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

Good day, and welcome to the FAB Q1 2021 Earnings Call and Webcast. Today's conference is being recorded. This call is for analysts and investors only. The call is not for media and all media are instructed to disconnect now. At this time, I would like to turn the conference to Waleed Mohsin. Please go ahead.

Thank you much. Good day, everyone, and Ramadan Kareem. It's my pleasure to welcome you to FAB's Q1 earnings call and webcast, cohosted by Goldman Sachs. On today's call, we're extremely pleased to be joined by Hana Al Rostamani, the Group CEO; and James Burdett, Group CFO. So without any further delays, I will pass the call to Sofia El Boury, Head of Investor Relations.

Thank you very much, Waleed. Good afternoon, everyone. Thank you for joining us today to review FAB's financial performance for the first quarter of 2021. This webcast is hosted by FAB's senior management team, represented by Hana Al Rostamani, Group CEO; James Burdett, Group CFO; Pradeep Rana, Group Chief Risk Officer; Shirish Bhide, our Group Head of Corporate and Commercial Banking; and Rajesh Deshpande, our Group Chief Credit Officer. Before we get started, a quick reminder that today's presentation and all of our financial disclosures for Q1 '21 are currently available on the dedicated Investor Relations section of our corporate website as well as on the FAB IR app. After the presentation, our senior management team will be answering all your questions. With that said, I'll pass it on to our Group CEO, Hana Al Rostamani, for opening remarks.

Thank you, Sofia, and good afternoon, everybody, and welcome to First Abu Dhabi Bank's results call for the first quarter of 2021. I'm pleased to be speaking with you today for the first time as FAB's Group CEO, and I'm excited to be leading a great team, a great bank with a promising future and opportunities ahead. I'll take you through a summary of the first quarter performance. We have a strong bank with unique competitive strength that has demonstrated resilience over the last 12 months, committed to supporting our customers and communities and the markets we operate in, while achieving superior returns. And I believe that we are in a very strong position to pursue our growth and transformation journey, unlocking new opportunities for our clients and delivering superior and sustainable shareholder value. We have strong regional presence, strong balance sheet and great talent to take us for a growth story in the future. Looking at Q1 results, we achieved a resilient performance, and group net profit in the first quarter of 2021 was at AED 2.5 billion, up 3% year-on-year, and a group revenue of AED 4.4 billion and a return on tangible equity at 12.8%. Looking at our operating environment in the first quarter, the increased cases of COVID in the year softened the pace of recovery, and our CIB pipeline is materializing slower than expected, which has impacted the business momentum. But a wide range of indicators support our positive medium-term outlook with the UAE leading globally in terms of the vaccine rollout. We have today 9 million doses of COVID vaccine administered to date. And the pickup in the oil prices is a strong business confidence and it's improving. And the resumption of key activities is taking place and signs of stabilization in the real estate market. We expect these to translate into a pickup in activity in the second half of the year as these trends are sustained. And the UAE actions continue to be decisive in response to the pandemic and the support of the economy recovery through a range of initiatives and reforms. The UAE Central Bank targeted economic support scheme, which includes 0 cost funding scheme as one of these many supportive actions, which now has been extended until mid-2022. Despite the challenges of the quarter, we maintained a robust foundation with strong liquidity and funding ratios, a solid capital position and resilient asset quality. And we're confident we are in a strong position as the UAE economy turns and grows. Against this backdrop, there are certain strategic priorities we've been focusing on, and I'm pleased to report that management has continued to deliver against these strategic priorities. For the first quarter, we successfully completed the [Audio Gap] strategic milestone is designed to unlock value for our shareholders through the establishment of this agile independent business, focusing on technology, data and customer relationships and, of course, shape the future in the regional payments industry. The second strategic priority is getting closer to finalizing our acquisition with Bank Audi Egypt. This marks our first international acquisition. We've been present in Egypt since 1975. And of course, Egypt is rapidly growing. The trade links are also growing between the UAE and Egypt, high expected GDP growth. And of course, Egypt is a strategically important market for us. And we've appointed the senior leadership team, and we will be starting the integration process, expected to be completed by 2022. We also continue to make good progress against our sustainability agenda. Environmental, social and governance factors set to become more deeply embedded across the organization. We are on track to finalize our ESG roadmap in the course of this year, and we continue to lead the market for green financing, leading green bond issuer regionally and globally with our total green bonds outstanding now crossing USD 1 billion mark. While we continue to optimize our property portfolio, our focus is enhancing the group risk-adjusted returns and translate it to the further rundown of our nonstrategic assets. And we continue to focus on digitization and investing in digital technology to make our business much simpler, more efficient in order for us to better meet our customer needs and evolving needs. We continue to improve on the self-service capabilities, automate key services, driving innovations in the payment space, offering [ fire-raining ] solutions to the CIB businesses and, at the same time, continue to build a world-class technology foundation moving forward on our cloud technology strategy, banking platform, among these other initiatives. As we move forward, we're firmly laying the foundation of our long-term success. And we have thoroughly reviewed the full customer value chain of products and services across all businesses. And we have realigned in order to build on our service model and product proposition to drive greater specialization and a competitive advantage. On the corporate and commercial, better services to understand the large corporates, the SME and build a strong momentum and service a larger client base. On the investment banking, looking at the large corporates and all the government-related entities and really bringing in specialization in terms of products, being a strategic adviser. On the consumer banking side, looking at the full range of products and services and continue to deliver digital capabilities and build a market share, strong market share. And then, of course, on the private banking side, really offer our clients comprehensive suite of global wealth solutions and provide them access to different markets through our hubs in the UAE and Geneva, in Singapore, Paris and London and Riyadh. So as the business and service delivery model go hand-in-hand, we are also looking at streamlining technology, data analytics and AI operation and administration. So we ensure that there is a seamless delivery of our banking -- of our offering. There's a better organizational agility and offer distinct and superior customer experience to our clients. So focusing on customer segmentation on the client and what do we deliver for our clients and making sure that we are aligned internally in terms of the operations and technology to really position us and give us a competitive advantage when we deliver to our clients. We are confident these changes will help us firmly establish FAB at the forefront in the market and enhance, as I said, our competitive advantage, unlock opportunities and help us continue deliver superior and sustainable shareholder returns. In summary, I'm excited about the opportunities that lie ahead for all of us, and I'm confident that we are all well positioned to strengthen our competitive advantage and achieve our ambitions. Thank you very much, and I'll hand over to James for the financial performance review.

Thank you, Hana. Good afternoon, everybody. Ramadan Kareem, and thank you to Waleed and Goldman Sachs for hosting today. As per usual, I'll go through the slide deck pretty quickly, and then we've got time for Q&A at the end of the session, with most of the Executive Committee present to answer your questions. So starting off at Slide 8 of the investor deck. As Hana has already mentioned, I think the performance was very resilient against the slowly improving economy. The first quarter profit, you can see there was just under AED 2.5 billion, which is up 3% year-on-year. The top part of Page 8 just shows you the bridge between Q1 2020 and Q1 2021. And clearly, the biggest impact for us was the reduction in operating revenue, mainly as a result of the Fed rate cuts, which, as you know, happened in April last year, so weren't reflected in Q1 2020 results. That was just over AED 400 million for us in terms of negative revenue headwinds and it was offset by growth mainly in CIB and mainly in Global Markets, which was up 32% year-on-year. We also had some one-offs through property gains as we continue to optimize the property portfolio. Operating costs improved 3% year-on-year. Clearly, we took action post-COVID in response to the revenue headwinds. You can see that coming through Q1 -- sorry, prior comparative period. But most importantly, you can see lower net impairment charges, which were AED 268 million or 36% lower than the first quarter last year, which was mainly due to the COVID overlay we took in the first quarter last year of AED 185 million. Just looking at the chart at the bottom right-hand side of Page 8. Clearly, you can see a reduction in Q1 '21 profits over the fourth quarter. The fourth quarter, as you know, we had a number of one-offs, notably the sale of the legacy FGB license to ADQ, but also some interest in suspense that didn't recur in the first quarter and also a couple of property deals. Drilling into the performance of CIB on Page 9. This was a very good result for us. Operating profit up 19% year-on-year. You can see the bridge. It shows that, very clearly, GCF revenue was up. We had strong fee generation, so growing 3% over prior comparative period. GTB revenue down considerably. You can see they're down AED 259 million, again, mainly due to the Fed rate cuts in our GTB business on CASA. That said, it's important to note that CASA for us is at a record high of AED 250 billion for the first time and up 53% year-on-year in the GTB business. Most notable, 180 new cash mandates won in the first quarter which was significant. Global Markets, as you would expect, up considerably 32% year-on-year driven by trading performance and benefiting from our positions against market volatility. And then other revenue is just the property gains that we talked about earlier. Clearly, lower impairments flowed through into the CIB business versus first quarter last year because of the overlay. And you can see net profit was up 21%. Loan reduction, you can see there, in the first quarter over the fourth quarter was mainly due to a small runoff in some of our GRE and public sector entity positions. On a year-on-year basis, we are down a little bit, but that's mainly due to the tactical actions we took to reduce the low-yielding trade of our portfolio of about AED 10 billion year-on-year. Turning to Slide 10 on the Personal Banking. Personal Banking profits, impacted by COVID clearly, down 16% year-on-year. Net interest income down mainly on the back of the Fed rate cuts, but the noninterest income down considerably as we get less fee activity coming through on the back of a subdued market. That said, our activity levels are improving. You can see the loans and deposits are roughly flat year-on-year. In fact, deposits are up 9% year-on-year. Just to give you some activity levels and show that these are improving, our personal loans are up 5% over prior comparative period, mortgages up 2%, cards up 15%. It's just we're not getting the fee-related revenue on the back of those acquisitions. But as the economy begins to recover, we are expecting this pipeline and this growth to start feeding through into the revenue line. And as Hana has already mentioned, there's a number of strategic initiatives that we delivered in that space, most notably carving out Magnati, the new payments company. Turning to Page 11, which just gives you the full view of the balance sheet. You can see most notably deposits up considerably Q-on-Q. As I mentioned before, most of that growth is in the corporate bank. Most of it relating to CASA, 180 new mandates, which is a record high. And as you know, when and as the Fed rates begin to climb, that will be a significant tailwind for us. In terms of loans, I've already mentioned, down 1% year-on-year and 2% Q-on-Q. Year-on-year, again, was mainly the rundown of our tactical portfolio that was mainly FI trade-related with low yields, so it was a tactical move on our behalf. But Q-on-Q, we have some GRE runoff. That said, we think the pipeline still remains very healthy, particularly in the GRE and public sector entity and government space. And we are -- and we do believe we can hit the mid- to high single-digit balance sheet or loan growth that we put out to the market. Liquidity remains strong. The liquidity coverage ratio at 140%. And in terms of term funding, we've already issued AED 3.3 billion of a targeted AED 4 billion of longer-term debt across a range of different issuances, all at very economic spreads for us. Turning to Slide 12 on asset quality. Cost of risk, significantly lower in the first quarter '21 due to the COVID overlay that happened in the first quarter 2020. You can see the cost of risk at 51 basis points, significantly below guidance of 100 basis points, but we are maintaining that guidance to be conservative, given the uncertainties that lie ahead. Looking at the right-hand side of Slide 12, you can see the NPLs are flat at just over AED 15 billion, and the NPL ratio is stable at 4%, the coverage improving to 96%. On Slide 13, our capital adequacy has improved considerably over the first quarter last year. We've gone to 13.7% versus 12.1% in the prior period. As you know, the prior period was materially impacted by the AFS losses we sustained on our investment portfolio as credit spreads blew out in response to COVID. That's substantial and will entirely come back as of date. And so that's the main driver of the improvement to 13.7%. I'd also point out 49 basis points of organic profit generation coming through. And as we said before, we are trying to improve return on equity. We are focused on deploying our balance sheet efficiently. And you can see the bottom part of Slide 13 our return on risk-weighted assets stable at just under 2%, 1.99%, down a little bit over the full year because of some of the one-offs that came through. But nevertheless, a good result in the circumstances. Slide 14 drills into a little bit more detail on net interest income. And you can see net interest income of just under AED 2.7 billion is down 13% year-on-year, almost entirely due to the Fed rate cuts. In terms of net interest income Q-on-Q, the main difference between fourth quarter '20 and the first quarter '21 was interest in suspense releases in the fourth quarter. NIM itself at 1.47% is down 44 basis points year-on-year, almost entirely due to the Fed rate cuts. And Q-on-Q, it's down 14 basis points -- or 18 basis points rather, due to interest in suspense not recurring in the first quarter '21. The full year estimate for margin is between 1.5% to 1.6%. Turning to noninterest income on Slide 15. Total nonfund income of AED 1.7 billion is up 14% year-on-year. Fee commission -- fees and commissions, however, was down 21% year-on-year, mainly in Personal Banking, partially or mostly related to credit cards as we see less activity and the markets are yet to recover. In terms of FX and investment income, we're up 12%, mainly on the back of client flow and trading activity in Global Markets. Other income in the first quarter represents the property deal we talked about earlier. On Slide 16, costs improved 3% year-on-year. But they're up, what, 4% Q-on-Q, mainly relating to depreciation uptick. And as we said, we continue to invest in our digital proposition in our customer journeys which will yield productivity and revenue gains in the future. Also, the costs in the first quarter up slightly because of the integration costs relating to our acquisition of Bank Audi in Egypt which, as you know, will conclude some time in the second quarter in terms of consolidating into our accounts and represents significant upside for us. So to wrap up the last 2 slides with guidance, we're maintaining our guidance. Most notably, cost of risk, below 100 basis points. But we acknowledge that, that's conservative and we may revisit it at the half year. The provision coverage, we're committed to keeping above 90 basis points and the core equity Tier 1, most importantly, at 13.5%. The cost-income ratio, we're confident of keeping below 30%, and we are committed to mid-single-digit or mid- to high single-digit loan growth. On the back of what we think will be a slowly recovering economy, we expect GDP to go from negative to positive this year. That's supported by higher oil prices. We can see our pipeline remains very healthy. And we have the M&A piece coming through in Egypt, and that's just under AED 1 billion of sustainable revenue for us that will come through in the future years. So to wrap up, a solid quarter. We expect the recovery to flow through into our balance sheet in the ensuing quarters. We have a sound strategy, we have track record of execution and confident we can grow our risk-adjusted returns to support a healthy dividend for our shareholders. And as Hana mentioned earlier, we are in the process of doing a 3-year strategic plan, which we will follow up with a Market or an Investor Day at some point further in the year once we've concluded that process. So with that, I'll hand over to you for Q&A. Thank you.

[Operator Instructions] We will take the first question from Rahul Bajaj from Citi.

This is Rahul Bajaj from Citigroup. I have 3 quick questions actually, if I may, please. The first one, you mentioned about the second half '21 pipeline and it appears very strong. I just wanted to understand, I mean, what gives you that confidence that you think that the second half pipeline will fructify the way you are probably expecting? And closer to that, I mean, in the second quarter, right now, I mean, should we expect the same GRE rundown which we had in the first quarter to continue and then kind of an uplift in the second half? So I'm kind of trying to get a shape -- the shape of the recovery over the next few quarters. So that's my first question. The second one is on the capital slide. You mentioned about the capital impact of the Egypt acquisition and the new Basel III requirements. So just wanted to understand what these individually are and what kind of capital take or benefit we should bake into our numbers going forward. And related to this, on Egypt, what would be kind of -- I think you mentioned second quarter consolidation, if I'm not mistaken. So I just wanted to understand the timing there. And basically, how should we kind of consolidate Egypt -- when should we start consolidating Egypt into our models? And my final question is on the Magnati. So I just want to kind of understand, I mean, the whole spin-off exercise, which is -- which took place earlier this month. What is kind of the medium to long-term implications? When you say shareholder value -- kind of unlocking shareholder value, so what are you thinking -- what is your thinking around the future course of Magnati? Are you planning to go directly [ B2B ] and kind of maybe list the entity at some stage? Or are you looking for international [ TB ] investors? I mean what is your thinking about Magnati over the next 3 to 5 years?

Thank you, Rahul, for your very detailed questions. So yes, we think the pipeline will start dripping through in the second quarter. We're seeing that a number of pipeline deals have been approved yet to be drawn down. But we expect the main pickup to happen in the second half, as we've guided. I think from your perspective, big picture, we expect to finish the year between mid- to high single-digit loan growth, and we're confident of achieving that. To your question on capital, yes, we've got a huge investment portfolio in our global markets and treasury space. When the spreads blew out on the back of the COVID pandemic, we lost, I think it was, about 180 basis or somewhere within that vicinity, and that clearly came back as credit spreads tightened throughout the year. And that's the main reason for the change in the core equity Tier 1 improving over the first quarter. Your question on Egypt, yes, we expect to conclude the deal in the second quarter and start consolidating. The capital impact for that will be 45 basis points. The approximate profitability of that deal is around AED 300 million pre synergies. But obviously, it's going to take us some time to integrate Egypt into the full system that the bank has. In terms of Magnati, yes, it's exciting for us. The payment space is hot, as you know. There's a lot of investment going into that. We believe that spinning it off will help us be more agile, be more nimble, progressive around the -- in the digital space that we need to invest in. And eventually, it may lead to strategic investors and really pushing the agenda of the payment space for us. So we're quite excited by that.

And a quick follow-up on the first answer, James, if I may, please. When you say mid- to high single-digit sort of volume growth, does that include Egypt acquisition or excluding that?

That includes the acquisition as well. And sorry, just to correct -- your question around the core equity Tier 1 was around the regulatory impact, yes, there are some regulatory headwinds potentially on the horizon. But I think from our perspective, the timing and the magnitude of that's still unclear as the banks are still discussing this with the Central Bank. And clearly, the Central Bank is still in the mode of not tightening, but also -- but helping the economy prosper, as evidenced by the fact that the test was extended.

The next question comes from Kate Carpenter from Morgan Stanley.

Just a quick follow-up question on the Bank Audi acquisition. You mentioned there could be some incremental integration costs going forward. Just wondering if you could provide a bit more color around that over the next few quarters. And then on the optimization of FAB's property portfolio, how should we think about that going forward? Is there further scope for further property sale gains? Or is it on a more ad hoc basis?

Yes. So thank you for that question. Yes, on Bank Audi, yes, we expect the integration costs to start running up. We are estimating at this stage approximately AED 100 million of OpEx to integrate the 2 banks. There'll obviously be some CapEx that will be amortized over the -- whatever life we choose, depending on the system that we roll out. But it's a good deal for us, and we've already seen it on a stand-alone basis. It's ROE-accretive. We've also said that's before synergies, and obviously we expect to have synergies as well. Sorry, I missed your second question.

Just on the property portfolio optimization initiatives. Is there a further scope for potential property sale gains in the future? And how should we think about those sales going forward? Is it more on a strategic ad hoc basis? Or is it something ratable that we should be incorporating into our numbers?

Yes. We're committed to continuing to optimize our property portfolio. Our investment portfolio, we're looking to continue to sell down and essentially reduce those balances and focus on the business of banking. In terms of our own occupancy, yes, there's been a paradigm shift in the way people operate. We are looking at the working-from-home policy, and where that will end up will dictate our own rental cost because, obviously, there's some synergies to be made there and we're working through hot desking and various other things as a result of that. So net-net, yes, you can expect some further gains on the property side as we execute deals. And you can probably expect further reductions in rental costs as we start to formalize our working-from-home policy and structuring our business around that.

The next question comes from Naresh Bilandani from JPMorgan.

It's Naresh from JPMorgan. I just have one question, please. Can you please just confirm if there were any material-traded transactions that affected your first quarter impairment charge? And put bluntly, I'm just keen to know if the Abu Dhabi Airports' guarantee invocation and the underlying exposure that you have to Arabtec will have that guarantee caused any movements that may not be repeated in the second quarter. And if impairment charges could drop further as we move on from here into the future quarters. Or maybe I'm just being too bullish here, but if you can throw some light on that, that would be super helpful.

Naresh, Shirish. So I think your first question was, was there any significant impairment in quarter 1 that came to the numbers? The answer is no, there wasn't any. Obviously, we won't comment on any specifics around the airport news article that was in the public domain. But suffice to say that we are -- we've done our own analysis of the situation and remain confident of having covered our own position and looking at the various scenarios and the way they're likely to play out. So we see no risk from an FAB point of view that comes out of that transaction. That's probably all I can say at this stage. And for the remainder of 2021, we don't see any material impact on the impairment front from any significant credit at this stage.

We will now take the next question from Aybek Islamov.

So I wanted to ask you a question about your strategy in Egypt. So what are your plans there? Do you want to recapitalize Bank Audi once you complete the acquisition? Is the strategy about gaining market share? So if you can elaborate on that, that will be very useful. Secondly, we know that First Abu Dhabi Bank is known for fairly volatile deposits, right? You may have unexpected inflows and outflows during the quarters. But it also looks like the deposit volatility kind of impacts your NII, which was the case in the first quarter of this year, given that you place all these deposits, a big bulk of them, in cash, right, with the central banks. Is there a way you can manage this deposit volatility so your net interest income line would be kind of more stable and predictable? One would have expected that the impact of low interest rates should have already passed, in my opinion. So if you can comment on this, that will be very useful. And I think that's pretty much it in terms of questions.

Thank you. So in terms of Egypt, we believe it's a big market. It's got a substantial nominal GDP. It's growing. It's relatively underbanked. We've had a presence there for a number of years. Bringing these 2 banks together and successfully integrating them essentially doubles our scale. We have, we believe, significant synergies and massive ability to grow in that space because of the close affinity between the 2 countries. And as Hana mentioned, the trade flows between the 2 countries and the FDI flows. So yes, we're very optimistic about Egypt. And as a major market, it makes sense that we diversify away just from the UAE, and Egypt is a great return market. So we're looking to grow there. In terms of your question around deposits, the deposits come in and because they are government deposits and therefore subject to volatility, we only behaviorize a relatively small portion of it for longer-term liquidity, which means the short-term balances get placed with the Fed or the ECB. But what it simply means is when the deposits come in or go out, all that happens is the balances with the ECB or the Fed go up or down. And in terms of NIM, it doesn't make much difference except so the mathematical calculation, because the footings -- the balance sheet footings go up or down. So these deposits we make a spread on. There's no capital associated with them. And there's essentially no liquidity costs. So they're good for us, good business for us, and we make a small return on it. In terms of your question, you thought the Fed rate cuts will have passed. Well, all we're doing is comparing first quarter 2020, where there were no Fed rate cuts, against the first quarter '21, where obviously there were rate cuts. So that's the reason we quoted that in our discussion, showing the net profit bridge. But Q-on-Q, as I've said, was mainly related to interest in suspense, significant interest in suspense, which was really a one-off, that wasn't repeated in the first quarter this year. But as you know, there's always interest in suspense releases and they happen favorably depending on our success in terms of restructuring and working out NPLs with clients. And we do expect more to come this year, but we don't provide guidance on that.