Corporate client or a member of the press, please kindly disconnect from the call. This will be an interactive call, so if you would like to ask a question, please use the raise hand feature on your screen or press star nine if you are dialed in by phone. I will now hand you over to your host for this call from JP Morgan, Naresh Bilandani. Thank you.
Thank you. Good day, everyone. I am Naresh Bilandani, Head of MENA Equity Research at JP Morgan, and I would like to welcome you all to the First Quarter 2024 Earnings Call of Abu Dhabi Islamic Bank, which JP Morgan is very pleased to host. We have with us today Mr. Mohamed Abdelbar y, the Acting Group CEO, Mr. Ahsan Akhtar, Acting Group CFO, and Ms. Lamia Hariz, Head of Investor Relations, Marketing, Communications, and ESG. I will pass the call now to the ADIB team to commence their presentation. Thank you.
Thank you, Naresh. Good afternoon to everyone on the call, and thank you for joining us today. Before we get started, I just want to remind everyone that today's presentation of all our financial disclosures are already available on the IR section of our website and on the IR app. As Naresh mentioned, I have with me Mr. Mohamed Abdelbary, our Acting Group CEO, and Mr. Ahsan Akhtar, our Group CFO. The agenda of today is consistent with the previous quarters. We will start with the quick highlights of the quarter, and we will give you a quick update on our strategic progress, and then a detailed analysis of the performance. We will then conclude with the guidance for the rest of 2024 and open the floor for Q&A. With that, I will now hand it over to Mohamed to start the presentation.
Right. Thank you, Lamia, and good morning, good afternoon, everyone, and thank you for joining us on today's call. We are very pleased to have reported a strong start for 2024 with net income for the first quarter of AED 1.45 billion, which is an impressive increase of 32% year-on-year. Or if you were to adjust for the impact of tax, it is 41% up year-on-year. This result was driven by sustained revenue momentum, which was up 24% year-on-year, driven by all business segments. Return equity has improved to 27%, which is an improvement of around 3.5 percentage points. If one would just look at from last year, the number was 25%.
Underpinning this performance was 13% year-on-year asset growth, driven by 9% growth in net customer financing. This was efficiently funded by 13% year-on-year deposit growth, with CASA increasing 9% and our CASA contribution to total deposit now stands at 66%. At the same time, our credit quality metrics continued to improve, with our NPE ratio declining to its lowest level since fourth quarter of 2019 to 5.5%. With that, I move to the next slide, Lamia.
On the strategy. What's important to note that our strategy remains to be unchanged, and we have a very clear vision, which is to become the world's most innovative Islamic bank. Our strategy is built on four key pillars, which I will just quickly call out. First, continuous innovation of new Sharia-compliant banking products. Second, segment focus to build on our existing strengths in the Emirati retail segment, while still attracting and developing new business segments where the bank can grow profitably and sustainably. Number three is our digital excellence to elevate customer experience through STP and leveraging advanced analytics. Last but not least, sustainable future, which involves embedding sustainability and ESG into our existing Islamic banking DNA.
Moving forward, under continuous innovation, we continue to launch new innovative products and campaigns. The last one was the famous 100% salary campaign. Over 17,000 new Amwal user accounts were acquired since its launch. We have also improved our revenue mix, with non-funded income now representing 33% of total revenue compared to 30% a year ago. We continue to focus on non-funded income in the form of asset under management, which has now grown to AED 5 billion.
Under segment focus, again, a few key highlights. In the first quarter of 2024, we have attracted or onboarded or welcomed 46,000 new customers, out of which 15,000 were UAE nationals. We maintained our strong relationship with customers, keeping our cross-sell ratio above the 1.5x, and we're also growing our corporate banking with new mandates from GE and large corporates.
Under digital excellence, again, a few points to call out. We are monitoring very closely all our digital metrics. 51% of our sales are now going end to end through our digital channels. During the quarter, we completed end to end customer journeys for Covered Cards and personal finance, and we introduced new features on our mobile app, which continues to be widely used.
On the sustainable future, which is the last pillar here, we finalized our net zero plan for the highly emitted targets. We maintained our position with a single A under the MSCI ESG Rating, and our Emiratisation ratio now stands at 40% while we continue to be ranked the number one UAE bank in customer experience.
Let's now move to highlights on the financial performance. As mentioned in my opening remarks, we're very happy to see the strong start for the year. Again, just reminding of the key numbers, AED 1.45 billion of net profit, which is up 32% year-on-year, and normalizing this for the UAE Corporate Income Tax or the tax line, we are at a 41% increase year-on-year. Revenue has grown 24%, backed by robust funded and non-funded revenue, and assets and financing costs were sustained while maintaining our healthy funding profile.
This was achieved despite that we had seen the Egyptian pound devalue in the first quarter of 2024, and given our exposure in Egypt, it had an impact, which we will articulate at a later stage. But these numbers are net of that impact, so, with a forward-looking view, that could only then be hopefully an upside. Our cost-to-income ratio improved to 30.4%, and as mentioned in my opening remarks, we are reporting return equity of 27%.
Okay, on this slide, I think I covered most of the points, but one maybe point to call out, and this might come in the question, is that our effective tax rate, which we have calculated for the group, stands currently at 11.7%. I just would like to remind the audience who have been on our calls previously, we always said that we're going to be anywhere between 11%- 12%. Concluding this exercise, we are quite happy that we are close to that number.
Okay, moving forward, on the income statement, we are very pleased with the quality of the profits that we are delivering. As you can see from the top right chart, the key drivers of profit growth were 19% funded income and a 35% increase in non-funded income. At the same time, effective cost and risk discipline results in a moderate 5% expense increase and a 25% lower impairment charge. From a segmental perspective, the retail and wholesale bank have equally contributed very strongly to the net profit we have reported in the first quarter of this year. Let's move forward then, yeah.
Funded income, in terms of performance by segments, or maybe just a few key highlights just to remind the audience, because again, I would just always like to take you back to what we have been always consistently signaling to the market over the past five, six quarters. Our funded income versus non-funded income contribution, clearly, our non-funded income has done very well, and as you can see from the slides, that is contributing to our net profit margins, enhancing our own equity, and more importantly, as you see, our funding cost asset here and then net profit margin accordingly, a consistent growth quarter on quarter, something I think we have not seen in the wider market recently, but given, again, ADIB's efficient funding structure, we continue to benefit from that upside.
Non-funded income. Non-funded income grew 35%, as mentioned. As growth has been coming from fees and commission, investment income, and an underlying strategic focus on revenue diversification. I would draw your attention to the waterfall chart on the top side, which highlights the components of the movement in non-funded income for the year. Investment income improved 53% versus last year, mainly from our ongoing expansion of the investment book.
Fees and commission income grew by a solid 40%, and the drivers, as you can see in the bottom right chart, it's mainly coming from retail, Covered Cards, risk participation, and other AUM. I think the key message really on this slide is that while we are focusing on non-funded income, it is not a specific area, but we are ensuring that we have enough diversity that we are pulling on all fronts, hence we are creating a natural, I would say, a cover, if one area is not growing as fast as we expect to see.
Moving forward on the cost line. Expenses grew only by 5% year-on-year. The underlying growth has actually been lower than that. It is only 2% if one would exclude the growth we have seen in Egypt. Egypt, I can talk about it also a bit more later, but it is important to understand the Egypt dynamics is that while there is a currency devaluation in Egypt, which would suggest that even on the cost translated into dirhams would be lower, the reality of the matter is that most of the vendors in the country were already pricing their services linked to a dollar rate, and not even the official one. While you are actually losing on the top line this devaluation, you end up still paying almost the same expenses, if not higher, if ones translated into dollars or dirhams.
Now sitting at the 38 bps into the first quarter of 2024. Again, we have not seen any significant reversals. Just for our audience to get that picture, because sometimes these numbers can be a bit confusing when there are too many reversals on that line.
Okay, I started the year last year in first quarter of 2023, non-performing asset ratio stood at 7.7%. Again, we did commit to the market that this is going to be a focus. NMC impact was last year. The drop from 6.1%- 5.5% is a combination of further write-offs as well as recoveries. As we progress through the year. Also, our coverage ratio including collateral has now also reached a 145% mark. Without collateral, it is 73% book, you are hitting slightly your coverage ratio excluding the collateral, but this is going to start building up again, and we are further.
All right. Slide 18 on the balance sheet. The bank reported a 1% balance sheet growth in the first quarter of the year, but the number is slightly distorted. Egyptian pound devaluation had an AED 8 billion impact, eating away almost of the growth we have seen. Underlying growth was 5%. On the financing side, the story we financing growth has been in the first quarter our retail bank. We are very happy to see how the pipeline on the corporate bank is also now converting. Quickly on the retail side, we are continuously focused on all our key products. Auto finance, personal finance, and Home Finance have grown. Even distinguish between Islamic or conventional, we are between number one and number two in terms of portfolio size for these three pillars. One of them holds the pole position and the other two are.
We have hit a AED 26 billion mark by the first quarter of 2024. It is important for us that we cautiously and in a focused manner. It does give us that natural hedge, as rates will start to probably decline, starting maybe this year, but more profound next year. But we are very to give us that cover and also the right yield and return.
On the customer deposits, we have seen a growth of approximately 6% from the beginning of the year, and in the wider market. In that rate environment, growing CASA at any point in time is not an easy task. If you look at this number, actually from a year-on-year perspective, we have grown CASA close to AED 10 billion of that book. Nice cushion in terms of having flexibility when we make pricing decisions on the asset side, without by any means compromising our net profit margin. You have seen it in the earlier slides that our net profit margins.
On the capital side, a very predictable story for us as well. We are reporting a CET1 of 12.6% and a total capital adequacy ratio of 17.2%. The fact of the dividend payout, that is a very intentional drop. As you can see, we are always very cautious to keep that flow of 12%, and hence we are focusing on continuously to create a mix of capital life versus a bit of more higher yielding financing opportunities to instill enough buffer and ammunition to follow our, I wouldn't say standard dividend policy. However, ADIB has a very consistent way of thinking about how much we will think about dividends, how much we will reinvest into the business, and hence it's important that as we ensure that we continuously grow our business, all these key metrics are important for us to be kept in mind.
On the last slide, just on the guidance perspective, gross financing year-on-year is 8%. We are guiding to anywhere between 5% and 7%. Very doable, and we are saying that this will be even after incorporating the FX impact. The underlying growth is going to be actually more in double digits, but the FX impact is something we don't control. Net profit margin at 4.67%, we're saying above 4.5%. Now, you might argue saying, are you being overly conservative about this number? Probably the answer could be yes. But we are saying above 4.5%, so not 4.5%. We're trying to signal to the market that we do not think that we will fall below that number, but more likely than not, I think we will be closer to where we are today, if not a bit higher.
Cost of risk, we are now at 38 basis points. We are signaling anywhere between 40- 60 basis points. What we see, today is probably going to be at the lower range of that number, but we are still wanting to keep a floor at 40 basis points because we are factoring in any possible surprises if there's anything in the economy we need to look at, particularly in the Dubai segment. We did say that we are focusing more on that segment, which is naturally slightly a higher risk segment, but again, at the 40 basis points, we are very comfortable with that number.
Cost-to-income ratio, 30.4%. We were looking forward to celebrate breaking that three number very soon. Hence, we are signaling that by the end of the year, we will be entering the 20+ number in terms of cost-to-income ratio. This will come with focusing on top-line growth and keeping our costs under control. It doesn't mean that we will not invest. We are actually heavily continuously investing on our strategic pillars. However, we are able also to create efficiencies to support that investment growth. Hence, I think you would be pleased to see that our operating jaws have been very positive, very wide with a revenue growth of 24% and cost only of 5%. We intend to continue somewhere closer to these frames.
ROE, again, similar to the comment I made on net profit margin, we are at 27%. I don't think we will fall below 25%. 25% could be closer to the 27% we have today. But really our floor where we are looking at is not to go below 25%. I think with that, we can open it up for any Q&A. Thank you.
We concluded the management presentation, and now we're ready to take any questions.
Thank you. Just a reminder, you can use the raise hand feature at the bottom of your screen, or if you're dialed in by phone, you can press star nine. Our first question is Rahul Bajaj. If you'd like to unmute yourself and ask your question. Thank you.
Thank you. Hi, Mohamed. Hi, Lamia. This is Rahul Bajaj from Citi. I have three quick questions, actually. The first one is on margins, net profit margin. We saw a recent increase sequentially in the first quarter. How should we think about the net profit margin going forward sequentially over the next couple of quarters? I think Mohamed mentioned that you would expect margins to grow from current levels over the next couple of quarters. Is that correct? Are you not seeing cost of funding pressure on your margin? That is my first question.
My second question is on your new customer addition mix. I saw on one of the slides that you have added 46,000 new customers during 1Q, and only one-third of that were UAE nationals. Just wanted to understand, is this a change in strategy or is this a continuation of the strategy? Is the same mix, one is to two in your back book as well in terms of customer profile, wherein you have two non-national customer for one national customer? I just wanted to understand, has there been any deliberate attempt to expand more in the non-national segment in the last few quarters? If there is a focus in that segment, what areas are you focusing on? That is my second question.
My third and final question is on NMC. I recall NMC is out of the NPL book now, but what is the latest status? Are we still expecting any write-backs from NMC in the future, or it is done and dusted for ADIB? Where are you now with respect to NMC? Thank you. Those are my three questions.
Thank you.
Okay. Thanks, Rahul. I will take two of these, and then I will pass one to Lamia as well to address. On the net profit margins, given where the portfolio mix is, Rahul, and because we monitor the repricing of the book and the vintages very carefully, I see that there is still a strip of lower financed or lower priced financing, which is still to go off our books, which is happening. It is being replaced by the higher strip. That is why I said is that in the quarter two of this year, we might still see some uptick.
Now, given if the rates start to moderate in the second half of the year, the verdict is out, some are now talking about two rate cuts, and if you look at the forward swap rate, I think it does indicate that there could probably be two cuts happening. Then it is almost like going up a bit and then maybe coming back to where we are today, and hence, maybe the end point of that year is probably where we are today.
I would say I am still cautiously optimistic that the ability for us to reprice downwards on the assets is always good because it is a mix between fixed and floating book, which always gives us its air cover. However, on the funding side, because of our buildup of contractual profit carrying Wakala, these are usually short-term in nature, like three months, six months. Hence, t he moment you start seeing the curve declining, you would be fast also in acting on these. So I am still quite happy with how I see the profit margins moving. So a bit up and then maybe moderating to where we are today. I think ADIB has been known for really managing that area very well.
On the third question on NMC, before I pass on to Lamia to take the question on the customers. So NMC is off our books from stage here from the non-performing assets in the fourth quarter of last year. It has turned into an investment in a holdco, which is treated as such. Now, what you could expect to see from any impact on the financials going forward is this investment will be marked to market on a regular basis, and if there is an upside to that number, this will be the reflection you will see in our financials. But recoveries in form of a financing, having a provision release or a recovery from NMC itself, no, that is not going to happen anymore. It is only going to be the real valuation of the investment overall.
The last one, Lamia, if you can take the last question on the customer-
I have a question on customers. I just wanted to highlight here that there is no change of strategy. We will continue to build on our existing tech, which are the UAE nationals. However, we are expanding our customer base and expanding into new segments, specifically in Dubai. We have done a campaign, which was a salary, cashback campaign, we have called it, where the focus of the marketing was mainly Dubai, and this has helped us a lot in attracting expat customers.
Understood. Thanks, Lamia. Thanks, Mohamed.
Our next question comes from Shabbir Malik. If you would like to unmute yourself and ask your question.
Hi. Thank you very much. A couple of questions from my side. In terms of the recent purge that we have seen in the UAE, do you foresee any negative impact as such on your financials coming from that? That is my first question. Second question is regarding the provisioning in the first quarter was quite low. If you can maybe touch on were there any particular one-offs? Is this more of a longer-term trend that we are likely to see from the bank? So if you can shed some light on that one, please. And thirdly, if I look at your growth in the fee income, that has been also pretty strong. Again, is there any one-offs that you will highlight? Or for modeling purposes, should we assume a similar kind of fee income going into the second half? Thank you. Or the rest of the year, sorry.
Shabbir, just to make sure, your first question was about, I didn't hear the first part.
The rate, I think. Rate?
The deferral? No.
Yes, deferrals and any potential impact on credit quality.
Oh, okay.
Okay.
Understood. Okay. On the first point, we haven't seen any impact yet other than that the month of April has been slower, of course, because of the disruption in terms of access to clients as well as our own sales team being able to reach our clients. Naturally, April will be lower, but I believe that by now we're more into a BAU mode, and hence, May and June will go back to our historical high levels in terms of sales. April is to be covered. Other than that, premises are fine, our field visits are fine. It was, again, a test for our digital capabilities, which I think again stood the test of time. We were very happy with that, and our BCP plans worked well as well. Nothing on that point.
In terms of the provisions, I think it's just a reflection of, again, the quality of the book. The good thing about, or the important thing about ADIB is that we stay very true to our strategy and our underwriting standard and our risk appetite. Even when we extend some of the segments, we still ensure that the overall book does not dip so far. Now, in the first quarter, the originations have been very strong, and hence, the provisions have been also good. I don't think there was any material release. There could be some usual reverses, which you could see from collections, but nothing to be assumed like I need to significantly adjust to see a more underlying number. The 38 bps, probably a good reflection of our first quarter number.
The third one, in terms of growth and fee income, this is a reflection again of our high sales number. Maybe I'll let Ahsan, you want to talk a bit about what is driving the fee income, Ahsan, y ear- on- year growth? Yeah.
Yeah. The key drivers of the fee and commission income was essentially retail bank, and particularly our Covered Cards business, where we have seen acquisitions grow significantly over the last one year, and that has contributed towards the increase in spend. In addition to that, the other retail products like personal finance, auto finance, have also seen significant increase in sales. Increase in processing fee, and others have contributed towards that.
Fantastic. Thank you, Ahsan.
Thank you very much. Sorry, just maybe one more question from my side. In terms of the environment of higher for longer rates, do you expect that to be- w ould you view that as positively for your NIM outlook, maybe not for 2024, but let us say 2025?
Yeah, absolutely. We benefit, I would say exponentially, if compared to the wider market when rates go up. That is because our repricing ability is faster, I think, than the market, and our ability or the opportunity not to really have to source too expensive funding challenge is also quite strong in ADIB. The jaw widens for us quite fast, if you see that chart on net profit margin. For us, it is welcome. The only point we are really focusing on now is if there is any stress going to be on our clients, because high rates for a long period of time, some clients might find it challenging.
For now, we have not seen that pressure. Again, thanks to our strong client base of UAE nationals, which represent almost 80% of our portfolio today. But we are very aware of that, and wherever we can, we are quite conscious of how much we pass on of rates into our financing structure for products. And why that is? Because we can. We have that optionality, and we can make these choices.
Great. Thank you very much.
Sorry. Pardon my interruption. Ahsan, may I please just, the question that Shabbir asked on fees, could I please just add a follow-up there? Just on the cards fee income, there has been a relative drop as compared to what we saw in the fourth quarter. Now, I realize the fourth quarter you had a significant spike because you had roughly about AED 100 million or so of what would be considered as a one-off income in there. But the drop seems quite significant in the first quarter. Would you attribute that to a seasonality because of Ramadan, or has there been any other factor contributing to that drop? And would you see a recovery from this line going into the second quarter?
Yeah. To comment on it, just from a high-level perspective, quarter four, and also I think we signaled it in our quarter four numbers, our call, is that it had a seasonal fee element from some contracts we have with our third parties, which usually come in Q4. So Q4 is a higher number, which you will usually see in our fee number as well. Ahsan, you want to add to that?
No, I think that is absolutely right. That is really the reason why it has come down. I think we can see this progressively building up for the rest of the year.
Thank you, Ahsan.
Understood. Thank you.
Our next question comes from Aybek Islamov. If you would like to unmute yourself and ask your question.
Yeah. Thank you for the conference call. A couple of things I want to ask you is, what are your thoughts about your NPL ratios? Where is the flow in your opinion, given how well things are going at the moment? I think NPL ratio 5.5% you showed earlier. Where do you see it falling to? That is one. Secondly, we are talking about rates being higher for longer, but nevertheless, if we see rate cuts sometime maybe later this year or next year, what could be the implications for loan pricing here? Do you think you will start to pass on these lower rates onto your customers? Does your reaction depend on what the bigger competitors will do in the retail market? Can you give some color on this please? Yeah. Thank you.
Sure. Happy to. In terms of NPA, while we do not want to give a specific number for forward-looking NPA, I think the trend has been quite healthy, and we do believe that this trend will continue. I think we are very close to where we are comfortably looking at. Sub 5% is a good number for us. We are targeting that. This did not come by chance. As I said, it has been a work in progress for at least for the past year and a half, very targeted plan executed and being executed still, so it is not over yet. Hence, I think that is important.
It is important also to understand that NPA ratio can only be managed in two ways. Also, that you have to control the flow into the NPA from Stage 2-S tage 3, otherwise you are almost on a treadmill. That also has worked for us very well with the migration into Stage 3 has been strong by having very strong proactive early alert signals where we actually can cure the situation before it gets out of hand. So yeah, that is really our stand on NPA.
In terms of the, I think your second question was regarding the net profit margins and rate cuts and what it means for us next year. Again, I think you mentioned it. We are not alone in the market. We are in a market where we have competition. We are very aware of our competition, and we always do what is best also for the franchise and the client. If rate starts to come off, there is a balance to be made between how fast you start absorbing these cuts into your fixed product opportunities for the clients, because your floating will automatically price as well, right? So that is just the fixed element. But the pace and the velocity of us starting to even reduce our fixed rates will have to be looked at.
Now, the good thing is that our fixed rate products are already built in two things. One is itself has a floating and fixed element in place. So I give you an example. Home Finance, we are offering fixed rates for one year, three year, five years. Then we move into floating. So it is already there, right? The client can choose what he wants to do, and it becomes a win-win for the bank as well. I think to answer your question, we will be mindful of that. We will be aware of our surroundings. But I think if rates go down, we are not out of the market. We will have to follow the market probably as well.
Thank you very much. Then the next question comes from Aaron Armstrong. If you would like to unmute yourself and ask your question.
Hi. Good afternoon. Thanks very much for taking the questions. Firstly, could you give any comments on international M&A? Anything that has come up, kind of the press reports over the last week or so, and how that fits into the broader strategy?
Yes, sure, happy to. If the question is regarding the news on the Indonesian bank, we put out a note on that, and we are strongly denying that. We have never had these discussions, not today, not in the past, and to be honest, we do not know where they are coming from. But it did not help, I know. And that is why we felt strongly that we had to put out this official note out in the market, and we corrected the news as well.
On the wider strategy from M&A, we have always been very conscious of the fact that for us to grow, it is an element of organic and inorganic, and hence we continuously are mindful of if there are opportunities which will add to the value of the franchise, we look at it. At the moment, there is nothing we can really comment on other than once we go public. But all I can assure the audience is that it is a standing agenda item for us to look at how much we grow organically, but also inorganically. But what I can say is that we are more focused on our footprint in our surroundings. We are not wandering off too wide because we are playing to our strengths, and our strengths currently sit in that part of the world, and hence that is what we are looking at.
That is great. Thank you. I think the particular article, although it is not accurate, and I appreciate that, was speaking about taking a minority stake, a financial stake, rather than a full acquisition and full integration. Can you talk about how you think about that side of things on M&A? Would you be looking to buy something outright and fully integrate it or taking financial stakes?
Everything is on the table, but we are known to not prefer the minority stake. We like to be having a bit of more, I will not say control, but ADIB has a very strong DNA and culture, right? The only way that franchise can operate is that if the entity embraces the ADIB culture and DNA. You cannot do that with a minority stake. So it just becomes an investment, which is a commercial transaction, does not add any value to the franchise or reputation, not on our priority list. Hence, we do prefer to have, when we consider targets, that we will be able to bring them to our DNA and culture, which I think it has proven to be working quite well, and we can leverage on the wider group as well.
That is great. Thank you. Could you talk about how a potential overseas M&A could add value to the franchise? Is it an international customer base, remittances, traveling for Hajj and Umrah, how it fits with your business and how it would add value?
The first thing to add value is that we do not want to start from scratch. We always see what is our existing value proposition, who are your clients, and, first of all, how best you can serve these clients into the wider network. We follow our clients, that is number one. Where is our clients' interest? Hence, that is why I made the point about this part of the world. Our clients' demographics and the background is the interest in this part of the world and maybe in London. We are there, right? We are in the U.K. That is really where we are focusing on.
Number two, if we are finding an opportunity to serve these clients, either by having to do an acquisition on the ground, having to do some kind of fintech digital solution, everything is on the table, right. That is why I am saying is that the reason why maybe we have not come out in the past announcing anything, because there was nothing really which we felt will add value to the franchise. It is not a matter for us just hitting the news and saying we have done one, two, three, but it is actually value destructive.
We have been very careful about it. There will be a time when we will come to the market, and hopefully the market will understand also the rationale. Because if the market does not understand why we did a certain task, then this is the first red flag of why this transaction is anyway being considered in the first place.
That is great. Thank you. That was my first question. Second question would be on the NPA side. You mentioned sub 5% is a good number for the bank. Can you talk about why you could not potentially be more aggressive? Why, given that the organic inflows of new NPAs are so well controlled, why could not you be a sub 3% NPA bank, for example?
Well, we 100% could even sub 2%, but what I meant is that we are taking it in phases, right? There is the very aggressive option. As I said, we have been on this journey for some time, and we could have taken that aggressive option and bite the bullet much earlier, but we felt that this is not right way to go about because you need to fix or to address the root cause of what happened for us to be in that situation and address it heads on. Then as you go into your future operating model, ensure that it becomes sustainable.
I could take that number to 2% today, right? We bite the bullet, we write off the book, we take the pain and move forward. That is not sustainable. Hence, I am saying my phase 1, let me just get below the 5%, and naturally, with our strong underwriting standards and by us continuing to follow the plan, we will continue to advance. But really, phase 1 is just sub 5% for now.
That is great. Thank you. Maybe final question from me, if I may please, would be just one on the NIM dynamics. Could you talk a little bit about how much of the book is fixed versus floating? On the CASA side, are you having to pay up for new depositors' behavior? Are customers asking to move from CASA into time deposits with an interest rate? Then perhaps just to conclude would be, we have spoken about rates being higher for longer. Can you talk about how you are thinking about your mid-cycle ROAs and ROEs, given how you are thinking about interest rates on a two, three-year view, please?
Sure. In terms of books verification, let me even also give it to you by segment. If one would look at our retail book, which is approximately AED 60+ billion , I think the first product, Home Finance. Home Finance is a mix that is predominantly fixed. There is an element of floating, but our clients do not like the floating too much likely so, because you want to have some peace of mind, and our fixed rate is very comparable. So that is predominantly a fixed rate book. Our personal finance is fixed. Our auto finance is fixed, right? So that is your, consider AED 62 billion or so, and maybe outside is a fixed.
Now comes to your corporate book. The corporate book is all float. It is based on a benchmark, and hence, I would say probably 60%-65% of your book is fixed and the remaining on a floating level if you take the two segments combined. Okay, I think that was the first one. The second question was, sorry, remind me again, what was the second one?
ROE.
The ROE for us, and again, my best proxy, I always go back in time, right? There is a direct correlation between your ROE, your net profit margins, and your return on assets, right? It is mathematical. You can almost work it out.
Yeah.
At these levels of net profit margin, 27% is the number. The moment we start dipping below the 4%, I think probably because of the 2022 number. When we went back to the COVID levels where our net profit margins were probably 3.5% or 3.4%, we were 18% ROE. That is the correlation. I do not think our net profit margin will go to that level next year, definitely not. Probably we get closer to the 25%, 24% mark towards the end of next year if the rate cut starts to happen, but not lower than that. All these are quite healthy numbers in my view still, in terms of shareholder return.
Thank you very much. That is great. Thank you.
Thanks, Aaron. Our next question comes from Fredrik Nyh . If you would not mind unmuting yourself and asking your question.
Hey, thank you for taking my question, and well done on the results. I have just one question about the disclosure that you provide on your customer financing slide, where you show the breakdown across loans by sector and also the retail book composition. Historically, loans to individuals have largely matched the retail financing number. However, this quarter, we see that loans to individuals is about AED 5 billion larger than the retail gross loan. I wanted to know what explains the difference between those two numbers. Is that due to a change in classification of some of your loans to corporates, for example? The reason I ask that is because this AED 5 billion difference seems to be one of the main drivers of your strong quarter-over-quarter loan growth performance. Thank you.
In the financial statements, there was some reclassification in December. That has resulted in an anomaly. The first quarter data is actually correct. If we were to compare apples for apples, the increase in the individual under the Ijarah line would be closer to AED 3 billion if we do the reclassification in December. If we do that, then obviously that number would then tie with the retail numbers on slide 19 in the investor relations pack as well.
That's clear. Thank you.
Our next question will come from Waruna Kumarage . If you wouldn't mind unmuting yourself and asking your question. Thank you.
Hi. Good afternoon. Am I audible? Hello?
We can hear you clearly, yes.
Yes. Thank you very much. I have a couple of questions. The first question is on the gross loan yields. I see that since it has crossed the 7% mark, it's almost 7.4%, and I want to know. Hello? What I want to understand is that in terms of ability to pass on these increases and the pain that the customer, in accepting this, from that perspective, do you think what could be the medium term impact on this? Could it result in NPLs, especially since this is related to the personal finance sector? That's my first question.
Secondly, on the Home Finance. This is amongst the retail segment. This was, like you mentioned, the pole position. I just want to understand, was there any initiatives which you launched during the quarter? Secondly, can this be sustained in the next few quarters? Lastly, if I may add a third question. This quarter, the corporate took a back seat. Going forward into the rest of the year, do you think corporate demand will return, or do you think the retail will drive the expected loan growth for the year? Thank you.
Okay. Thanks, Waruna. First question on the net profit margin. You mentioned regarding if this could probably impact the clients in the long term. We haven't seen that happening yet. I think, given, as I mentioned, the demographics of our client base, we're watching the situation very carefully, but no stress yet observed on this. The upside always happens, particularly on the financing, which is on a variable basis, because you're able to capture that upside much faster. These are usually the corporate side. No, the short answer there is that we haven't seen any stress on this yet.
On the Home Finance, you mentioned the sustainability of our Home Finance book. ADIB has always been very strong in Home Finance, but I do have to say with a lot of pride that we have really taken the market by the head. Quarter one has been phenomenal for us in Home Finance. I think we had record bookings in Home Finance. What did we do different? I think it's an element of, again, we had a lot of campaigns happening. We had a very targeted approach in terms of developers. I cannot tell you all the recipe, otherwise we'll be picked up, but it is clearly working. All I can tell you is that we will continue to do so, and you should expect similar trends.
Obviously, the economy is helping. I think we have to face it that the record transactions which we're seeing in the property market is allowing all the players to really participate quite efficiently. It becomes a win-win situation for all the players in that specific industry.
Answering your question on corporate finance, sorry, the corporate banking book or the wholesale bank book. Yes, the answer is we are expecting that book picking up quite nicely in Q2, and I'm saying that because I see what I see as we speak today. It will continue as such. Quarter one being a bit slow on that specific segment is not unusual, because what tends to happen is all these corporates would close all their financing needs quite quickly in the last quarter of the year. By the time you start building the pipeline again, building the needs and converting them, you're already in Q2. I think it's just a seasonal impact and going back in time, it's always been the case in Q1, and actually the market as well. We're looking at the market. I think it's not very different from what we've seen here as well.
All right. Thank you very much.
That is all the questions we have on the line currently. If anyone does have any more, I will just give you a short opportunity to raise your hand or press star nine if you are dialed in by phone. Otherwise, is there any closing remarks from the bank which you would like to make?
Thank you everyone on the call. If there is any follow-up question, as usual, we are available to take your calls or email. Thank you, and hope to see you in the next quarter. Have a lovely afternoon. Thank you, guys, as well. Okay. Have a lovely afternoon. Thank you, guys, as well.