Hello and welcome to the First Abu Dhabi Bank Q4 Full Year 2022 Earnings Call and Webcast. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on the telephone keypad, or you can write your question into the Q&A chat box. I will now hand over to your host, Abhishek Kumar, to begin. Please go ahead.
Good afternoon, everyone. Thank you for joining us today to review FAB's financial performance for the year 2022. This is Abhishek here from, Deputy Head of IR at FAB. Unfortunately, Sofya Al Bouri , Head of IR, is not feeling well and apologizes for not being able to hold the call as usual. As usual, all our financial disclosures are available on the dedicated IR section of our corporate website, as well as on the IR app. Today's call is hosted by our senior management team, represented by Karim Karoui, FAB's Group Head of M&A and Interim Group CFO, Pradeep Rana, Group Chief Risk Officer, and Rajesh Deshpande, Acting Group Chief Credit Officer. They will be here to answer your questions at the end of this short presentation as well. Without further ado, I'll pass it on to Karim for introductory remarks.
Thank you, Abhishek. Good afternoon, everyone. Thank you for joining the call today. As you would have seen in the news this morning, we have appointed Lars Kramer as our new Group CFO, and he will be joining us in May this year. Lars has extensive experience in our industry and joins us from ABN AMRO, where he has been CFO since June 2021. Previously, he was Group CFO at Hellenic Bank, and for almost 20 years, worked with ING as CFO in various parts of the businesses. We very much look forward to having him on board with us soon. In the meantime, and as James had announced his retirement, I am assuming the role of Interim Group CFO, in addition to my current responsibilities as Group Head of M&A until our new CFO joins.
I will now run quickly through some strategic updates and key highlights before handing over to Abhishek for the financial review and before opening for the Q&A. In slide four, you will see that FAB achieved another standout performance in 2022 with record net revenue and record net profit, despite ongoing global market volatility. This was driven by strong underlying business performance in a rising interest rate environment, combined with prudent risk management and discipline amidst ongoing investments. We witnessed positive momentum across all business buying sources of income, enhancing the revenue contribution of our international operations to 24% from 18% from a year ago. We are very pleased with the excellent progress that was made against our strategic priorities, creating significant shareholder value.
Some of these achievements included monetizing a 60% stake in Magnati, supporting regional capital markets and a dynamic equity market, completing the integration of Bank Audi into FAB Egypt, advancing our ESG strategy and our transformation agenda. In light of these results and the group's capital position comfortably above regulatory requirement and our internal threshold, the board is recommending a cash dividend per share of 52 fils compared to a cash dividend of 49 fils in 2021. This implies a total cash dividend amount of AED 5.7 billion, which is 7% higher in than 2021. Despite a more challenging global outlook, FAB's scale, leading market position and FAB's strength position us very well to pursue our growth journey and to drive further value creation for all our stakeholders.
Before we cover the financial performance, I would like to spend a few minutes talking, taking you through our group strategy and our medium-term strategic priorities. Overall, our. That's in slide, you can see it in slide five. Overall, our ambition is to create a future-proof FAB, and we believe there are key structural market shifts that favorably support this ambition. This includes the evolving and growing strength of the GCC as an economic heavyweight, a favorable interest rate environment, a healthy pipeline of capital markets activity across lending, M&A, and IPOs. And the increasing sustainability and ESG needs of our clients. Within this evolving environment, our long-term aspirations as a group are clear and can be summarized in three points.
One is to be the banking powerhouse, driving regional economic growth and diversification. Two, to be the most trusted partner for our clients wherever we operate. To be MENA's most innovative and agile financial institution fit for the future. These aspirations truly reflect our deep roots and heritage. As well as our unwavering commitment to sustain our track record of superior and sustainable shareholder returns. Moving to slide six. For us, in order to meet these aspirations, we have been focusing and will continue to focus on three strategic priorities over the medium term, which you can... This means strengthening our position as the regional leader in our chosen segments and markets by diversifying revenue streams, expanding capabilities, enhancing cross-sell opportunities, and unlocking value through strategic partnerships. Two, catalyzing the change.
We want to accelerate investments in key areas, including digital capabilities, leveraging data analytics and AI, investing in systems to reinforce operational resilience, as well as cultivate a high-performance driven culture across the group. Three. The third priority is to enhance connectivity across our footprint, positioning ourselves as GCC plus Egypt's preferred financial gateway and a leader for cross-border banking flows, while also expanding our presence in priority markets through organic growth and as well as M&A. I know many of you would have questions about FAB's inorganic growth strategy following recent media reports of an exploration of a possible offer for Standard Chartered.
While we cannot expand further on this specific topic, as we are bound by the restrictions of the UK takeover code, I would like to emphasize a few key points as regards to how M&A features in our strategic aspirations. One, growth is at the very center of FAB's vision, and inorganic growth is undoubtedly going to be part of how we achieve growth and diversify our revenue streams. We are constantly monitoring for external growth opportunities to assess how they could fit with our growth strategy and meet multiple criteria, including diversification of our geographic and product offering, growing profitable businesses and more importantly, deals that make sense for FAB's shareholders. In summary, FAB's growth strategy is intact. FAB is a disciplined investor, and we will only proceed with transactions that benefit FAB and its shareholders.
With our priority being to create long-term value for our shareholders. Our key enablers to support our strategic priorities, investing in people, investing in technological innovation to support business growth and optimal risk, an optimal risk appetite, and strengthening our ESG leadership position as we continue to embed sustainability in everything we do, nurturing culture and talent. In slide seven, and just spending a little bit of time on ESG. Although it's a busy slide, it's important that we show the significant progress that has been made against our sustainability targets in the first year of launching our ESG strategy. I will let you go through it in due course, but just to call out a few points.
Over $9 billion US dollars equivalent of sustainable financing were facilitated by FAB during 2022, in line with group ESG targets our strategic focus to help clients navigate the energy transition. Half of the group's funding issuance in 2022 were in green format, we've significantly expanded our green product suite across the group. On diversity, we are pleased to have increased female representation at senior management, while also enhancing diversity on the board of the group's subsidiaries. ESG is a top priority for the group, with 2023 being officially the year of sustainability in the UAE, FAB will continue act as a pace setter in this area. If you have any specific questions on this topic, Shargiil Bashir, our Chief Sustainability Officer, is on the call to attend any queries.
Moving to slide nine. As I mentioned earlier, it's been a record year for the group. full year net profit of AED 13.4 billion, which is 7% growth year-on-year, and group revenue of AED 23.9 billion, which is a 10% year-on-year records for both. This was driven by strong underlying momentum across all business lines. The benefits from rate hikes as well as gains on sale of stake in Magnati. We've also further diversified revenue streams with double-digit growth in international revenue. The completion of our integration activities in Egypt expected to help accelerate that growth going forward. In terms of balance sheet, it is very strong. Liquidity position is strong with the LCR at 154%.
We ended the year with a CET1 above 13.5% before proposed dividend. Which is within our guidance, thanks to risk-weighted assets optimization and earnings generation. In slide 10, you can see that we have met or in some cases, exceeded elements of financial guidance for 2022. We delivered what we promised, which is a very positive outcome, which you can see here. On the loan growth +12%, cost of risk 62 basis points, largely below the 80 basis points committed. 98% of provision coverage and 13.6% CET1 above the 13.5 we guided for the year 2022.
I will now hand over to Abhishek to take you through the remaining slides.
Looking at slide 11, here we are gonna talk about the year-on-year net profit bridge. As you can see, net profit was up 7% year-on-year or AED 880 billion amounting to that. This was driven by strong activity levels across all the business lines, coupled with the benefits from the rate hikes, the gains on the Magnati stake sale as well. Which, you know, all of this helped to offset the softer trading gains that we had worse in last year, the exceptional trading performance that we had in 2021. Operating costs are higher mainly in reflecting the integration in Egypt, some of the legacy system write-offs that we took in Q4, roughly around AED 260 million.
This is in line with our technology transformation strategy that we are undergoing. Plus, continued investments into the business in terms of strategic and digital investments to drive future efficiencies. Impairment charges were higher by AED 181 million, reflecting prudent provisioning, particularly in the last quarter, we have taken AED 1.1 billion. Within the SNC also fees and commissions, you will see the negative amount is primarily due to the deconsolidation of Magnati, which was deconsolidated last year. Moving on to slide 12. Here the net profit bridges between the sequential Q4 performance versus Q3. Within this, you can see that net profit was down AED 2.5 billion. Net profit was AED 2.5 billion, down 16% sequentially on a reported basis.
When you take out or when you exclude the MTM, negative MTM on the real estate that we have taken in Q4 in terms of conservative asset valuations, that percentage would be something like 5% only. During the quarter, we saw very strong underlying revenue growth, almost AED 750 million or AED 745 million, to be more precise. Mostly, again, driven by NII, AED 556 million. You have fees and commissions, which were again, we had some good growth in our Investment Banking segment. Plus, you had some good gains on the FX as well as good gains on our equities trading portfolio as well. All of this has given us the headroom to take several precautionary measures to ensure that we enter 2023 in a strong position.
These include, like I said, alluded earlier, impairment charges of AED 1.1 billion in the quarter. In terms of legacy systems, we have written off almost AED 260 million in that. Plus we've taken a relative conservative view on the valuation of real estate. As you can see, the AED 327 million in blue small bar on the Q2, Q4 2022 impact. AED 327 million of negative MTM. Moving further and to talk a bit more about the businesses and how they performed. Underlying revenue performance, as you can see, you know, sustained levels of activity across the business lines in general. During 2022, our four core businesses saw strong volume growth driven by healthy pipeline execution in a relatively favorable regional backdrop and increased consumer spending.
As you can see, loan and deposit growth is there on the bottom of the slide. Across businesses has been largely positive. If you look at the balance sheet growth at the bottom left-hand side of slide 13, you will see that CCD is up for 44%, Investment Banking was up 2%, and even consumer banking after a period was up +4%. Revenue growth is there almost across the segments in general, except IV, where we talked about the year-on-year gains that we had exceptional trading gains that we had last year. In consumer banking, it's primarily due to deconsolidation of Magnati. In terms of the head office, the variance is AED 1.3 billion, mainly attributable to the classification of FABMISR under Echo.
Plus a strong FX gains, as well as one-offs associated with the accounting and full integration of the business. Moving on to slide 14 and talking about the balance sheet movements. The high key highlight is simply that double-digit balance sheet growth reflects the strong business momentum that we have been talking about all through the year. Group foundation remains robust across all key metrics. Starting with the liabilities, despite the outflows that you have seen in Q4, for the last five years since the merger. Most of that growth is attributable to the Abu Dhabi government and GREs, but it also includes good corporate related growth, and particularly on the CASA, where despite rising rates, we have seen a 3% growth year-over-year.
In terms of deployment, you can see we have deployed liquidity primarily into loans, investments, the due from banks, while cash balances with CBs have dropped off. This is a reflection of the deposit outflows during the last quarter. The increase in other assets is driven by the increase in valuation of derivative positions on both sides. This is primarily as a result of higher interest rates. In terms of loan growth and despite the run-off of trade loans, trade-related loans and some repayments in Q4, we are finishing the year in line with our guidance of low teens with a 12% growth year-on-year, which is a net AED 850 billion incremental lending. Simply outperforming the market by almost two times, where we've seen 5.5% growth year-to-date on gross credit in, according to central bank data as of November end.
FAB's liquidity profile remains very strong, with a liquidity coverage ratio at 154% and a net stable funding ratio of over 100%. Moving further and talking about further developments in terms of the NII then and the NIM slide. NII was 23% higher year-on-year, reflecting the significant benefits from rate hikes, volume growth and Bank Audi Egypt inclusion. Q4 NII was AED 4.2 billion, up 15% year sequentially, and 39% year-on-year. From the quarterly NIM trend on the bottom of the slide, you can see that NIM has picked up quite notably in the Q4, and this was mainly driven by rate hikes, partly offset by the margin compression due to competition and higher Fed place.
Our asset mix again shows that the mix of average interest earnings and average interest-bearing deposits, where, you know, you can see 31% of interest-earning assets versus 27% last year. All of this has had an overall, you know, mathematical impact on the overall mathematical calculation of NIM. We continue to manage our balance sheet sensitivity dynamically based on the market outlook. As of year-end, a 25 bits increase in rates would result into AED 343 million in NII profits in terms of the interest. You can get more details in note 46 in our financials as well on this. In terms of the outlook for 2023, as always, we will continue to focus on enhancing our Net Interest Income through volume and better pricing.
Margins are expected to improve in line with a couple of further rate hikes in first half of 2023 and perhaps flattering for the rest of the year. Moving on to the non-interest income slide here. Non-interest income for the quarter was AED 1.7 billion, down 8% sequentially. Mainly account, as we said, of the MTM negative losses on the real estate portfolio. Other components are showing good growth sequentially. As you can see, fees and commissions +9% and FX and income, FX and investment income was up 21%, driven by sizable FX gains, healthy client flow and cross-sell activity in global markets, as well as strong trading performance of our equities portfolio. Overall, this brings the non-interest income for the year to AED six and a half billion, down 36% Y-o-Y.
Because of the exceptional trading performance in 2021 that we had. Fees are down 8%, mainly as a result of the recognition of Magnati. If you reverse that out, as you can see, they've actually grown 2% year-over-year. Moving on to slide 17, which is OpEx. Excluding FABMISR costs, what we have done here is we've taken out the whole of FABMISR, whereby Bank Audi Egypt was consolidated starting end of April last year. Just to give a simpler explanation of the increase in the cost year-on-year, we've taken out the FABMISR completely to show you what does the cost growth look like. Within which you can see again, 260 million of that is related to systems, legacy systems write-off.
This I, this, like I said, is part of the ongoing technology transformation strategy that we've been adopting. Further excluding that, the growth, if you look, if you exclude that out as well, the year-on-year growth would be roughly around 8%, which is in line with the growth that you're seeing across the quarters. Overall, main investment is going into systems related infrastructure, depreciation, uplift coming through the investments in technology, and we are confident that these investments will deliver productivity both in terms of revenue and costs. Cost income ratio for the year is just below 32%, excluding the gains on sale of Magnati. Although we all expect OpEx growth to decelerate in 2023 versus 2022, it will continue to reflect investments in our systems and infrastructure with the objective of creating future efficiencies.
Moving on to asset quality. NPL ratio remained healthy at 3.9%, with coverage at 98%. NPL formation during fourth quarter was primarily due to downgrade of a few large corporate accounts in the real estate and contracting sectors. We do not see this particularly as an emerging trend or general deterioration in the creditworthiness of our clients, although we do remain vigilant towards any such signs going ahead into the year. Cost of risk came in at 62 bits for the full year, with higher impairment charges taken in the fourth quarter as a result of prudent provisioning as we build our buffers in the context of a more challenging global macroeconomic outlook. In terms of outlook ahead, FAB enjoys a high-quality portfolio, strong provision buffers and a superior credit profile.
This puts the bank in a very strong position to withstand any deterioration in the credit cycle, which would be caused by a more challenging macroeconomic picture. Further specific guidance can be covered on the cost of risk and coverage will be covered on the guidance. On the capital front, we are very pleased to report that we've seen a 50 basis points improvement in CET1 ratio to 13.6% pre-dividend. This was on the back of ongoing RWA optimization, strong earnings generation, as well as recovery in the AFS' investment results, but partially offset by adverse impact of currency depreciation and devaluations. Capital generation in 2022 overall was strong, although partially offset by regulatory and market headwinds.
We are finishing the year with a CET1 within our guidance and enabling us to increase dividends year-on-year by 7% while retaining sufficient capital to support future growth and transformation. Moving on to slide 20. This is about our strategic focuses. We are constantly shaped by the structural market shifts that we see, the evolving client needs that we experience across the franchise. In the context of a slowdown in economic growth globally that is expected, we do expect this region to continue to outperform on the back of the positive momentum that we see across non-oil economic sectors and the ongoing structural reforms to accelerate growth and diversification. We also expect retail capital market activity to remain sustained with a healthy pipeline in the equity capital markets and an acceleration of initiatives on sustainability, helping our clients navigate the energy transition front.
This leads us into the guidance for next year ahead, and largely it's pretty consistent with the guidance that we gave for 2022 in terms of cost of risk, provision coverage ratio, as well as CET1 guidance. On the loan growth side, we are conservatively targeting mid-single-digit growth and in light of the expected potential expected slowdown as well as strong growth that we have seen this year. To conclude, we've achieved another year of record revenue and net profits, reflecting positive momentum across our core businesses in a favorable regional backdrop and successful strategy execution. We will continue to invest in the franchise to expand our product offerings, strengthen digital capabilities and technology platform. We are entering 2023 with a robust balance sheet formation and a cautious approach, very well prepared to navigate a more challenging global macroeconomic outlook.
With this, I would like to hand over to the operator and open the floor to Q&A.
Thank you. As a reminder, if you'd like to ask a question, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. Please ensure you're unmuted locally when asking your question. You can also type your question into the Q&A chat box. Our first question for today comes from Nida Iqbal from Morgan Stanley. Your line is now open. Please go ahead.
Hi. Thank you for the call. My first question is a strategic question. As you mentioned, inorganic growth is, you know, one of the key things on the agenda for management at the moment. It would be great if you could get some color on what regions or countries you're looking at for inorganic growth opportunities and what are the factors that make these markets interesting for you, and in particular, the business lines that you're looking to develop via inorganic growth. That's the first question. The second question is on the negative mark-to-market on properties of AED 327 million that was taken this quarter, as well as the NPLs that you mentioned were driven by construction and real estate.
I find it quite interesting and I'm a bit surprised given the macro environment is quite strong and the UAE property market is doing very well. Negative trends being driven by property is a bit surprising for me. Any additional color there would be quite helpful, please.
Yeah. Thank you for your, for the questions. On the first one, for us, the we remain the same. You know, our priorities remain the same in terms of organic growth through across the businesses, the products, et cetera. That we... We've been showing this over the past few years. We continue on growing locally and internationally through the products where our strengths in organically. On the inorganic growth, frankly, same thing. I mean, as we stated in the past, we remain focused on the region. We mentioned few countries in the past talking about...
UAE, of course, is our local home market. We talked about Egypt and KSA in the past. We keep the same priorities for us. This is within the framework of being the regional champion and then, okay, our positioning in the region. Plus also we look at the flows in and out the region with through Asia, through Africa, et cetera. We continue on strengthening our position there in terms of. Focusing on the trade flows, focusing on the presence of our clients in the region and outside the region.
We continue on keeping the same priorities for us. This also we, as we, you saw some news in 2021 regarding one bank in Egypt. Basically, we have any opportunity which will help us in the first growth in our key business business lines, like the Investment Banking, the consumer banking, especially the digital part, the private banking. We will always continue on looking at opportunities. Same thing, same thing internationally. Whenever something which will help us have a stronger presence in the areas and then in the target countries and then where our focus areas and then where the trade flows are our business are, we will continue on looking at other opportunities.
Having said that, we will never deviate. You saw what we've done in the past. We maintain the discipline, everything for us is driven by the shareholder returns. Anything which does not add value to our shareholders, we look into it, but at the end, we will not go for it unless it is bringing the value it is expected. I will answer one part of your question related to the real estate. One is on the negative valuations, which you saw in the last quarter of this year. The first one, it is more linked to our real estate portfolio.
Currently, our real estate portfolio has more of commercial than residential, while the residential is doing well, as you rightly said. Given that, we got some negative valuations on some particular areas in the portfolios of real estate. The other part, which is related to the contracting, et cetera, I'll pass it to my colleagues.
Yes. Hi, Nida. Hi, this is Pradeep. Just to give you some more color. The NPLs in the real estate and the contracting sector are from our restructuring portfolio, where we have adopted a more prudent classification. We are seeing some positive momentum in some of these exposures, and may expect to see some recoveries in the next few quarters. At the same time, we have followed prudent provisioning norms by taking overlays on these accounts and adjusting for macroeconomic variables in certain geographies where we are seeing challenges. Rajesh, I don't know if you've got anything more to add.
Sure. Thanks.
Hi, good afternoon.
You know, this is Rajesh. Just to build on what Karim and Pradeep had mentioned. You know, if you look at the real estate sector, that's quite broad, right? You have, you know, the residential real estate and the commercial real estate. Even in the commercial real estate, what we do is you would like to bifurcate between the, that part of real estate which is more associated with the tourism industry, and then you have the commercial, which is with the offices. What we are seeing on an overall basis is that the residential is doing very well. The, the hotels and the other associated real estate with this sector is also doing well. We see some stress on the commercial or the office office buildings.
That's where, you know, we are looking at taking, building our buffers. The other lens which we also have used in terms of, you know, trying to be more prudent is to also look at the, you know, real estate assets which are owned by the GREs or large corporates, and then the assets which are owned by the smaller borrowers. That's where, you know, in certain segments, we've tried to build our provisions on that. Thank you.
Thank you very much.
Thank you.
Thank you. Our next question comes from Waleed El-Amir from Goldman Sachs. Your line is now open. Please go ahead.
Yes, thank you much. Good afternoon. Thank you for the presentation, and great to hear from you, Kareem. A couple of questions from my side. First on the cost base. You kindly unpacked some of the one-offs during the quarter. I just want to get an understanding of how do you see the cost growth shaping up from here. Even if you look excluding some of the integration costs, your cost-income ratio above 30% is significantly above what we are used to with FAB historically. Wanted to get a sense of where you see this cost-income ratio, you know, trending going forward and the kind of, you know, cost growth you see on that, on that front.
Secondly, you talked about, you know, the growth ambitions for the bank. In that regard, you mentioned organic and inorganic both. Where does ROE sit in all of this? I mean, if you see this year you had strong growth, but the underlying ROE obviously dropped, if you exclude some of the one-offs. In that context, how is the management team thinking about ROE? Kareem, you mentioned that, ultimately the focus is on delivering shareholder return. In that context, if you could please, you know, talk about, you know, the ROE aspirations that the group has, both in the short term and the medium term. Maybe a last one is on net interest margin. Has been quite volatile. There was a pickup in the fourth quarter.
Given where you are, how do you see that trending going forward? Thank you very much.
The questions. On the cost base you saw some exceptional items happening during the year. Some clean up also because okay, we've been investing a lot in the technology and then of course, some systems become obsolete, some systems are not after the investment, are not bringing the value. We are putting now more discipline in our investment in technology strategy going forward. That's some of the things which happen. After...
I think after excluding the exceptional items, the integration costs, et cetera, I think if you assume a high single-digit growth in our expenses, it should be a good way of building your models for 2023. When it comes to the growth ambition, et cetera, I think 15% return on equity should continue on being our target for the future. This is where we see the value, which or the value for our shareholders.
Of course, I mean, for us the way we've been, we have always behaved is that we built the story around the organic growth. We are improving on in all. I mean, we had good reasons to be ambitious, to be optimistic about the growth of our in the main business lines of our of our business. But at the same time, now we always see that exceptional items come sometimes that it's a booming IPO market, sometimes it's a real estate market. Sometimes we see that we have a good asset which has value, be it in real estate or any of the subsidiaries, et cetera. We will continue on doing that.
If you look at the core business over the past three years, it's a growing story. The trend will, we expect that the trend will continue, we will never say no to an opportunity which will come, we will continue on having this opportunistic mindset. Of course, the 15% is what we will be always looking at. In terms of for the NIMs, yes, you saw that maybe, fourth quarter was better than third quarter, et cetera, because of the Fed rate hikes. We will continue on seeing the boost happening, let's say, during, at least during the first half of 2023. That's why we are...
Also, frankly speaking, during the discussions which we were having with the board, with the senior management, is that to make more efforts and then put more focus in order to improve the net interest margins. Of course, given the profile of FAB, the excess liquidity we are managing, et cetera. Definitely it is one of our priorities in 2023 to work more on improving the net interest margins, even if it is few basis points.
Thank you much, Karim. That's great. Yeah, just one quick follow-up. To get to a... If I understand correctly, 15% is also where you see the current business, right? The organic business going. If, if that's true, then, you know, if you look at the, let's say the 2022 ROE, it's sitting at around 12.7% underlying. That bridge between 12.7% and 15%, you think it's gonna come from NIM improvement and some cost income improvement? Is that a fair assessment? Because your cost of risk was already below the guidance of 2023.
I think, Waleed, the focus is more on the revenue side. That definitely will continue. I mean, we are good now in executing our strategies locally and internationally. Things are improving. The key focus will be on the organic growth on the revenue side. Definitely if there is some, there are some boosters coming from other areas, God knows what may happen in 2023. At the end, we will continue on doing all the efforts so that organic plus inorganic gives us at least the 15%, which we are in terms of return on equity, which we are looking for.
Great. Thank you so much. Thank you.
Thanks, Waleed.
Thank you. Our next question comes from Shabbir Malik from EFG Hermes. Shabbir, your line is now open.
Thank you very much. Good to hear from you, Karim, on this quarter, on this quarterly call. Thanks, Abhishek. Just, most of my questions have been answered. Maybe just one question. You've talked about inorganic expansion, but if I look at your capital position, although it's, you know, seeing, and the necessary capital, raising the necessary capital for those inorganic expansion. Do you think you will have enough capital internally to kind of make those acquisitions or would you be open to tapping the market for new capital? Thank you.
Yeah, thank you. Thank you, Shabbir, for a very relevant question. You saw our behavior. In general, we are like, before dividend, the CET1, which is the driver here. The CET1 at around 13.5%, post dividend, it goes to 12.5%. Over during the year, we are, I mean, through the accumulation of the quarterly results, we bring it back to that range, which we believe is fine, and again, within the context of giving the returns to the shareholders, maintain the dividend story. At the same time, at the same time, look at the growth components, look at how we are going to optimize the deployment of capital through the risk-weighted assets during the year.
I think at this stage it depends on if there is a good opportunity in terms of inorganic growth. Of course, we have to look at all the aspects of that particular opportunity and then see if we see what's the impact on the CET1. That is one of the most important criteria for us. If it makes sense for our shareholders, we are repeating ourselves, but the discipline is that we have to do it, right? If it adds value to our shareholders, if there is a requirement, we boost a bit the capital to maintain those levels, which are at this stage appreciated by our regulators, by our rating agencies, etc.
We can only afford to do the right thing, and then we will continue on maintaining these levels of CET1.
Got it. Thank you.
Thanks, Shabbir.
Thank you. Hey, Karim, Pradeep, and everyone on the call. It's Naresh Bilandani from JPMorgan. Karim, it's good to speak to you after a while. This feels like our FGB days again, so good to hear from you indeed. Just two questions from me, please. First is on the cost of risk. Could you please share any thoughts on whether we could see any pressure in the cost of risk later in this year once we have the implementation of Corporate Tax in the UAE? Would you see any risk to your guidance in this regard? Just generally, I feel that you've still continued to maintain a level of conservatism on your cost of risk.
This especially stands out when one of your competitors earlier today in the call, they sounded quite positive on the scope for recoveries, potentially in UAE and one of the other markets, but also in the UAE. Just in this framework, can you please share what cost of risk should we realistically look at? I know you generally try to be conservative in your guidance, but realistically, how much cost should we model in for our expectations into 2023? Specifically, if you can throw any risk to this expectation from implementation of Corporate Tax. Generally on cost of risk, that's the first question. My second question is on loan growth.
I think this guidance at mid-single digits is looking somewhat more muted than what I would have expected out of FAB. I mean, in my previous meetings, my understanding was that in the medium term, up to high single digits should still be a good trend for FAB to model through. I'm just trying to understand what has been the bit more conservative. Is there any of Or in detail, that would be super helpful? Thank you.
Good that you are. I see that you are still nostalgic with the FGB story. No, but, frankly, we've done. I think we've done the right thing by doing the merger between FGB, legacy FGB, legacy NBAD, and then the creation of FAB. So far till now, it's an amazing story done through the First Abu Dhabi Bank. We want our ambitions do not stop here and then definitely we will continue with the same pace, which is continue on doing our best, our best to give back the returns to our shareholders. In terms of cost of risk, I am sure.
giving the guidance, maybe the last three years, what we guided for and what we ended up having. There is a gap. It shows our way of being very conservative when it comes to the cost of risk and also to the loan growth. I will give one last comment from my side on the Corporate Tax. I understand your point. Although the implementation will happen, let's say the impact will happen in 2024, but it's a good point
At this stage, we didn't see the, we didn't feel it from the market or discussions with the client, et cetera. We didn't see any signs of nervousness regarding the Corporate Tax impact. At this stage, it's too early, too premature to give some guidance on the impacts of the tax. Pradeep, if you have other additional comments.
Yeah, yeah. Yeah. Hi, Naresh. Naresh, I think you probably know this better than I have because you've been covering that for a very long time. You know, when you look at our cost of risk over the last number of years, it sort of ranged between 50 and 70. It's sort of been in that range. I think the last few years, you know, have been unprecedented. I think, you know, last year, for 2022, we gave a guidance of 80 basis points simply because we were at the back end of COVID, and we really didn't know how 2022 would actually pan out.
Then we obviously saw the situation in Russia and the Ukraine, then we made a decision at the middle of the year that, you know, we will stick to 80. When we look at 2023, we still see a number of headwinds, obviously, with the recessionary pressures, interest rates, but also with respect to the China opening as well. I think what we are gonna be doing is that I think we will revisit this 80 basis points number, possibly if at the end of the second quarter, and, you know, if we do feel that this number does need to be revised, that's exactly what we will do. Naresh, I hope that answers your question.
Indeed, it does. Thank you.
Thank you. Our next question comes from Ayberk Islam from HSBC. Your line is now open. Please go ahead.
Yeah, thank you very much for the conference call, everyone. I would say, a couple questions from me. You know, during the presentation you mentioned that the client needs are becoming more sophisticated. It's on one of your slides. I was just curious to ask you, what does that mean in terms of geographical exposure? Does it mean more international business? What does it mean in terms of the product offering, and the implications for profitability, the margins that FAB can earn, right? That's one question. I think the second question is about the risk-weighted assets. There's a substantial decline in market risk within risk-weighted assets, which is a good thing.
I'm just curious to know, is it due to higher interest rates, Mark-to-Market of the securities, hence the market risk is lower, or is it just active repositioning and you're intending to keep the market risk at much lower levels going forward? Yeah. Thank you.
Yeah. Thank you. Thank you, Ayberk, for your questions. You know, on the first one, which is, we see it. I mean, given the, given the, the development, the progress happening every day in the technology, overall also, what you see, I mean, the, I mean, the, the expectations of the customers are becoming higher and higher in terms of demand, in terms of customer service, customer experience. So that's the, that's something which we will continue. Maybe. So on the consumer bank, that's very, very obvious. It is moving extremely fast in terms of expectations.
On the corporate and then large clients, the systems means more sophistications in the, in the, in the trade finance, the cash management. Basically, the big clients, they expect more sophisticated systems in terms of, of the, of managing their cash, their, their, the daily cash flows, et cetera. Where they expect the banks to play a bigger role. Same thing on the trading platforms, et cetera. Things are continue on moving fast. That's where we have to continue on moving fast and then investing in the, in, in the, in the technology. The other part of the story here is on the link with the ESG.
That's, that's one area where, definitely we have to be ready with the network for the financing, with the network for the financing. A lot of requirements from the clients and then so which pushes us to be to have more discipline in on the credit side when we approve, we look at all this. It's a normal, it's a normal evolution when it comes to a client's, as demanded. Regarding the second one on the market risk.
Yeah. Hi, Pradeep. Let me take that. I think, you know, on the market risk side, I think what I can say is that we did dilute some investments, especially from our emerging markets portfolio, thereby reducing our market risk, cautiously. Now, with markets improving in the current year, we will build up in 2023, but within our risk appetite, as approved by the board.
Thank you. Thank you.
Thanks, Ayberk.
Thank you. Our next question comes from Shayan Brahme from Al Ramz Capital. Your line is now open. Please go ahead.
Hi. Hi, everyone. I just wanted to get a better sense of how you're thinking about the trajectory of NIM and NII as you move through 2023, and how much interest rate you forecast additional hike in 2023. If you can provide updated sensitivity of 25 or 50 basis points, that would be really helpful.
All right, thank you. In general, we don't give a precise guidance on the net interest and exact basis points which we expect on the NIM. The trajectory shows that we are on ascending curve, and we expect that this will continue, this trend will continue in the first half. You would expect improvement in the NIM in the first half at least. We will continue on managing dynamically the balance sheet to ensure that as I mentioned in the beginning, it is one area of focus for FAB's senior management this year.
Discussions happened at the with the board, et cetera, to continue this positive trajectory of increase in the net interest and on the net interest margins. Thank you.
Okay. I think Abhishek mentioned that the bank see further hike in 2023. May I know how many rate hikes have been anticipated in your budget? If you could provide the updated sensitivity of interest rates.
I mean, best estimate, at this stage, we thought of two-three maximum, and then we thought of a range of 50-75 basis points in terms of, in terms of increase, in terms of rate hikes. This is the best estimate, and then nobody knows exactly what will happen, of course. At this point stage what we forecasted internally and then within our budget numbers, this is the kind of guidance which we have. Thank you.
Okay. Regarding trading gains, we saw a significant decline in 2022 due to high base of 2021. Again, there was a sequential decline of 90% in fourth quarter. Like, how should we think about its like trajectory in 2023? Are we anticipating any recovery in trading gains?
I fully understand that it's difficult to factor into your forecast models, et cetera. Again, we had the opportunistic mindset, and then we saw good opportunities in 2021 to invest. When we saw the macro not really, I mean, not really improving, so we were more conservative and prudent in terms of managing the investment portfolio. We will position ourselves during 2023 if there are opportunities, so we will position ourselves in order to take advantage of that.
Otherwise, we will continue the focus on the organic growth and our core businesses, and then growing all our four business lines, private banking, consumer banking, corporate commercial banking, and the Investment Banking, locally and internationally.
Okay, that's helpful.
Thank you.
My last and final question, is regarding like, what kind of a cost to income ratio, are we looking over the medium term?
Yeah, I mean, that question was asked before. I didn't answer. I didn't answer that. I mean, now we are getting close to the 30% range. Plus 1%, minus 1%, plus 2%, minus 2%, we will get into that. It should be something we should not be deviating far from the 30%.
Oh, perfect. Thank you so much.
Thank you.
Thank you.
Thank you. We have no further questions for today. I'll hand back to Abhishek for any further remarks.
Thank you everyone for joining the call. I am aware there were a couple of text-based questions which were there. Given the time limitations, be rest assured that our team will get back to you and respond to your questions separately as individually. In the meantime, if you have any further questions or queries, please feel free to reach out to the IR team. And all the disclosures, like we said, are available on the website and on our IR app as well. Thank you. Have a good day. Have a good weekend.
Thank you for joining today's call. You may now disconnect your line.