers who are telling them, "I will not have cash. I will not transact cash." So what has happened is while the international transaction sell and there was a perception that, finally, the market is going all over the place, post Q2, post March, April, May, the markets suddenly stabilized and the market started getting strong. And as FAB, we have seen a phenomenal reversal in our volumes. And if you exclude quarter 2, we are actually positive from last year. We have grown in single digit, higher single-digit terms in terms of our total processing volume, which is phenomenal. I don't think there is any issue in terms of understanding that the local transactions or domestic transactions are happening. And I also am very optimistic that there is much more to go in terms of conversion of cash. And when the gates open up, I'm sure the country is ready to achieve the growth. So I'm pretty optimistic.

And Ramana, just -- I mean, obviously, optimism there from you, and you've thrown out some numbers of single digit, high single-digit growth. So is that just Q3 stand-alone and Q1? Is that what you're referring to that your total -- your TPV is up in those 2 quarters year-on-year?

Yes, year-on-year. Year-on-year Q3 stand-alone and Q1 stand-alone, we -- our total processed volumes have grown up higher single digits. And the perception is that the market is not good also, right? And in terms of our overall, even if you consider the quarter 2, compared to the other players in the market, our impact is less than -- I mean it's less than half of what they have suffered. So now where we stand, this proves the resilience of our business model. This proves the strength of our clientele. And this also proves the focus on which our payment strategy is built on. For example, we have a very strong proprietary government payment business. And these are particular solutions built for the government. The Abu Dhabi Pay is a futuristic government -- specifically government payment solution that's built along one single transaction for a customer who interacts with 8 or 9 departments or government entities, and everything happens through a single touch point. This is with close coordination with Abu Dhabi [indiscernible]. And it's an inherent exclusivity in terms of the way we build the platform for them and the way they're working with them. So that's a running business. The other thing we have seen is our ability of some of the -- moving some of the industry, right? So education as an industry transformed, which previously, it was -- it used to be an industry where everyone used to go, either go to the school or make a payment or used to pay check and so on. That's transforming. And what we have seen on that, this is quite the most interesting concept that happened was, there are people who now pay their cars or buy cars on Pay by Link. So we have launched something called Pay by Link in the middle of the crisis. As soon as the crisis hit, we went to the stores who were traditionally store-based, who didn't have online, and we told them, "Okay. Even if you're a small store, you want to deliver to customers in and around your locality. Don't worry. When the customer calls, ask them for their mobile number. We will give you a tool where you send the link to that mobile number. And the customer can click it, pay by card, and you can deliver your small stuff." So we have moved entities from in-store to online with the click of a button. And that really transformed some of the...

Sorry, I don't know whose hold music that is. So Ramana, you were saying some the biggest transactions one does, whether in Abu Dhabi or Dubai, as a resident here is the rent check. Monthly checks to pay rent, to pay for school fees, these are big chunky transactions and you pay by check for historic reasons. How do you take those online? How can you make them digital?

It's a great case study, Ronit. So I think this goes back to show how our -- so how we are not in the need to acquire, right? So we went to the real estate companies and we sat with them and we told them, "Guys, listen, we all know that there are challenges of check." It's not the challenge of check. It's more also of us physically visiting the agency. And in most of the cases in Abu Dhabi and in some cases in Dubai, where you have to go to your agency's building office and hand over the checks and sign the document, that was ridiculous in peak crisis. Then what we did is we went to these real estate agencies. And I can probably say that we have acquired most of the largest real estate companies. Some of the names were also in the press like Aldar property management company and so on, where we told them, "Let the tenant pay by Pay by Link." So on the day of the payment, the link comes to you on your mobile, you click it, you make a payment. Finished. And you make a payment by your card. Previously, you used to make a payment through your check, which means you're paying out of your pocket right from day 1, but now the customers have option to use their credit card because you and I or most of the people in the country have good limits, which we never have exhausted them, right? And also people -- this is one of the largest payment for people. So they were quite happy with this solution. And many of the biggest transformation happened in that sector as well. They're real estate companies. Today, we have clients who are big property companies, and I'm talking about huge properties, who have launched and they started accepting their post payment or upfront payment or advanced payment, everything on card now. So that's where the transformation is happening.

So obviously there's new areas we just touched upon, housing, education. These are big parts of spend here, domestic spend that are slowly shifting online. Could you talk a little bit about what else is driving the cash/check, the digital trend out there? Is it more SME? Is it more government? What else is driving this?

So there are 2 factors. I mean one is, of course, the B2C or C2B, where there are customers walking into the small-scale entities or the SMEs and MMEs, where they traditionally were like, "You know what? It's good, I used to accept cash. There was never a challenge. People walked in. They asked me for electronic payment, I said no. And then they went around, took the money from ATM and came and paid me. So I never had a problem." But suddenly now, they have a different issue. It's not whether I have cash or not. It's just that I don't want to touch. I don't want contact. So what happened suddenly is they had no other action. There are no other option to stand up and say no to the customer. Previously, it was easy. They said, "It's very costly to put a machine, blah, blah, blah." So now they have no other option. Now the customers are telling me. That's number one. So that's one segment, which has traditionally contributed. Then the segment -- then the same segment also contributed to B2B. So there are big companies like, let's say, Nestlé, Almarai, [ Oasis ], blah, blah, blah, all these big companies who supply to these small-scale or medium-scale entities. All those payments used to happen either in cash or in a different form of -- predominantly cash. Now that transformation hasn't yet happened, and that's an inherent field where we are working with a lot of corporates in connecting the supply chain. And when you connect the supply chain and the power of connecting the supply chain is, today, the biggest thing is the buyer has credit limit with supplier. So I supply, I give the money in 30 days, 25 days. Now the supplier don't want to break it, but supplier is also struggling for his cash flows. So what we have done now is we have converted that credit limit into a card-based mechanism where a supplier supplies, buyer pays by card, which means, by default, they still get the 50-day credit or 35-day credit, depending on the cycle. The supplier gets money now. So what's happening is now we are linking the B2B trends. And B2B trends are picking up, and they will pick up. And one of the biggest areas it will pick up as soon as the markets open is the corporate travel accounts, the travel payments, the agency travel payment. These are the largest payments today that are done through non-card-based model. And they will all move because of the efficiency of the cash flow management, right? So that's another large area of it. And hopefully, once the skies open up, and we are hearing some good news as we speak, and I hope that's correct, and I think from that perspective, we have had a great win as it's public news. We won Etihad Airways in the first quarter. And we are the only acquirer for -- who have provided like-to-like currency settlement for Etihad. It's the most transparent way of providing payment transaction information. So previously, what used to happen is if you have used euro to buy your ticket, Eurocard, the settlement used to happen in dollars, and they used to get money in dirham. So there was never a transparent model in terms of how it is. So what we went into, to the likes of airlines, and this is the strongest differentiator for us as payment player, is our ability to look at each transaction and look at the base currency or the transaction currency and settle it in the same currency that the airline wants because airline itself has a strong treasury management system and they want to pay the local expenses in local currency. So now they're paying 2 legs of FX income. So we have reduced our cost considerably for them. And that's the benefit we want to give to our merchant, where the benefit of giving in the right acquiring solution or the right payment solution is the power of data, the power of value and how it overall brings efficiency for the merchant. And at the same time, we get the right value because, at the end of the day, the deal was much more beneficial for us and it's a win-win for Etihad as well. And so the fact that many other clients, the same.

Sure. [indiscernible] if I look at, say, the growth rates as we sort of look out into next year -- and let's leave international sort of tourism and travel on the side because who knows? I mean it could be up a lot, but we don't know. So let's just talk about domestic. So the sort of single-digit growth you saw in Q3 year-on-year is sort of total TPV, right, not just domestic spend, if I understood you correctly.

Right. It's total TPV.

Total spend, yes. So if I take out the international across border, then your domestic spend is growing year-on-year what? Like 20%? Something like that? I don't want to put words in your mouth or numbers in your mouth but...

Okay. Exactly. So let's not -- again, this -- the answer to this is very difficult because you guys are all analysts. You need to analyze it in the right way, right? It's not the spend growth. It has the highest component of conversion growth. So the spend overall may still be the same, but cash conversion is driving the growth and the percentage, right? So it will still be -- it may still be in single-digit value. And as I said, once the confidence comes in and local houses and the jobs stabilize and so on, the spend increase. It's quite normal. I mean, Ronit, you and I wouldn't have spent on -- I mean not me, you wouldn't have spent on your luxury car yet, right? You would have postponed that decision to buy your next Ferrari. You'll buy pretty soon once the whole thing [ subsides ].

I don't. I careen everywhere, Ramana, and you know that. I don't have a car but never mind. I just -- So stop projecting onto me.

I'm just giving you an example. So there's pretty interesting studies around how people used to change their cars every 2 years -- every 1 year, every 2 years, to now it has extended to 4 years. These are all the doubts in the minds of people about the continuity or about comfort levels. And once it comes back -- and corona has impacted many business, right? Once it comes back and once the confidence comes back, these spends would drive. And there is no -- I am quite optimistic that it will come back. At least the domestic spend would come up. And with the drive around both -- I mean this is back to same example. Each and every one of us are sitting in our houses, waiting for when the skies will open to do our next trip, right? And when that happens, the spend happens.

Yes, yes. So just to be -- just to wrap up the section on volumes, it's a very clear message. You're seeing lots of cash and check to digital transformation. Your headline total TPV was up high single digits despite the absence of international travel in Q3.

As well as in Q2.

So you're pretty optimistic about it as we head into next year. Obviously, Q2 was different, yes. Obviously, Q2 was different, yes. Now if we switch a little bit from talking about volume to pricing and competition, tell us a little bit about the competitive environment in the UAE. Obviously, your -- there's the merchant side, the merchant solution side, the issuer solution side. Well, let's talk more about the merchant side. Our understanding is there are 3 big players in the UAE. But you tell us, you're the expert. What's the competitive landscape like in terms of market structure? And how would that look similar or different to, say, a market like the U.S. or the U.K.?

Absolutely. So UAE market has traditionally been driven by 3 players, as you've said, and you all know who are these 3 players. So -- and then there were new acquirers who came in because of the new licenses issued and so on. So -- and then when the new acquirers came in, they relied on one of the existing acquirers to provide them acquirer processing solution, which it ultimately would end up you paying much higher cost than what you do and make yourself unsustainable in the competitive market. So I would not focus on outlier. I would focus on the normal market. There was a trend which the market went through. There was a trend where one of the largest competitor decides to go public or whatever, decides to -- and this is my perception, decides to have the market share and one way or the other -- and with the newcomers coming in, impacted the pricing of the market in a very drastic way, right? So there -- some people wanted market share. Some people -- newcomers want market share. People who want to establish themselves and took us that they're big names -- or they went to the big names and said, "It doesn't matter even if it's loss-making. We will get the mandate," right? And then there are players who said, "No, we want to do the business the right way, and we stick to the right way of doing the business," because you cannot -- this is not like a -- people say that this is a complementary business, which compensates the cost of flows coming into bank. It actually is not because now the interest rates have also gone down. So it's a double-whammy. You are making loss on every transaction, and the money coming in doesn't generate you the necessary interest income as a bank. So what is happening now is most of the acquirers realized that the pricing model which happened 1 or 2 years ago was wrong. And now we are seeing a phase where every one of the acquirers are stabilizing. Nobody is willing to take a loss-making proposition. And I know for sure that some of them are up-pricing. The people who went down are now up-pricing the deals because they are now making -- they used to make 2 million, 3 million loss per account, which was unsustainable, right? Now that's on the pricing side.

This is off-line or online? Are we talking about...

Both off-line and online, right? Now what happened is we had a very clear strategy from the time I took over the business and the merger happened and under the leadership of Hana. We were very clear. One, we will not do business in loss. There is absolutely no discussion around it. We -- and I don't want to name a client, but we have lost one of the largest merchants in 2018, mid-2018, because of pricing. And I was in the meeting and I told the merchant, "I want to come to this meeting not to discuss 5 basis points, 3 basis points pricing because that devalues both you and I. Because I want to hear, and we will address pricing, but I want to be here to present our value." And from day 1, our model was to create the value of the payment journey. So we call it from payments to possibility, right, from payments to opportunity. And that's when the model of payment as a platform -- so that's how we started payment as a platform. So when we went to the client's payment as a platform, we told them you -- so when clients -- when merchants ask us, "Please reduce your fee," so the question we ask them is, "Do you want to reduce your cost? Or you want to reduce your cost to income? If you want to reduce your cost to income, we are the right partner for you because we not only drive your cost efficiency. We drive initiatives around your income." You asked me a question compared to U.S. The traditional acquirers in U.S. also get [ killed ] for a few basis points of pricing. At the same time, the squares and stripes grow and command a 3.54% pricing on transactions. The reason is that they are perceived to be delivering value, which they do. And the value in the entire transaction is the value around the cost of integration. So there are cost sides. So if you divide those sides into 2, the cost side, which are the cost of integration, cost of technology, cost of hardware, cost of software, blah, blah, blah, then -- which still can be managed but more or less commoditized but with efficient process to manage. But the value, which is income side, is the value of monetizing the data, bringing in the fintechs, bringing in the new payment values, converting whatever existed in the payment data as junk data into more of insight and monetizing that insight. And that was -- yes?

Sorry, apologies to jump in. Sorry about that. But I hear everything you're saying. But one of the kind of common sort of assumptions, let's put it, amongst investors and analysts, is that payments business is a commodity business, that it's inevitably every year, margins will get eroded. There's 3 big players. There are more players that have come into the market. The online space has much more than 3 players. There's lots of sort of [indiscernible] fintechs running around providing online payment gateways. And that's just been the general trend around the world as margins come down. Are you telling us that, that trend is not happening? Or are we misunderstanding anything?

No. No, the trend is happening like it is happening in every industry, right? Like it has happened in the industry. But for every industry, there's a Facebook, there's Googles of the world which differentiate themselves. And in payments industry, there are Adyens of the world who, today, command massive value because of what they are. And by the way, they also do the same acquiring. There are Checkout.coms of the world who command the same value because they do the same acquiring, but they do in a way where they add value. And that's exactly the model I was talking about. So today, we go to the merchants, and I'm sure you have seen this. So what we launched is a Super Surprise. And over the last 2 weeks, I have had many conversations with merchants one on one, all the key decision-makers. And I can tell you when there were instances where we showed this and the merchants were like, "Wow." It's awesome because we are telling them now, "Once you put our payment machine or payment gateway, you will -- we will not only accept your payments, which is something which is expected from us, but we will drive new footfalls to you. We will help you grow your business. And we will only do that and you only pay us fees for that conversion on successful conversion. So only when you see a sale is happening, you pay us extra for conversion." So now what used to happen? Previously, our income used to be the few basis points we make on a payment transaction process for acquiring. Now we added a layer of new revenue called Super Surprises conversion fee. With every footfall we are driving into our merchants, we'll now catch fee, in some cases, much higher than the acquiring margin.

So if I summarize what you're saying, yes, there has been pricing pressure particularly in the past few years -- but am I getting this right? Are you calling for a stabilization in that pricing trend for yourself or some of the major players? Or is it simply a slowing down in the ongoing erosion of take rates and pricing? Just so I'm clear what you...

No. There are acquirers who have realized the value of staying green, right? And there are -- and I think it's quite visible. We used to see some early deal that used to happen before. Now it doesn't happen. And now I mean most of the merchants also realize that they cannot play around between the acquirers. Of course, yes, they can pay down with 4 or 5 basis points or 2 or 3 basis points but no longer the crazy cuts we used to do before. So from that perspective, yes, I think we are now becoming responsible is the word I would use.

Responsible and competitive, okay. That's clear. We've had a question come in, Ramana, which I'm going to read out, coming through Investor Relations. [Operator Instructions] So Ramana, the question refers to the recent announcement, it was just about a week ago, about setting up a separate payment subsidiary at FAB. Could you tell us a little bit about the decision to set up a separate legal entity and operations, what that means and also what kind of optionality, strategic and otherwise, it gives you in the future? And if you could tie that into your history because 10 years ago or so, biggest bank in Dubai obviously decided to spin out that payment business with third-party shareholders, and now it's listed. And you've gone the other way up to recently. You've kept this all in-house, yet you seem to be making maybe small steps that separate this in a direction that maybe this other bank took a decade -- tell us about what's happening here.

Absolutely. So I'll tell you what I can. And then there are some things which will come, and we'll talk more about it in the next few days. Let me make a point absolutely clear. FAB as a bank absolutely understands the importance of having payments business and the power of payments supporting the other businesses within the bank, right, because payment business is always a bridge for much wider banking services. When a merchant -- the first thing the -- any merchant when they open their shop is what they want is commission so that they can access the money for their payment. And subsequently, once you are with them at their core, then they open up other bank accounts and other banking services and so on and so forth. So the importance of payments is absolutely known and clear. The reason of creating a separate payment subsidiary is for us to focus on more agile, more investment, more focus, so we can expand regionally. And we can expand in terms of our capability to acquire and provide more value-added services with the fintechs coming in. So there are 2 parts to this statement. The first part is we have been servicing FAB merchants, right? And as a merchant acquirer, typically, people -- or do you have a banking relationship and so on and so forth. That was one of the strongest points when the other bank did it because they wanted to create a neutral player who will be seen as neutral for any bank to deal with them. We are living in a situation where every bank wants to reduce their cost. And whether it's issuing business or whether it's an acquiring business, the game is all about volumes, and the game is all about reduction of costs. So today, you have more or less one strong player who is offering you a bank. And then there are small, small, small players who are offering different value. There is always an option -- we are creating an option for these other banks to look at us from a processing perspective. And now that's on the direction-wise. And of course, I talked about regional and so on. The second part of it is we want to build a focus -- so when you are in a bank and when you're looking at a bank-level budget, and payments always used to be part of the personal banking budget, the investments and so on -- the way you run the projects, the way you run the investment, the way you run it need a much more focused and agile technology in the teams. And that's the reason where we carved out that part and created a subsidiary, where now we will have a dedicated focus in building and creating this technology. Now why is technology important? And that's the reason why -- you asked the strategy, and I'm telling you the differentiation. We don't want to be an SME to cross it or really to acquire. We want to go into the market with an absolute differentiating technology, which is not available in the region. And our technology will be built around payment as a platform, issuing as a service, acquiring as a service. Today, all the issuers and the issuer processors or acquirer processors are very mundane traditional technologies, which are not built around APIs, which are not built around integrating with fintechs, which are not built around -- modularizing everything as a service. This is where, for example, Adyen is different. This is where, for example, Stripe is different. So we want to build into a model where everything is modularized for this and we want to create a working environment where all the fintechs can come and work with us as part of the payment scape. Now this is back to the example where -- I've given, Ronit, in some of our previous calls and I'll repeat it. We want to be a platform player. And when we are a platform player, this is like you buy a smart TV. Only 1% of the smart TV application is built by that particular smart TV manufacturer. So Samsung TV, only 1% or 2% of the apps are from Samsung. Everything else are Netflix, Amazon and so on. So the same with App Store, the same with Play Store. The future of payment technology or any other technology in general but payment technology is all about who is going to be that platform player. And we want to be that platform player in the region. And we will provide more -- much more detail soon.

Great. So just to be clear, so the -- so operationally separating out the payment business doesn't mean that we should assume that the ownership of that company changes in the short term. It gives you more flexibility to expand across the region, across Middle East, Africa. It makes you more competitive in the UAE. Is that a fair summary?