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

Welcome to the First Abu Dhabi Bank Q1 '23 Results Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host Sofia El Boury, Head of Investor Relations, to begin. Sofia, please go ahead.

Thank you, Lauren. Good afternoon, everyone. Thank you for joining us today to review FAB's financial performance for the first quarter of 2023. As usual, all our financial disclosures are available on the dedicated IR section of our corporate website as well as on the IR mobile app. And today's call is hosted by our senior management team, represented by Karim Karoui, Group Head of Mergers and Acquisitions and Interim Group CFO; Pradeep Rana, Group Chief Risk Officer; and Rajesh Deshpande, Acting Group Chief Credit Officer. They will be here to answer all your questions at the end of this short presentation. So without further ado, I pass it on to Karim for the financial review. Over to you.

Thank you, Sofia. Good afternoon, everyone. Thank you for joining today's call. I will quickly run through some key financial and strategic highlights before opening for Q&A. So turning to Slide 3 of our earnings call presentation. FAB had a strong start to the year. The group produced first quarter net profit of AED 3.9 billion, up 60% quarter-on-quarter and then up 70% year-on-year when excluding the gains on sale of a majority stake in Magnati, which were booked in the first -- in the prior year period, Q1 of 2022. These results translate to a return on tangible equity of 18.5% versus an adjusted RoTE of 11.3% in Q1 2022, which is a significant improvement. On an underlying basis, when adjusting for the Magnati stake sale, this is the highest quarterly net profit achieved by the bank and the clear indication of the progress we are making on several aspects. Firstly, that we deliver on our growth strategy. Secondly, that we are consolidating our status as a regional banking powerhouse. And thirdly, that our long-term client focus and commitment to deliver superior and sustainable shareholder returns is paying off. These results continue to be supported by a favorable macroeconomic backdrop in the region with strong fiscal surpluses and then the real GDP growth expected to average around 4% for year 2023. Sustained momentum across all business segments and products, which helped drive a strong uptick in operating income to AED 6.7 billion. That's a 51% growth year-on-year with double-digit growth in both net interest and noninterest income. This strong revenue momentum, coupled with disciplined cost management despite ongoing investments led to improvements in the cost-to-income ratio, while cost of risk remained contained and then well within guidance at 62 basis points. During the period, we continued to help our clients drive their growth and investment plans, facilitating their cross-border banking flows through our market-leading capabilities and expertise. This resulted in strong deal pipeline execution across several areas and the sustained lending momentum with a 3% sequential growth in gross loans and advances to AED 494 billion. More notably, customer deposits grew 11% or plus AED 80 billion, to over AED 780 billion, underlining the depth of our relationships and our superior credit rating of AA minus or equivalent as one of the safest banks worldwide. We end the first quarter of 2023 with sound balance sheet fundamentals with March end 2023 LCR at 151%, NSFR about 100% and CET1 strengthening by 57 basis points quarter-on-quarter to 13.2%. Overall we are pleased with this strong set of results and the group is in a unique position to continue to drive sustainable and superior shareholder returns while shaping the future of banking in the UAE and beyond. Turning to the next slide. So as communicated in the previous earnings call, one of our long-term aspirations as a group is to consolidate our status as a regional banking powerhouse, driving sustainable growth and economic diversification. During the first quarter, we continued to deliver against our strategic priorities to stimulate growth, catalyze change and enhance connectivity through; one, the acceleration of business momentum across segments and product lines to further income diversification with a strength in fee-based business, the deepening of client relationships and enhanced cross-sell, particularly in global markets. Also, innovative -- through innovative solutions, leveraging digital capabilities and new strategic partnerships to unlock customer benefits. Also ongoing investment in talent and technology in order to support business growth, key management hires to help drive strategic execution, strategy execution. We also made significant progress in our ESG strategy. So FAB was the first MENA bank to set the carbon emission reduction targets for high-emitting sectors within the bank's loan portfolio. We facilitate over USD 5 billion of sustainable financing in Q1 2023, making good progress against our group target of USD 75 billion in 2030. Also election of 3 Board members, including FAB's first female Board member. Next slide, so going back to financial results and turning to the next slide and to the financial results. The net profit bridge year-on-year and quarter-on-quarter. So the group recorded high double-digit earnings growth, driven by sustained business activity and commercial momentum, benefits from higher interest rates and enhanced income generation across our diversified franchise. Starting with year-on-year trend, Q1 '23 net profit was AED 83.9 billion, up 70% year-on-year. That's plus AED 1.6 billion after excluding the AED 2.8 billion gain on the sale of a majority stake in Magnati booked in Q1 2022. As you can see on the next profit bridge, the year-on-year performance was driven by a strong uptick in operating income from strong net interest income, increasing 41% year-on-year or plus AED 1.3 billion, helped by healthy volumes and then higher interest rates. Around AED 81 billion growth in noninterest income, that's plus 74% year-on-year, driven by higher fees and commissions, a strong sales and trading performance and sizable FX gains. This was partly offset by higher operating costs and by continued investment, impairment charges and slightly higher taxes. Sequentially versus Q4 2022, Q1 '23 net profit is 60% up sequentially. And you can see here that this result was driven by a marked improvement across each and every single line of the P&L, which is reflecting business growth, benefits from higher interest rates as well as the prudent measures we took in the fourth quarter. Turning to the next slide. The group delivered a strong operating performance across business segments and product lines. So during the first quarter, we saw positive momentum across all business segments. Investment banking revenue grew 49% to AED 2.7 billion, with solid momentum across all major products, be it on Group Corporate Finance, GTB or Global Markets. This was driven by healthy volumes, higher interest rates, strong deep pipeline execution and Global Corporate Finance across several areas, including M&A, ECM and DCM as well as a robust sales and trading performance. Loans and deposits were up 2% and 14%, respectively, underlying a healthy liquidity position and a loan-to-deposit ratio of 41%. Corporate and Commercial Banking revenue grew 66% year-on-year to AED 1.7 billion, primarily driven by strong growth in net interest income in Global Transactions Banking, benefiting from increased business volumes and higher interest rates. Sequentially the business saw solid growth in noninterest income on the back of higher fee generation, new cash management mandates and strong FX and derivative sales. In Consumer Banking and despite lower revenue year-on-year, commercial momentum was very strong with customer-initiated digital sales of credit cards and CASA increasing more than 140% year-on-year with co-branded card sales growing 86% on the back of successful product launches and strategic partnerships and continued productivity and efficiency gains on the back of increased digitization. In Global Private Banking, net flows were positive despite volatile market conditions and the business grew revenue by 15% to AED 274 million on the back of higher fee income and the strong momentum in IPOs, which saw record client participation and a few local listings. In head office, the strong uptick in revenue of AED 0.8 billion was primarily driven by strong performance in FAB Misr, which is still showing under the head office, but will be reclassified under the various business segments in the next few quarters. Turning to the next slide. The group presents a robust balance sheet foundation supported by a strong liquidity position and healthy loan growth. Group total assets grew 7% sequentially to AED 1.2 trillion. One of the key highlights of the quarter was the significant growth in the deposit base by AED 80 billion, including AED 19 billion of additional CASA balances. Nearly half of the new inflows during Q1 were gathered from our international franchise and aligning the group's unique role as an aggregator of regional and international liquidity. By counterparties, corporate and private sector deposits were primary drivers, so plus AED 72 billion, including the money market funds, followed by government, plus AED 11 billion and individuals, plus AED 4 billion. On the asset side, cash and balances with central banks, mainly FAB placements grew AED 76 billion, loans and advances plus AED 13 billion and investments to plus AED 4 billion through our continuous focus on efficient balance sheet deployment in order to maximize returns. Loan growth of 3% quarter-on-quarter, so it's plus AED 13 billion, was primarily driven by short-term FI trade loans, corporate/private sector and government lending, reflecting sustained momentum in the UAE. FAB's liability profile remains very strong with a liquidity coverage ratio at 151% LCR and then a net stable funding ratio of over 100%. Turning to the next slide, which is covering net interest income and margin trends. So NII growth was helped by strong business volumes and then higher interest rates. NII was 5% sequentially and plus 41% year-on-year to AED 4.4 billion, reflecting volume growth and significant benefits from rate hikes. You can see from the quarterly NIM trend on the bottom of the slide, that NIM has improved 11 basis points year-on-year and 2 basis points quarter-on-quarter, driven by higher interest rates, which is partly offset by the dilutive impact of higher placements with Central banks as a result of the sizable deposit inflows during the period. Our asset mix shown in the bottom middle part of the slide shows the mix of average interest-earning assets and average interest-bearing deposits were due from Central Bank and banks now represent 38% of interest-earning assets versus 27% in the prior year period, which has an impact on the overall mathematical calculation of NIM. We will continue to manage the balance sheet dynamically in light of the evolving interest rate outlook, and we do expect NIM to further improve by year-end, provided there are no significant balance sheet movements. Discussing the -- in the next slide discussing the noninterest income in Slide 9, made up of fees, FX gains and sales and the trading income. So overall, noninterest income grew 74% year-on-year and 35% quarter-on-quarter. On a quarter-on-quarter basis, this was primarily driven by a jump in FX and investment income, mainly on the back of increased client flow activity, significantly higher FX gains and overall, a strong sales and trading performance in global markets amongst highly volatile market conditions. While most of this revenue stream is sustainable and underlies enhanced cross-sell, around 20% to 25% of the FX and investment income in Q1 '23 could be considered as nonrecurring. This was coupled with a 15% growth in fees and commissions from strong deal execution in GCF and then higher cash management and the trade related fees. Other noninterest income was at AED 67 million and is higher quarter-on-quarter as Q4 2022, which included MTM losses on investment profit in Q4 2022. In Q1 2023, noninterest income represented 34% of group operating income versus 30% in the prior year period. Turning to the next slide, showing the quarter-on-quarter trend in OpEx and cost-to-income ratio, operating efficiency improved considerably, both sequentially and year-on-year. So Q1 '23 OpEx of AED 1.7 billion was 16% lower compared to Q4 2022, reflecting legacy system write-offs in the previous quarter as well as cost discipline. Year-on-year, OpEx grew 11%, reflecting ongoing investment in talent, technology and strategic initiatives to drive business growth. These investments are expected to deliver productivity and efficiency gains over the medium term, helped by revenue growth. Q1 2023 cost-to-income ratio improved to a market-leading level of 25.1% for the quarter compared to 33.2% in Q1 2022, adjusted for the gains on sale of stake in Magnati. Overall, group operating efficiency is very strong, particularly for a banking institution of our size and group cost-to-income ratio is expected to remain below the 30% threshold by year-end despite ongoing investments. Turning to Slide #11. Looking at asset quality. The group continues to present strong metrics as of March end 2023, demonstrating a high-quality portfolio and a prudent risk approach. NPLs were stable quarter-on-quarter at AED 18.5 billion with subdued NPL formation overall, implying a group NPL ratio at 3.8%. Impairment charges stood at AED 798 million and were 28% lower sequentially and 74% higher year-on-year, translating to an adequate provision coverage of 101%. As a result, cost of risk was contained at 62 basis points for the quarter, well below full year guidance of below 80 basis points. Turning to the next slide. Capital generation was strong during the period. The group ended the quarter with a CET1 of 13.2%, that's a 50 basis points improvement from December 2022 level post dividend. This was driven by higher retained earnings plus 69 basis points impact, coupled with the risk discipline and ongoing risk-weighted assets optimization. That's plus 9 basis points impact; partly offset by adverse movements in the reserves and the Tier 1 interest payments, that's minus 21 basis points. Despite the strong balance sheet growth with total assets up 21% year-on-year, risk-weighted assets were less by 2.5% year-on-year to AED 568 billion, implying a return on risk-weighted assets of 2.8%, up from 1.6% in the prior year period. Turning to Slide 13 and to wrap up. FAB had a very strong start to the year, delivering high double-digit growth in revenue and net profit, capitalizing on a sustained momentum across all business segments and benefits from higher interest rates. The group operates on a robust balance sheet foundation across liquidity and funding, asset quality and capital, supported by strong earnings generation capacity. As we continue to deliver against our growth strategy, we see for the time being more tailwinds than headwinds and we believe we are uniquely positioned to continue to drive sustainable growth in profitability and returns for all our stakeholders. With regards to the full year '23 financial guidance, you can see on the right-hand side that we are either very well on track or ahead on the various metrics. At this stage and in light of a volatile global backdrop, we have decided to reiterate our financial guidance, but we may revise a few of these metrics at the half-year period as per our usual practice. With this, I would like to hand over to the operator and then open the floor to Q&A.

Lauren, you may open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Nida Iqbal from Morgan Stanley.

This is Nida Iqbal from Morgan Stanley. My first question is on the deposit side. The deposit growth has clearly been very impressive this quarter. International up 27% quarter-on-quarter. It would be great to get some color on exactly where this is coming from, which countries are contributing to this? On the other hand, your cost per share has decreased from 52% a year ago to 40% now. And this is a faster shift away from CASA versus some of the other peers. So I just wanted to get a better understanding of what are the reasons for this? And linked to this, if you could please comment on your NIM expectations from here? Do you think NIMs have peaked or is there further upside? And my last question is, as you mentioned, about 38% of the interest-earning assets are now placements with the Central Bank and due from banks. How should we think about the deployment of excess liquidity for FAB going forward?

On the -- yes, sorry. Thank you, Nida. On the first one, so on deposits, I mean, given what's happening all over the world, so -- and then being, let's say, a fly to quality area, we saw a lot of deposits flowing into FAB's balance sheet. So approximately, like 50% of these deposits are coming internationally from -- mainly from U.S. And then the remaining is coming from the UAE. These are -- there is the mix of government deposits and corporate and private sector deposits. So it's a mix. It's balanced, and then we are happy that our international locations are contributing to this increase in the deposits. On the CASA side, it keeps on growing from in terms of absolute figures from one quarter to another. Overall, this will continue. Maybe the first quarter, the movements in deposits in general were quite high. But overall, this is the kind of percentage which we are looking at in the future. The efforts will always continue for us to bring the CASA in such an environment. So for us, the efforts will continue, and then you can see this in the future quarters to continue on increasing. On the net interest margin, I think we are doing a lot of efforts internally to improve our NIMs. So then you expect -- it's not like we reached plateau or we reached, but definitely, we will continue on doing the efforts to improve on the NIMs. So what you saw as increase in the NIMs of 11% from Q1 to Q1 of last year could be a good guidance for you -- could be a good guide in basis points. So -- and it could be a good guidance for you for the increase in the NIMs in 2023. On the excess of liquidity deployment, that's our profile and then one is that the very short-term liquidity, excess liquidity, we deployed in the -- we deployed in U.S. dollars with the FAB. But other ways, other avenues for deploying this is the short-term FIs. So that would help us improve on the returns regarding the very short-term liquidity, which comes to our balance sheet.

Our next question comes from Rahul Bajaj from Citibank.

This is Rahul from Citi. Two quick questions from my side. I want to revisit the margin question asked earlier. So just to clarify, you said that Q1 to Q1 NIM expanded by about 11, 12 basis points, and we should expect a similar expansion for 2023 Y-o-Y. Is that kind of my understanding correct? Or you are alluding to something else? So that's my first question. The second question is, if I look at your segmental disclosures, especially the Excel file, which you kindly shared, it seems like a bulk of loans and assets have moved from the consumer segment to the headquarters segment. Just wanted to understand what's going on there, why you have moved things between consumer and headquarters. Those are my 2 questions.

Yes. On the net interest margin, I confirm your understanding. So a 10 basis points increase in the NIMs would not be a big surprise. This is given the size of our balance sheet; we find that this could be reasonable. So quarter-on-quarter, there was an increase of 2 basis points. So from every quarter, basically, all this is reflecting that we are very focused on increasing the NIMs within the deployment of -- within the asset management of our balance sheet. On the segmental note, which you made. So basically, this is the classification of the -- on the national loans, which we moved from the consumer bank to the head office because it's a portfolio which we actually are exiting because it's very regulated by the Central Bank, where the yields are capped. So for us -- so for us, it's just a reclassification because effectively it's not managed 100% by the consumer bank. And then this is -- we are just following the regulation and the rules and then we are in a cycle of exiting this portfolio, which was legacy from the [indiscernible].

Our next question comes from Waleed Mohsin from Goldman Sachs.

Congrats on a solid set of results. 3 questions, please, from my side. Karim, you clarified that some part of the FX income could be classified as or considered as nonrecurring. You said, I think, 20% to 25%. When I look at the fee income line as well, there is a component, which is other fee income, which increased significantly on a sequential basis. So my question was if you could clarify what part of that is nonrecurring. And linked to this, you reported a return on tangible equity on your calculations of 18.5%. When we adjust for some of these one-offs, whether it's on the investment income side on the fee income side, what would be the comparable underlying return on tangible equity, which is -- which we should consider as recurring? So that's the first question. Secondly, you've done some RWA optimization despite the credit growth we've seen a reduction in risk-weighted assets, and it's not only coming from credit risk. So any clarification on that would be helpful. And if this is going to change significantly as banks transition to Basel IV? And my third and last question is on cost of funding. So despite a very liquid balance sheet, I mean, you've got probably one of the most liquid balance sheets across the Middle East. When I do a simplistic calculation in terms of your cost of time deposits, it appears you're still paying a premium on 12-month Emirates interbank rate. So given the liquidity of the balance sheet, one would expect a significant amount of, I'd say, bargaining power for the bank. So why is it that the cost of funding or cost of deposit, especially the cost of time deposit turns out to be something like 5.5% or so? Or is there something which we are missing on that calculation?

Yes. Thank you, Waleed for the questions. Regarding the first one, which is the FX income mainly. So this is mainly coming -- the increase came this quarter mainly from FAB Misr because we are holding our capital in U.S. dollars. So overall, the impact was AED 444 million impact positively on our balance sheet. So I think if you see further devaluations in EGP, you would expect some positive impact on our FX income. On the other fee income, Waleed, which one you are -- you mean exactly you asked about because overall, I don't see any other material ones in our FX -- in our fee income.

So Karim, on Slide 9, there is a component which has grown from AED 117 million to AED 205 million. And so that's almost doubled during the quarter. It's called other fee income in your Slide #9.

I'll get back -- I'll get back to that one. I'll jump on the third one. When you talked about the -- on the cost of funding. So this is exactly what I meant when we talked that -- when we mentioned that we are doing a lot of efforts now on our cost of funds and then on the asset side is the deployment of the balance sheet in order to improve the NIMs. So basically, we are looking at both sides of the balance sheet. And then I think your point and then sometimes you see on the cost of funding that the rates look higher, but you should link that also with the maturity profile. So some deposits are longer term. So then this is pushing a bit at our cost of funding. Regarding the risk weight optimization, I will get some help from my colleagues in the room.

Good afternoon, Rahul, this is Rajesh. One of the reasons why you see that is if you see our growth in assets, you will see that we have increased exposure to short-term FI assets. And these are highly rated trade assets. So that is one of the reasons which has resulted in a lower rate.

And then just, Karim, just to follow up on the return on tangible equity point. So the -- in your view, what would be the underlying return on tangible equity for this quarter, which is recurring?

I think -- so if we take -- I see something between 16% and 17% because of the one item which I look, I mean, which I think should be considered in your calculations is the effects on the FAB Misr. So that's the only one which I see as a huge where you could -- you have to forecast it in the future. On the other question on the fees, we had higher fees because of the IPO cycle. So over the quarters that increased the fees on IPOs. What else is left, that's the answer, the one on risk-weighted assets on the cost of funding.

Our next question comes from Shabbir Malik from EFG Hermes.

Karim, a couple of questions. I think you mentioned that in terms of the new deposit inflows, you saw, I think, around 50% coming from the U.S. Is it because of maybe flight to safety, given what we've seen in the U.S. is would you attribute that increase due to the concern that maybe around U.S. banking, which got tribute to this increase? Or is this client specific? And my second question is on -- if I look at your noninterest income line, there tends to be a bit more volatility. So certain items such as other income can be difficult to forecast -- but based on your comments, it looks like non-funded income of about AED 2 billion a quarter looks quite sustainable. Would that be a fair assumption for the rest of this year? And finally, if I look at your cost base, the increase that we've seen this year in first quarter '23, if I then compare it to some of the other banks it seems a bit low. So I would like to understand how are you managing the inflation pressures and other cost pressures and also, at the same time, not compromising on future growth? And maybe finally, in terms of a longer-term sustainable ROE post corporate tax, what would be a level that you'll be looking at?

So on the first one related to the deposits coming mainly from the U.S. So these are mainly the money market funds, which are maybe for sure creating products and leverage products for their clients. So it's not like we did not see something -- of course, there must be -- it's -- there is an element of flight to safety here maybe for them, maybe some of these deposits, which were in the place in the U.S. But as -- in this current high interest rate environment, so we saw these deposits flowing into FAB. We see some of them are sustainable. So we see the trend maybe will continue within the current context. On the noninterest income line, in general, there is some expansion of the trading activities. So there are quarters where we have the global markets doing well. Sometimes that is less well than the previous one. But the numbers which you -- I mean, what you have in mind. So I mean, there would always be volatility. And then we always position ourselves to take advantage of the movements in the markets than in the trading. So that's -- and then there is -- I mean, then we are showing in our numbers that some of these activities are coming. Some of these revenues are coming from the client-related activities thus the positioning of our balance sheet, et cetera. So in general, except the elements related to Egypt, the EGP devaluation and then how we accept that, I see that it's normal to have this kind of numbers every quarter. On the cost side, definitely, we are doing -- we are very conscious and then we want to protect our profitability. So we are watching very closely our expenses. We are doing some savings -- we are taking some drastic decisions in terms of investments, what maybe -- what was the trend in the past 3, 4 years like every new technology, everything you go, you invest in a project. Now it is on a need basis. It's based on the impactful investments. So we think twice now before we just best something in -- we invest also in the things which will really make the difference for us. So this area, we -- I mean we expect -- it's a prudent management of our expenses. We continue on investing in our people and the technology platforms. But as I mean, with an eye of some of savings on the cost in the future. Overall big picture regarding your last question, big picture for us each time and as long as we exceed the 15% -- the 15% hurdle into return on equity, we are fine. So we have to adapt so be it, if the tax will come into the picture we have to change our models. We have to look at the corners within the balance sheet and then look at our pricing to ensure that we continue on delivering on the 15% on the long-term basis.

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

I have 2 today. What part of securities do you revalue through capital? And what is your sensitivity of CET1 to blended bond yield? And I appreciate it's difficult to say what is blended bond yield, but maybe you have made such analysis for your book? And second question is, in which type of securities portfolio, do you hold your foreign exposure to Egypt, if I'm not mistaken, BB rated?