I will now hand the call over to Janany Vamadeva from Arqaam Capital to begin. Please begin when you are ready.
Thank you, Maxine. Good afternoon, everyone, and thank you for joining us today. This is Janany Vamadeva. On behalf of Arqaam Capital, I am pleased to welcome you to Abu Dhabi Islamic Bank's Q3 2023 earnings conference call. I have with me here today from ADIB management, Mohamed Abdel Bary, the Chief Financial Officer, Ahsan Akhtar, the Group Financial Controller, and Lamia Khaled Hariz, the Head of Public Affairs and Investor Relations. Without any further delay, I now turn the call over to the Head of Investor Relations. Lamia, over to you.
Thank you, Janany, and 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 and all our financial disclosures are currently available on the IR section of our website and on our dedicated IR app. The agenda of today is pretty much consistent with the previous quarters.
Mohamed will go through the key highlights of the quarter and for the first nine months. We will also give you a quick update on our strategic progress, and he will go into a detailed analysis of the financial performance of the quarter. We will then open the floor for some Q&A, and he will give an update and guidance for the rest of the year. Mohamed, over to you.
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 yet another strong set of results, with net income for the first nine of 2023 reaching AED 3.75 billion, which is an increase of 53% year-on-year, and which has already surpassed our full year net profits for 2022. These results were driven by strong revenue momentum, which was up 48%. Our return equity expanded by 6.8 percentage points, reaching a high of 26.4%, which is higher than we expected and exceeds our guidance of above 22% for the full year.
It is worth mentioning that in the third quarter of 2023, our net income growth was also quite impressive at a 41% year-on-year, and that is compared to the third quarter of 2022. Moving on to the next slide, Lamia. Our strategy is built on four key pillars, split into continuous innovation, segment focus, digital excellence and sustainable future. I will provide a progress report on each of these on the next slide. We are on slide number seven. Under continuous innovation, during the last quarter, we rolled out several projects.
Let me just talk about a few of them. One is the salary campaign, cashback campaign, a new cashback card, introduction of digital onboarding for business banking and the expansion of remittance programs to new corridors. Development of all the projects gained good pace in the third quarter of 2023, and we are quite happy with the outcome so far. We have also welcomed around 157,000 new customers, of which 52,000 were newly in action in the last nine months. We maintained our strong relationship with customers, keeping our customer ratio now crossing the 1.5x.
From a wholesale bank perspective, we have grown our financing book by approximately 7%, and we have grown retail assets by 14%. Our digital mobile app continues to be widely used and the highest rated app on the store. On the ESG front, we maintain our position with a single A MSCI ESG rating, and we finalized our ESG strategy with new sustainable finance targets. Moving on to some of the key financial highlights. As mentioned, we are reporting AED 3.7 billion of net profit up 53% year-on-year. Very happy with the driver, which is driven by basically revenue growth of 48%.
Our ROE, I mentioned at a 26.4%. Now, the important one, which we will talk about also later, is our Cost-to-Income Ratio has continued to improve, reaching now 32.6%. If I take you just two years back, this number was close to 48%. Moving forward, slide number 10. On the income statement, as you can see on the top right chart, the key driver of profit growth has been on the funded income side, which was 61% up year-on-year. But we have also seen good contribution from non-funded income side. From a segmented perspective, both retail and wholesale bank has contributed quite positively to the growth in net profit.
Net profit from associates and subsidiaries was AED 149 million. Let us move on to slide number 11. On the funded income side, as mentioned, 61% up year-on-year. In terms of performance by sectors, we have seen some good improvement in margins, predominantly on the retail side as well as on the wholesale side, really capitalizing on the growth in the interest rates in the market. On the funding side, we have also continued to see benefit from strong non-earning or non-paid liability base.
As you know, ADIB is quite known for its very strong and resilient funding mix. From a non-funded income perspective on slide number 12, the dynamics of non-funded income in the third quarter of 2023 continued its positive trend from the previous quarters, where we have seen it growing 18%. I would draw your attention to the waterfall chart on the top right, which highlights the component of the movement in non-funded income. We have seen investment income growing 16%, fees and commission have grown 24%, FX was quite impressively growing at 21%, and we have seen also some good control over our operating expense.
Which leads us to the next slide on costs. Our cost, it is important just to call out that because for us to do a like- for- like comparison, we have taken out the impact from Egypt consolidation this year and last year, and we have normalized some of the one-off, which show that on a year-to-date basis we are growing cost 6%. But if I compare to quarter three to quarter three of this year, actually the cost has been flat, which is quite impressive given the inflationary environment and as we continue to invest in our digital platform. Moving forward on slide 14, impairment. Cost of Risk is comfortably at 50 basis points for the nine months 2023.
As shown on the top left chart, the net impairment charge for the year increased by 62% year- on- year. Again, if one would normalize for the impact of Egypt, it is an underlying growth of 16% year- on- year. That is quite acceptable given our growth in financing assets as well as some of the overlays we have taken. Moving forward to slide 15 on non-performing financing. I think that is a very good story where we probably need to pause a bit, is that we did promise in the past quarters that we will deal with the non-performing asset ratio.
As you can see, we have fulfilled our promise. We are bringing it down to sub 7%, so we are now at 6.6%. This trend will continue on the back of active management of our non-performing assets, whether it is aggressive recoveries as well as writing off some of the legacy exposure. On the balance sheet side, the bank reported a 25% balance sheet growth year- on- year. If one would look at it from a year- to- date perspective, we have grown 9%. Sorry.
25% year- on- year growth resulted from 15% growth in financing, as well as a 21% growth in our investment/Sukuk portfolio. If one were to normalize again, because Egypt on its own has grown, however, due to the FX devaluation, you have seen it reducing by approximately AED 2 billion. So on a constant currency basis, actually, we have grown our financing book by 6%, which is trending quite nicely towards our full year guidance for the year. Moving on to slide 17, the financing book. I mentioned the underlying growth of 6%.
That is important because this is really showing the underlying business momentum. If even I would take into consideration the FX deval impact of AED 1.7 billion, it is still a 5% growth year- to- date. Moving forward, let me. On the investment book, we have grown, as I mentioned, our book by 18%. It did slow down a bit in the last two quarters. Not surprising given the external environment and where rates are today. But we are maintaining our position of ensuring that the portfolio is predominantly investment grade.
On the deposit side, deposits went up 10% year- to- date to AED 151 billion. The contribution has been on STIs, Wakalas, and CASAs. Now, the impressive part we need to call out is that in an environment where rates are where they are, we have still managed to grow our current account and saving account book by 6% or almost AED 6 billion from the beginning of the year. That is driven by our success in terms of opening new accounts, as mentioned, 157,000 accounts, the targeted campaigns we have been running, and accordingly, we are getting the benefit of this very efficient funding mix. Moving forward on our capital position.
Capital position has remained very healthy. We are reporting a CAR ratio of 18% and a CET1 ratio of 13.4%, which is higher than same time of last year. If one would look at it, we were at 12.8% same time last year. We are ahead 13.4%. That is important as we continue to build our CET1 to give us optionality at year-end when we start deciding on some of the distribution elements in alignment with the Board and the Central Bank of the U.A.E. The last slide I really would like to talk about is our outlook and guidance. Net financing increased, as I mentioned, by 6%. We are really within our range of meeting our 5%-8% target as promised to the market earlier on.
Net Profit Margins, we are currently at 4.48%. We promised 4.5%. Clearly, we are trending nicely towards that. The one thing which I think will be quite important to note is that the third quarter and hopefully also the fourth quarter will be quite high, which will give us some really good tailwind as we enter the next year of 2024. Cost of Risk at 50 basis points, very much in line with target. I do expect us to really fall within the range of the 55 basis points- 65 basis points, again, on the back of financing growth, but also as we watch carefully the performance of the book. Finally, on Cost-to-Income Ratio, we did say we will be below 35%.
We are at 32.6%. I see that success continuing. Similar to the comment I made on net profit margin, as we open up for next year, because that is a year- to- date number, I believe that we will probably show the market a number ADIB has not shown before. I guess with that, because return equity is quite self-explanatory, when we spoke about the 26.4%, we said above 22%. It really reflects ADIB's ability to drive capital accretive business. We are not only depending on balance sheet activities, but we did promise the market that we will diversify our income sources. We have done that successfully, and the test of that is the ROE, which you see in front of you on the slide. With that, I am happy to open up for any questions.
We are ready to take questions now.
Thank you.
Yes.
Thank you. Of course, if you'd like to register a question online, please click the raise hand icon on your screen. You may also submit your question in writing via the Q&A chat box. Alternatively, if you've dialed in via the telephone lines, you may dial star followed by one on your telephone keypad now. Our first question comes from Shabbir Malik of EFG Hermes. Shabbir, your line is open. Please go ahead.
Hi, can you hear me?
Loud and clear.
Yeah, we can hear Shabbir. Yeah.
Yes. Thank you very much for the presentation. My first question is, in non-interest income this quarter, there seems to be a one-off. If you can maybe please elaborate on the drivers of that will be pretty useful. My second question, if I look at your NPA ratio, nice downward trend that is visible there. I think you've mentioned that there was, partly driven by write-offs. If you can elaborate on that, is it one account specific or is there more than one account that drove that improvement?
Any color on that would be pretty useful. Thirdly, from a deposit point of view, we've seen growth in CASA deposits. You've talked about attracting new customers. Is it largely driven by quality of customer service, or are there other incentives which are drawing those customers to bank with you? Maybe finally, on the margins, you said you expect to end this year NIM at a higher level. Do you expect competitive pressures to start weighing in more in 2024? Is that a scenario that could play out, in your opinion? Thank you.
Thank you, Shabbir. Four questions. Please, if I miss anything, please do remind me. The first question was on whether we had any one-off in Q3. There was a one-off. It's not material. I had seen your report. I think that it's not the AED 100 million you spoke about. We have a one-off I would classify closer to AED 40 million-AED 45 million, and that's on the back of a sale and buy transaction within our Burooj entity, where we recognized some gain on some fixed assets. So it's monetizing. As you know, Burooj holds investment property, and this specific asset was sold at a nice gain given where the market is today.
That's around the AED 45 million or so. The other income is just a smaller attribution, and we can maybe share with you some of the details. But there, I would not classify them as one-off. They will be recurring as well in Q4. That is only one-off. On terms of the NPA, the reduction in NPA to 6.6% is a factor of NMC specific as well as a wider strategy. There is a list of non-performing assets which are being actively pursued.
Some of them have been cured in Q3 and more will be cured in Q4, hence my optimism that this number will continue to improve. The one big NMC in Q3 is NMC. So we have taken NMC off our NPA book given the latest development which happened on this NMC . I am not sure how much of that is public knowledge, but there is an exit route for all the debtors who are holding NMC exposure, and hence we were able to take off the portion which is provided for.
Hence, we actually expect in Q4 to make some money once we are able to put a value on the exit of that specific exposure. That is on NMC. In terms of the deposits, the driver of the growth in current account and saving account is coming from a few factors. One is the number of accounts which we have opened. Sorry, can you please go on mute if you are not talking? Sorry, there is a bit of background noise.
Sure.
Yeah. Sorry for that. There is accounts which we opened. The 157,000 had definitely contributed to that. Our active campaign, which we have done predominantly on the salary cashback, has been a huge success. We have seen our onboarding, our cost ratio almost triple in the past few months. And then also our mobile app, which is, I believe, market leading, has led to that, and this links to the customer satisfaction point. So all this combined, we are able to really build on the CASA balances and at a time where rates are quite competitive and everybody is very price sensitive in terms of getting some profit returns on their deposits.
The last point was on the Net Profit Margin. We are reporting 4.5% year- to- date Net Profit Margin, which is a combination of a gross yield of close to 6.6% and the funding cost of 1.97%. We believe that Q4 will still continue to show an improvement because, the cycle of our portfolio repricing is coming to, I would call it an inflection point, given that now for the last 12- 18 months, we have seen these rate hikes. What it means is that as we enter into next year, the Q4 numbers will carry forward in Net Profit Margin, and I believe we will be very close to the 5% as we enter next year.
We do not believe that any interest rate movement in the market will have a significant negative impact on us next year. The outlook is that there won't be much reduction next year as per the Fed. The market yield curve is factoring in a reduction July 2024 onwards, but even if that would hold true, it will still take probably us into 2025 before we see any kind of impact, because the portfolio is built now at higher rates and the vintage at lower rate books are coming off our portfolio. I don't know if we answered all your points. Happy to elaborate on any of them.
No, that's very useful. Just going back to your point on NMC , is this scope for potential recoveries from that going into the fourth quarter once, whatever that deal is finalized?
That is the intention, and that is the ambition. Because the benefits for ADIB, and I speak only for ADIB's case, is that we've provided almost at 85%, and we've actually topped up to close to 90% during this year. So, the likelihood of a recovery is quite high, because if one would put an exit value on that book, I would say it's probably close to $0.25-$0.27 to the dollar.
That's pretty useful. Thank you.
Thank you.
Thank you. As a reminder, if you would like to submit a question on the call today, please dial star followed by one if you have dialed in by the telephone line. If you have joined online, please click the raise hand icon on your screen, and you may also submit your question in writing. Our next question comes from Aaron Armstrong of Ashmore Investment Management Limited. Aaron, your line is open. Please go ahead.
Hi. Thanks very much for taking the question. Can you talk a little bit about the quarter-on-quarter trends in NIM, please? I think you give a, sorry, a Net Profit Margin. I think you give a nine-month number in the presentation. Could you talk a little bit about Q3 versus Q2, and then break that down between yield change and Cost of Fund change, and then kind of some context around Q4 as well, please, if possible?
Sure. If one would look at the Net Profit Margins quarter-on-quarter, we had reported up to the third quarter, a number of approximately 4.6%. That is this third quarter on its own. If you go back to the half one number, we were closer to 4.4%. That's the half year number.
Yeah.
Quarter three on its own is 4.6%. Hence, as we go into Q4 as well, the expectation is that this number will continue to rise. That's why the point I made is that we are probably quite optimistic that as we enter next year, we are going to be very close or shy of the 5% as well, which I think is again, a record for ADIB's ability. Your question, where is it really coming from? I can tell you is that the doors for us are opening much faster than anyone else in the market, because of our funding mix. The funding structure is quite resilient and does not move up as fast as the ability to reprice on the asset side. It's shown on the slide where we are hitting a six-
Hi. Sorry, I've lost your audio. I don't know if you can still hear me.
Sorry, at which part did you lose me, Aaron?
Apologies. I think you were just starting to explain how the funding mix structure is resilient, and you repriced assets faster.
Fantastic. Sorry. Okay. The benefit we have is that our funding structure is quite resilient. If you see, given that almost 67%-68% of our funding mix is coming from current accounts and saving accounts, hence the price sensitive portion is not very big, it's 30%-32%. Accordingly, you will see that the increase in funding cost moves much slower than our ability to be able to fund on the asset side.
One point I would like to call out is that the 1.97% you see there's a big chunk of it actually coming from Egypt because the funding cost in Egypt is quite high. Here, they're also better, but the U.A.E. on its own, we are funding at 1.1%, which is, I think, probably, if I wouldn't say one of the best, but probably the best in the market in terms of ability to create funding sources.
That's great. Thank you. Maybe one follow-up from me, please, if that's okay. Just on the repricing side, could you give an update on the speed of repricing on customer financing? Is that interbank rate linked? Does it reprice every three months, six months? How much of it is mechanical versus negotiated? Just on the repricing and frequency.
Sure. At the portfolio level, I would say probably 45%-50% would have been repriced in one year. The mix is as follows. If one would look at our portfolio of approximately AED 112 billion, the wholesale bank on its own there is around AED 40 billion, and that is on an automatic repricing every three months, the entire book. That automatically reprices upwards. Coming to the remaining retail book, which is approximately AED 60 billion-AED 65 billion, you would have home finance of around AED 22 billion, and that is a mix between variable and fixed.
But today, the majority is on a variable basis, where the client opts for one year fixed and then moves to a variable component. That also reprices quite quickly. The AED 18 billion we have in personal finance and auto finance, these are fixed rates, and they behave their life for both approximately three to three and half years . That is why the average of the whole portfolio, 45% by year one, probably in year two, you would have 67%-69% completely repriced, and the rest beyond two years. Hence, I would say that we are now at an inflection point where majority of our book is now benefiting from higher rates and the vintage of lower rates are starting to come off.
That is great. Thank you. On the funding cost side, are you paying zero on CASA? Completely zero?
Oh, yeah. Current accounts are paid at zero. Saving accounts, we are paying approximately 30 basis points, which we call profit distribution.
That's great. Thanks very much for taking the questions. Thank you.
Thank you.
Thank you. We'll now move on to the written questions. The first is as follows. Competitive pricing and low pass-through to borrowers, it seems that asset yield expansion may continue to soften in the coming quarters and risk of Cost of Risk to pick up as rates stay higher for longer. Does that mean your margin may not hold at this level into 2024? Your CASA held very well despite the elevated level of interest rates. Do you see that most of migration in the industry has happened or there could be more in the fourth quarter as rates stay higher for longer?
I start with the second part. I do believe that there could be still a bit of uptick in terms of the cost of fund. It's very natural because we take the client's interest also very seriously, and it's only fair to compensate, particularly our more corporate clients and price-sensitive clients with market rates. I do think that there will be some uptick there, but not significant. The ability to reprice on the asset side, on the financing side, I think will still continue to happen. But, as mentioned, the 6.61 you see there is the year- to- date number.
If you were to look only for the third quarter, this number is quite bigger. Going into next year, I think it will stabilize at this level because majority of the book would have repriced. Accordingly, we are also quite sensitive in terms of ensuring that we don't overburden our clients, even if you have to hold back some of the pass-through on the asset side. Because at the end of the day, if you push your clients too hard as well, it will have an impact for you down the line in terms of your ECL and delinquency.
Perfect. Thank you. The next question, what is your effective tax rate expectation for 2024 and 2025?
We're still working on the math. We believe at this point it's probably going to be 11%. Please don't quote me on this number because we are still going through the exercise. We still have a few more weeks to sort it out. But we believe given the structure of ADIB's financial and balance sheet, the effective rate, we will move from a quarter rate of 9%, probably to an effective rate of 11%. Only once we start really applying all the rules and regulations in terms of applying tax, then we will have a better number. But for now, I would probably recommend using
Perfect. Thank you. Our next question here, can you please provide a guidance for 2024? Can you please shed some light on losses on amortized cost of securities? Do you have any guidance for dividend payouts in 2023?
For 2024, I think we do not usually provide forward-looking statements into next year. But I believe from the story you have seen so far, ADIB is a very predictable, sustainable bank building resilient portfolios, and hence, it is not a very volatile performance. If you use that as a proxy, you can probably assess how next year would look like. But at this stage, I really do not want to comment on next year's numbers till we are in a position to maybe make some more formal disclosures on that. What was the second part of the question?
Yes, of course. Do you have any guidance for the dividend payout for this year, 2023?
Yeah. Good. Okay. Again, I think the policy in terms of dividends has been very, very consistent over the years. The bank has always been saying the lowest part was probably 38.9, 39% of net profit. The highest we have reached was 50%. By the end of the year, once we finalize the numbers, we will make a recommendation to the Board and the AGM, and with the approval of the Central Bank, we will recommend the number taking into consideration shareholder interest, but also, our ability to create internal equity to support future growth into next year.
Perfect. Thank you. As another reminder, if you wish to submit an audio question on the call, please click the raise hand icon on your screen. If you have joined by the telephone lines, please dial star followed by one. Alternatively, you can submit your question in writing. We have three questions here. What prompted you not to raise a Net Interest Margin or ROTE guidance for the full year? Second, your loan growth this year is lagging some of your local Abu Dhabi peers. Is it because of loan mix or is it something else? And the third, how big is the Saudi growth opportunity for you?
All right. We did not change the guidance because I think we are at the guidance. When we Net Profit Margin guidance is at 4.5%, so around the 4.5% number. I do not think the year-to-date number will significantly change. When I mentioned that there is an upside, it is because of the Q4 number on its own, which will carry us into next year. But for the full year guidance, I would really like to keep it at this level for now, and we will obviously update the market if there are any further changes. In terms of our financing growth, we have grown year- to- date close to 6%.
I believe that is a fairly healthy number to have. Year- on- year, we have grown 14%. But we have always, from the very beginning, indicated to the market that our guidance would be 5%-8%. We have not changed our underwriting standards or risk appetite. We follow a very strict rule in that front, and it has worked very well for us. Cannot comment on the other institutions, what they announce, but this is our guidance. But if I were to look at the Central Bank data in terms of the financing growth in the sector itself, I believe the announcement was a 5% number. So we are actually very much in line with what the average market has reported.
Thank you. Could you please elaborate on why other income is so high for the period?
Okay. The other income is a question answered when Shabbir asked. There is an element of AED 45 million or so of a one-off transaction coming from our Burooj entity, from a divesture of an investment property or investment assets.
Perfect. Another two questions here. The first, how big is Egypt as a percentage of net profit? Going forward, could you give your view on how you expect NIMS to trend between the domestic business and the Egypt business, especially as rates eventually come off? The second, on asset quality, NPL has decreased, but so has the cash coverage ratio at 70% in Q3 2023, which screens relatively lower versus some of the peers. Can you please explain why you remain?
All right. So I think the first one was Egypt. Egypt contributes around. So out of the AED 3.75 billion, we had AED 300 odd million or so coming from Egypt. So that is probably, 8%, no, 9% contribution from the Egypt franchise. In terms of our commitment to Egypt, I think it is a very important market for us, and we continue to be very committed to the market.
The bifurcation between Net Profit Margin between us and Egypt, so clearly. The net actually is not very different. The main differentiator is the funding cost, whereby clearly, given the Egyptian pound funding and where the rates are in Egypt, it is much, much higher, but at a lower volume level. We are at 1.1% funding cost in the U.A.E. The group combined is at 1.9%. The delta between the 1.1% and 1.9% is basically Egypt's contribution of the funding cost.
Perfect. Thank you. What is the level of write-off during third quarter that helped trim the NPL ratio?
Yeah. The amount which we have written off is approximately AED 850 million-AED 900 million.
Thank you. Can you share some insight about amortized cost of securities?
Our securities are predominantly investment grade. The only, probably, element there would be if there is any pressure points. We do hold Egyptian dollar Sukuk. Given the downgrade, we have taken the impact on that. For us, in the bigger scheme, it is not big. We are holding AED 23 billion of investments, and Egypt, which is I think the only one which now is not investment grade, is really a fraction of that number. It does not really create any materiality for us.
Thank you. On asset quality, NPL has decreased, but so has the cash coverage ratio at 70% in third quarter 2023, which screens relatively lower versus some of the peers. Do you see any potential segments where there could be some asset quality pressure? Do you want to build this cash coverage level higher?
Yeah. I think it is natural. When you do some write-offs and you utilize some of the provisions you have, your provision coverage ratio will naturally decline. It is still at 70%, so we have not moved far away from where we are. Do we want to build it? We are selectively building on that coverage ratio. But the comfort we are getting is that including our collateral value after haircut, we are still at almost 131% of coverage. Having said that, we will continue to be looking at that number and building it over time.
Thank you. We currently have no further questions registered via the call. I will hand back over to the management team for any further or closing remarks.
Thank you.
Thank you. Thank you very much, everyone. As usual, if you have any follow-up questions, you can always send them via email or call us. Thank you. Have a-
Thank you very much.
Bye.
Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.