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

Good day, and welcome to the First Abu Dhabi Bank 4Q '20 and FY '20 Results Call. 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. Thank you, operator. Good evening, good afternoon, good morning, everybody. On behalf of Citi Bank Citi Research, I would like to welcome you all to the First Abu Dhabi Bank Full Year 2020 Results Call. This is Rahul Bajaj from Citi. With us on the line today, we have James Burdett, Group Chief Financial Officer; Sale Rana, Group Chief Risk Officer; Shirish Bhide, Group Chief Credit Officer; and Sofia El Boury, Head of Investor Relations. At this time, I'll pass on the call to Sofia. Sofia, over to you.

Thank you, Rahul. Good afternoon, everyone. Thank you for joining us today to review FAB's financial performance for 2020. Before we get started, a quick reminder that today's presentation and all of our financial disclosures are currently available on the dedicated IR section of our corporate website as well as on the app. And as usual, our senior management team is here to answer your questions at the end of the call. With that, I'll pass it on to James for the presentation.

Thank you, Sofia. Good afternoon, everybody. Thank you once again for joining us at our presentation for the full year '20 results. As per usual, I'll go through the slide deck at a fairly fast clip, just highlighting the main points. And then at the end of the presentation, we have time for Q&A. And as Sofia already mentioned, we have Pradeep and Shirish here as well. So first of all, I think if we look at Slide 3 of the presentation, I think the heading says it all, resilience, strength and transformation. On the resilient performance, I think was very strong against the backdrop of those extraordinary circumstances, COVID and the like. You can see the fourth quarter profit was up 28% to $700 million Q-on-Q, mainly on the back of higher revenue and lower cost of risk, and we'll go into more details on that as we go through the presentation. That brought full year profits to $10.55 billion, down 16% year-on-year. The main variance for the full year-on-year, as you know, and similar to the third quarter results was the Fed rate cut and a higher cost of risk. That said, the strength remains key and an integral part of our AA rating. And we do have a robust foundation, liquidity strengthened. We saw a flight-to-quality. We saw a significant improvement in CASA and a diversification of our liability portfolio. Asset quality remained within guidance, ticked up a bit, obviously, over 2019, as you would expect, but below 4% NPL that we set in the market, and a very healthy coverage ratio at 95%. Capital remained strong at 14.9% and has enabled us to reward our shareholders at AED 0.74, mainly on the back of significant organic capital generation. In terms of transformation, you'll see as we go through the slide deck, we have made significant inroads into our digital strategy as well as accelerating progress against key strategic initiatives, and we'll talk about that a bit later. But I think we entered 2021 in a position of strength with a good strategy and a clear road map for us to outperform the market. Turning on to the next slide, 4, where we show you our performance against guidance. You can see that we've outperformed against most of the metrics there; the cost of risk, the cost income ratio, the coverage ratio, the core equity tier 1 ratio. The only one we missed was the loan growth. We've said, and we continue to have a very strong portfolio with our traditional client base, the GREs, the public sector and the government. Those drawdowns were just slower than predicted. But as I said, the pipeline is healthy and it resulted in only a 2% year-to-date growth. I should point out here, though, that we have been very tactical in our asset portfolio. We have run down some $10 billion of suboptimal assets, mainly trade-related in order to manage the risk-weighted assets and the return on risk-weighted assets accordingly. Turning to next slide, which is just the bridge between full year '19 to full year '20. As you would expect, the impact of $10.55 billion was down 16% and you can see from the bridge, operating income down just under $1.7 billion, mainly on the back of the Fed rate cut, which impacted us year-on-year to the tune of $2 billion. You can see that was offset by cost management. We took action right at the outset in March to cover costs. And you can see operating costs were 8% or $439 million better than the prior comparative period. On the provisioning, provisions are up 42% over the prior comparative period, as you would expect. One thing to point out here is that our gross provisioning was $3.7 billion and we've had tremendous success in working out some of our nonperforming loans. So the net provisioning was $2.6 billion, and you can see some of that tailwind coming through, mainly in the third quarter but also in the fourth quarter this year. Jumping to the next slide. Just to give you a quick snapshot of the robust foundation that we've got. Obviously, the AA rating was reaffirmed by all rating agencies at the end of 2020, but our capital adequacy ratio is very strong at 18.1%. Liquidity improved to 143% of the liquidity coverage ratio. What was pleasing about the liquidity growth was that it was a reduction in government, offset by a significant growth in corporate public sector GREs as we diversify our liability base. We added some 800 cash mandates, which was a great result. Nonperforming loans ticked up, as you would expect, but below 4%, as you would expect, with the high-quality portfolio that we've got. And obviously, our coverage ratio is strong at 95% based on our conservative provisioning policy. Jumping to the CIB performance, which I think was very strong given the [Technical Difficulty] Sorry, there seems to be a bit of interference with the voice.

Operator?

Yes.

Yes. There seems to be some issues with the call, but...

I will carry on. On the CIB performance on Slide 7. As I was saying, I think it's a very strong result against the backdrop of the environment. And you can see there, obviously, the GTB revenue was down mainly on the back of cluster accounts and the Fed rate cut. And that was offset by growth across all the other product lines, like corporate finance was up 9% on strong deal generation, Global Markets was up considerably on the back of improved market trading as well as global market sales. And then we had a number of one-offs, which you're well aware of. We did some property deals in the -- I think it was the second quarter and the fourth quarter. That plus a small reduction in costs generated a 3% year-on-year growth in operating profit, which was a great result. Looking at the bottom of Slide 7, you can see the deposit outflow, that was as expected. If you recall, the government did some issuance in September. That money came into our balance sheet, spiked our deposit growth, which was placed [indiscernible]. And as we said at the time, we were expecting that to flow out, and it did, but underlying growth was still quite strong Q-on-Q. Personal Banking, a resilient performance on Slide 8, clearly impacted in terms of net interest income by the Fed rate cuts and a little bit of noninterest income reduction. But overall, quite strong growth activity across the board, and we see that pick up every quarter from second quarter, third quarter, fourth quarter. And in fact, we finished the year with pretty strong activity growth. Mortgage is up 27%, CASA is up 17%, personal loans up 14%. And all of this was really on the back of double-digit growth in our Net Promoter Score, which is great. So that plus lower costs on the back of our digital proposition resulted in only an 8% decline in operating profit, which, I think, is a good result given the backdrop. Turning to Slide 9, which just shows you the full view of the balance sheet. I guess the main thing to call out is reduction in deposits Q-on-Q, down 10%. Again, that spike that happened in the third quarter was expected to outflow in the fourth quarter. If you sort of remove those one-off moves, deposits were up 11% year-on-year. And as I've said before, we've experienced a flight-to-quality on the backdrop of the current economic environment. And we've seen a 28% growth in our CASA balances on the back of some 800-plus mandates. On the loan side, only a 2% year-on-year, mainly to core clients, but offset by about a $10 billion rundown in some of those suboptimal assets. And as I said before, liquidity coverage ratio remains strong. Slide 10, you've seen before, the metrics have only got a little bit stronger. So we're now in a 42% bank with some 40% government and government-related exposures with another 6% short-term trade loans. The key movement on the bottom of Slide 10 is our test facility down $4 billion to $3.5 billion versus an allocation of $8 billion, which represents a reduction and some repayments. On Slide 11, looking at the cost of risk. Our asset quality remains strong. You can see the coverage ratio at 95% with NPLs below 4% as we guided to the market. The fourth quarter cost of risk was only 37 basis points down Q-on-Q. We had about 3 NPLs, where we managed to restructure and generate some NPL release. So the gross provisions were $619 million. And again, in the third quarter, you know that we had a POCI asset which was resolved, and the revaluation of costs or impairments in the third quarter. So the net result of all of that is that the cost of risk was 63 basis points or $2.6 billion. If you add back the good work we did on some of those NPL recoveries, the real cost of risk was 90 basis points at $3.7 billion. Turning to the next slide on capital. Similar story here, significant organic capital generation offset by a little bit of growth in risk-weighted assets led to the core equity tier 1 being a 14.9%, and again, enabled us to play -- pay a dividend per share of AED 0.74 which was flat to last year and resulted in a dividend payout of AED 8.08 billion. Return on risk-weighted assets at 2.13, strengthened a little bit in the fourth quarter, mainly on the back of some of those one-offs, a couple of property gains as well as the lower cost of risk. Slide 13, net interest income down 4% or $500 million year-on-year, mainly due to the Fed rate cut, offset by growth in some global markets positioning. The NIM itself, you can see, is at 1.75% on a year-to-date basis, which is down 36 basis points year-on-year, 33 basis points of that resulted from the Fed rate cut. As you can see, the impact on full year '20 versus 2019 on the box sort of in the middle of the top of Page 13, the impact for us was some $3 billion as a result of the Fed rate cuts. But overall margin on the fourth quarter, flat lining, as we said, and as we guided in the third quarter, and we expect to remain at or about these levels going into 2021. On the noninterest income. Overall, noninterest income is down 15% year-on-year, as you would expect, on the back of lower activity as a result of what's happened in the market. Specifically, drilling down into fee, fee income that currently finished the year at $2.9 billion, only down 8% year-on-year on the back of lower transaction and lower volumes as a result of COVID. FX and investment income down significantly, 47% year-on-year, mainly due to lower liquidity arbitrage. And as you know, the offsetting benefit of that resides in net interest income. Other income up quite considerably, mainly on the back of those one-offs. So we had property-related gains of $946 million. We also took a property revaluation on the remaining portfolio of just under AED 250 million. And we also have the gain on the sale of the FGB legacy license to AED 200 million. Turning to the next slide on costs. You know the story well. We finished the year 8% down year-on-year. Cost income ratio remained very healthy at just under 26%. Costs overall down 8% or AED 438 million, mainly as a result of staff cost. We took action, but you can see there's still an uptick in depreciation as we continue to invest in the business. So turning to Slide 16. We thought we'd just refresh the market with our strategy. The strategy is very clear, to create sustainable value for our shareholders, which, I think, we've done this year. Our mission is to be the strongest, most profitable bank in the market with deep customer relationships. We have key enablers of digitizing being simple, being scalable and having the right talent, but at the same time, we obviously want to maintain our AA rating and the strength of our balance sheet. And the next slide just shows you some of the progress we've made against some of our strategic priorities. So the first one was to be customer-obsessed and we've delivered double-digit Net Promoter Score, and we're the most improved in the market in terms of service delivery. And as I said before, we started off behind our competitors because of the integration. I think we've now caught up quite considerably, and that's evidenced in our Net Promoter Scores that the market has given us. In terms of product, we're the only bank that's in the top 5 across all Middle Eastern league tables in our CIB space. We've deepened wallet share with our CIB customers. As I've said before, we've got double-digit growth in Global Markets, GTB, corporate finance, all the double-digit CAGRs over the last several years, and I think that shows that we are leading the market in terms of product offerings. Smart expansion. We readjusted our international strategy, as you know, and as I've said in the past, to be more of a CIB network provider. We also very successfully completed the Egypt acquisition. And as you know, we got that at a very good price, it's ROE accretive, even before leverage and even before synergy. So that was a good deal for us. We'll obviously help our expansion into Egypt. We also have a 10% stake in ADQ neobank or digital bank, which we think is a good addition for us. And we continue to leverage our digital enablement. And the next slide will sort of talk a little bit more about our digital capability. But we have deepened relationship. We are a high dividend payer, and we've executed against some of our strategic priorities. The next slide, just to drill down on digital. We've significantly invested and accelerated our proposition. 86% of our transactions are now digital. We have 100% growth in our digital users, obviously, with the COVID tailwind supporting that. We've launched 12 new digital branches, which are teller-less. We've released significant number of RPAs to automate various processes, and we continue to innovate. In the payment space, we've released the corporate mobile app. We've invested and participated in the UAE Trade Connect. All at the same time, we continued to invest in our cloud proposition, urban banking and building our IT team. So looking forward to 2021, on Slide 19, we have reason to be cautiously optimistic. We have the vaccine tailwinds. We certainly have seen recently a pickup in oil price. We think that will be sustained into 2021. We're expecting, on the back of market guidance, negative GDP to turn into positive GDP. We expect to capture a large share of that. So that coupled with the government stimulus, execution of our very sound strategy, we think we can pick up reasonable growth in the market. So in terms of guidance, on Slide 20, we're looking at mid-single digit for loan growth. We're looking to keep the cost income ratio below 30%. We've been very conservative on our cost of risk at just below 100 basis points and we're looking to maintain the strength of our balance sheet with our coverage ratio above 90%, and our core equity tier 1 remains as before above 13.5%. So with that, just to wrap up, as I've said, I think 2020 was great performance. I think we've delivered superior results for our shareholders yet again with a strong dividend payout. We still have a strong foundation with most of the balance sheet metrics remaining strong, particularly the core equity tier 1 and liquidity ratio and the credit metrics. We have a good strategy. We have a strategy that's, I think, significantly differentiated from our competitors, which puts us in a good place to outperform our peers as we go into 2021 and get the tailwind, hopefully, of a pickup, notwithstanding the fact that there's obviously a lot of uncertainty out there. So look, that concludes my presentation. It was very quick, it only took 20 minutes. So over to you, please, for Q&A. Thank you.

[Operator Instructions] We will now take our first question from Amit Mamtani of Goldman Sachs.

I have 3 questions. Firstly, gross cost or risk for 4Q '20 was under 70 bps and your full year cost of risk was 90 bps. However, your guiding for cost of risk of less than 100 bps in 2021. Given the 4Q cost of risk trends and the reopening of the UAE economy, doesn't that suggest -- does that not suggest an improving cost of risk trend for 2021? And if not, could you have taken further subjective overlays during the fourth quarter, especially given that you had material recovery? Secondly, on your -- can you please -- I know you just gave some mouthful information about your digital strategy at FAB, but could you please give some more information about the establishment of the new bank with ADQ and the carve-out of the payments business? Also given the new CEO, will there be a change in the strategy going forward? And finally, opportune-related gains continued in this quarter. Can you just elaborate on what's driving this? And do you expect any further gains going forward?

Okay. I'll take questions 2, 3 and 4 and then pass you over to Pradeep for the first question on the cost of risk. So in terms of the digital bank, there's a long way to go there. They've only just established the license. They're still building out their strategy. I'm not sure it will even be operational until later or even potentially next year. So there's not a lot to report there, except that we've got a 10% stake in a neobank that is backed by the Abu Dhabi government and it's quite exciting. So I think it's a good investment for us. And as you know, we have that license sitting as an intangible asset on our books at 0. So selling it to them for a 10% stake for $200 million, I think, made a lot of sense. In terms of the strategy, yes, I would expect the new CEO to have a look at our strategy, to look -- take guidance from the Board, and we will look to come back to the market at some point with thinking. I don't expect to see a radical change, but clearly, she will want to put her own stamp on the way FAB runs going forward. In terms of the property, we said before, we're looking to divest our property. Back in the FGB days, there was a significant portion of the revenue. We are sale and leasebacking some of these buildings that -- and on the back of COVID, we are looking to exit properties that we own or lease as we pursue a more progressive working from home policy, where we expect essentially less people to be working in an office and we get more efficient that some of the global banks have done. The remaining property portfolio, is a strong portfolio. We took a small revaluation hit in the fourth quarter. We'll look to gradually dispose of that as and when the market permits us to do so. On the cost of risk, what I would say before passing over to Pradeep is that we're looking to be very conservative. I think the 100 basis points is a conservative number. And I think it's right to be conservative because we've got a spike in COVID cases happening globally. We don't understand the vaccine rollout. There's still potential volatility in the market. So I think it's prudent for us to act accordingly.

Yes. Yes. I mean, I can add more on. Obviously, the 63 basis points includes the reversals [indiscernible] excluding the reversal, the cost of risk comes around 90 basis points, which was in line with the guidance that we've given in quarter 2 and quarter 3 as well. I think looking ahead for 2021, I mean we are optimistically cautious, as James has said, and expect the cost of risk to remain below 100 basis points. And obviously, that all depends on how things pan out, especially on COVID. It's also difficult to give guidance on restructuring as well, if there are going to be more restructuring going ahead. So obviously, that's the reason why we are being conservative.

We will now take our next question from Naresh Bilandani of JPMorgan.

It's Naresh from JPMorgan. I just had 2 questions. I think one you kind of partially answered. My question was mainly on -- if you could share some insights on where exactly are we in the asset quality cycle? I mean we just heard from Emirates NBD and their view was, given their coverage ratio, hopefully, their cost of risk should be somewhere in the range of around levels which are slightly lower as compared to 2020 and maybe slightly higher as compared to what we have -- had in 2019. So I guess I kind of heard them right. But I would much appreciate if you could kindly throw some further color on how should we see the cost of risk trending, especially once the overall deferral period for the loan portfolios ends probably in the summer of this year? Just keen to get some more insight there. That's the first question. The second is on the dividend payout ratio. Now in this of all years, we kind of had a significant increase overall in the dividend payout at 77%, if I calculate it right. How should we think of going forward from here? Clearly, I think you have managed to display a very strong control on the overall credit risk management. So your RWAs haven't grown as much as the balance sheet has widened. So assuming we continue to see similar control on risk management going into '21, should we pencil in an equally elevated dividend payout ratio? If you could throw some further color on that, that would be super helpful.

Naresh, this is Shirish. I'll take the first question and then hand off after that. Look, I mean, I think the cost of risk bit has already been addressed by James and Pradeep earlier. We've taken a conservative view because there are still some unknowns out there in the market. We still don't know how COVID continues to play its role. The vaccination and its efficacy is still unproven in large parts of the world. We still don't know that's going to conclude end. So I think overall, when you look at it, of course, we believe there are some -- and the situation is better than the middle of 2020, let's just say. And there are some green shoots. But at this stage, with the whole year ahead of us, I think it's best to stay at a position that we earlier mentioned. Having said that, I think to answer your second -- the second part of the first question, which is the possibility of test -- the test release ending middle of the year, I think my own view would be once again to draw your attention to the kind of portfolio we have, the kind of target market names that we have in our books, and the fact that a large number of these clients who benefited from the test program. Really, this is as a response to the pandemic to manage their own cash flows and this is not necessarily a reflection of kind of the backing and the promoter support and the deep pockets that some of these orders continue to have. So in a sense, I think our own target market, FAB's overall target market and the kind of quality of the clients we have in our portfolio, with the strategy we deployed all through 2020, which is to be cautious in our -- on the lending front, I think keeps us in very good stead.

[indiscernible] 95%, which is adequate. And when we put in the collateral as well, we know that brings it up to 130%. Also, I think when we look forward-looking, when we do look at the MEVs. I mean we spoke about green shots. I think, when we look at oil prices, when we look at equity prices and also the housing price index, these are looking positive. But putting all that together, we are still adding a bit of conservatism to our outlook.

Naresh, it's James back again. Your question on -- sorry, your question on dividend. I think the answer is same as the answer we've given before. We want to be a high-yield player. We want to generate sustainable dividends for our shareholders. We want to be best-in-class and the most profitable and strongest bank in the UAE. And what we said is really the backstop of our AA rating, and the main hurdle for that is the core equity tier 1 ratio at 13.5%. So as long as we believe we have significant ability to generate organic capital and we're ahead of that core equity tier 1 ratio, we'll continue to be a high dividend player.

We will now take our next question from Chiro Ghosh of SICO.

This is Chiro Ghosh from SICO. A very quick question about the net interest margin. So looking at it, it appeared that the margins have kind of stabilized and yields are slowly picking up. If you can give us some more color on how we should pencil it or how should our forecast be for FY '21? And just 1 quick one, I don't know whether I missed it or not. So the real estate book which you have, is it fair valued? Or it is on...

Yes. Good question. So NIM, as I said before, we think is going to stabilize at or about these levels going into next year. We don't see negative interest rates coming in the U.S. market. Obviously, every 25 basis point cut impacts our P&L by 250-odd million, but we just don't see that happening now. We've got a little bit of positioning. We can go as the long-ending curve starts to increase. We can take a little bit more hedging risk there to mitigate some of the margin compression. I think in the lending space and in the deposit space, the competitive pressures tend to have tailed off. So we're comfortable at the 150, 160 basis point net interest margin going forward. Your second question was on the property portfolio. Yes, it is fair valued.

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

I just wanted to ask 2 questions. One is about margins. So I guess, the interest rate outlook is -- we're talking about low interest rates for a protracted period of time. But what about credit spreads? Do you see scope for credit spreads to widen, which could potentially help your margins going into 2021? And my second question is, given the challenges in terms of revenue growth, slow economic -- potentially slow economic growth, do you see more accelerated pace of consolidation in the market this year?

I don't think I have much more to say. I think it's going to be ever about these levels with a little bit of plus and minus in the market depending on what the yield curve does and what the credit spreads do. But I don't think we are going to see big movements in credit spreads either way, up or down, would be my gut feel going into the year. What I would say though is that we're focusing as a business on cross-sell and so when you look at the CIB business, the very stringent reviews on minimum return thresholds, we're obviously looking to cross-sell GTB, global market -- global corporate finance products into our traditional customer base and essentially take that business off the [indiscernible]. In terms of revenue or balance sheet growth, no, we're -- I'm a little bit more optimistic, I suppose. I think you are going to see a swing from negative GDP to positive GDP. We all know GDP formation is government and government related. We see that in our pipeline. And I've been saying this for several quarters now, but we still see it in our pipeline, and I think eventually, it will come through when the recovery starts to happen. And people, i.e., businesses and governments are happy to commit CapEx -- capital expenditures of various strategic projects and start growing again. The whole thing revolves around the recovery of the world. And if you take an optimistic view, I think you will see balance sheet expansion, and therefore, revenue growth come through. Does that answer your question?

Yes. So -- but if you look at the UAE in general, I think -- and some banks have taken a more radical approach towards their comp base. It suggests to me that there's still probably [ certain ] obstacles in terms of growth. So -- and with that kind of background, do you see scope for further consolidation? Do you think there is -- or do you think there is enough levers within the bank to kind of generate growth?

Yes. Apologies, Shabbir, I forgot about your consolidation question. So look, I think there's several factors at play here. So one, we proved with the merger of NBAD and FGB that there can be significant economic value creation for shareholders. And I think that does support further consolidation in the market. Clearly, there's politics at play. Clearly, there's -- any merger and acquisition goes through a pretty stringent due diligence process. And for all the deals -- M&A deals that we look at, half -- most of them don't eventuate for all sorts of reasons. One, it's got to be in line with strategy. Two, it's got to be accretive. Three, we've got to get shareholder approval for it. But I think eventually, you will see consolidation in the market. If you look at Saudi, if you look at Kuwait, if you look at some of the other markets, there's no question that with 19 local banks in whatever it is, 50 foreign banks in the UAE, we're in overbank market and, therefore, fragmented. And therefore, I think consolidation makes sense. And I think eventually, the economics will win out over the politics and all the other hurdles that we've got. So I do see it happening. But is it this year or is it 5 years from now, I couldn't tell you.

Our next question comes from [indiscernible].

Can you hear me?

Yes.