Ladies and gentlemen, welcome to the Emirates NBD results call and webcast for the third quarter of 2024 . Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should now disconnect. I'll now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.
Thank you, Lydia, and welcome to our results call covering the first nine months of 2024 . We've maintained the very strong operational performance from the first half into the third quarter. We delivered a AED 5.2 billion profit in Q3, which brings the total profit for the first nine months to a record AED 19 billion. There are many highlights in our outstanding results. The record profit was driven by 9% increase in lending in 2024 . We've been investing to generate new sources of income, and success is evident with the growth in net interest income, despite interest rates starting to fall, a growing trend in fee and commission income as new products are introduced, and more service benefits from straight-through processing.
Emirates Islamic continues to be a real engine for growth, delivering a record AED 2.5 billion profit for the first nine months, with customer financing growing 24%. All business units achieved an outstanding performance. Retail grew its loan book by AED 27 billion. The digital wealth management proposition is really gaining traction, with mutual funds now available in addition to equities and fractional bonds, helping grow volumes over fivefold in the last year. Assets under management across the group now exceeds $40 billion. Corporate originated AED 70 billion of gross new loans, delivering landmark sustainable deals across the network, leveraging the group's growing regional presence. ENBD Capital occupies impressive league tables for bonds, loans, and IPOs. Global Markets and Treasury broadened investment opportunities for customers with fractional bonds and Sukuks, an expanded commodity product suite, and rapid turnaround of FX customer requests.
DenizBank continues to play a key role in supporting the Turkish economy, injecting fresh funding into key sectors such as agriculture and SMEs. Our growth in the Kingdom of Saudi Arabia is a real highlight. We have now 19 branches and 59 ATMs, driving 49% loan growth since the beginning of the year. On the back of the strong regional demand, we revised up our loan growth guidance. Net interest margin improved to 3.75% in the third quarter, as DenizBank NIMs continued to improve. CASA grew strongly in the third quarter, not only in escrow, but across corporate and retail accounts. We have implemented Gen AI across our operations in partnership with Microsoft. We have harnessed new revenue stream by deploying AI and machine learning to analyze customer behavior and efficiently predict the need for FX and trade products.
Gen AI is streamlining the customer onboarding process, significantly reducing manual intervention to improve the extraction of relevant information from documents. We have also enhanced our AML processes with machine learning to monitor and detect suspicious activities. Other highlights include further progress on ESG. We have the highest number of LEED Platinum-certified branches of any bank globally. We now offer sustainable fixed products, fixed rate products. We're the first bank globally to publish an SLL bond framework fully aligned with the new ICMA/ LMA guidelines. We have introduced new product and service launches, such as paperless smart guarantees and real-time payment tracker for business customers. We're pleased with the positive credit rating upgrade action for both Emirates NBD and DenizBank.
In summary, the group continued its strong financial performance into the third quarter, and our investment in the network and digital are really starting to bear fruit. We are well placed to benefit from the strong regional economy, and new sources of income will help offset the impact of falling interest rates. I will now hand you over to Patrick to go through the results in more detail. Patrick?
Thank you, Shayne, and good afternoon, everyone. Just to reiterate the strength of our results for the first nine months of 2024, all business and product lines continue to perform very well. We have updated some guidance, which I'll come to, but first, let me take you through the summary results, and then we can dive into a bit more detail by component. Starting with the performance summary on page two, you can see our business momentum from earlier quarters has continued into Q3. Group's ongoing investment in the UAE and the region is delivering at both the top and bottom lines. Total income of AED 32.9 billion for the first nine months of 2024 is broadly flat year-on-year, and Q3 is up quarter-on-quarter.
Within that, net interest income increased 7% year-on-year on the back of a very strong 11% increase in assets, which has more than offset margin contraction. Quarter-on-quarter, NII was also up 7%, helped by 3% loan growth and an improvement in margins at DenizBank. As usual, we've split out the contribution from ENBD and DenizBank in the appendix on page 11. Non-funded income is lower year-on-year, but our customer and client fee and commission income has grown extremely well. The overall decrease relates more to DenizBank's variable non-client income, which I'll go into more detail shortly. Costs have increased 16% year-on-year, supporting strong volume growth across all businesses. There is also the inflationary impact of DenizBank's cost base, and accelerated depreciation of some IT systems, as new completed IT projects come online.
The cost-to-income ratio at 29.4%, however, remains well within guidance. We have registered an impairment allowance credit in the first nine months of AED 1.3 billion on the back of cash repayments and recoveries. In Q3, we had a AED 0.9 billion charge, equating to a 63 basis points cost of risk. Given the lower likelihood of further recoveries in Q4, coupled with the effect of high interest rates in Turkey, we have revised our full year cost of risk guidance to a 10-20 basis points charge. More detail on that shortly. This gives us a very strong profit before tax and hyperinflation of AED 24.6 billion, and a AED 19.0 billion bottom line profit, which is up 9% year-on-year.
Turning briefly to the results for the third quarter, you can see that income grew 7% over Q2, which helped deliver an AED 5.2 billion profit, despite higher costs and a net impairment charge. This quarterly profit is flat to Q3 last year. In Q4 last year, our profits were lower than Q3 as a result of higher costs of risk. Given this year's cost of risk guidance, we may experience a similar pattern in the final quarter of this year. In the bottom summary table, you can see the balance sheet metrics are in great shape, with total assets and deposits both growing by double digits in the first nine months on strong underlying business momentum. Capital liquidity and credit quality metrics all remain robust. Now, turning to net interest margins on Slide three.
The bottom left chart shows that margins tightened by thirty-six basis points year-on-year, mainly due to higher funding costs and competitive loan pricing at Emirates NBD. Year-on-year, DenizBank's NIMs were lower with the higher funding costs after the significant rate hikes. For Q3, NIMs have improved 10 basis points to 3.75%. As we anticipated back at the half year, we are seeing the upside in DenizBank margins come through from asset repricing, with some offset from ENBD due to lower IBOR rates. We expect NIMs to finish the year near the lower end of our guidance range, as any further gains in DenizBank's net margins are likely to be offset by the impact on ENBD from last month's fifty basis point cut and potential further cuts.
Thinking ahead to 2025, our research team expect a further 225 basis point cuts this year and 525 basis point cuts next year. We currently don't expect any rate cuts in Turkey this year. Of course, we'll update you at year-end with NIM guidance for 2025. Just moving to slide four and non-funded income. Net fee and commission income year to date is up 46% year-on-year and with a very strong trend of quarterly growth across almost all of the group's customer-driven businesses. The increase in fee income, as per the bottom left chart, is substantially higher fees, substantially higher investment banking activity, increased loan volumes, higher retail card spend volumes at both ENBD and DenizBank with the added impact of higher interchange rates in Turkey.
The chart at the bottom right shows that other operating income has a rarely stable client and trading flow income component of around AED 1 billion-AED 1.2 billion per quarter. This relates to businesses such as retail remittance, FX trade flows, and client hedging. Non-client related income is lower year-on-year, mainly from non-recurrence of very strong mark-to-market gains last year, around the time of the elections in Turkey, and higher swap funding costs this year after the rate hikes to 50%. On slide five, we see that gross lending increased 9% during the first nine months. Retail had its strongest ever nine months, adding AED 27 billion in loans. Corporate also had very strong period with AED 70 billion in gross lending.
There was strong financing demand across most industry sectors throughout the region, especially manufacturing, trade, transport and communication, utilities and conglomerates, which more than offset sovereign and other scheduled repayments. DenizBank also has strong loan growth, up 29% in local currency terms and up 11% in AED terms, with regulations favoring a pivot towards sectors such as agriculture. KSA is benefiting from the network expansion, registering an excellent 49% loan growth so far this year. We have revised our full year loan growth guidance to low double digits following the strong growth so far, the continued positive economic outlook and further announcements on infrastructure investment. We are, however, mindful of the abundance of liquidity in the UAE, which can lead to competitive loan pricing, but we maintain our disciplined approach to pricing for risk.
On the liability side, total deposits increased AED 60 billion, up 10%, year to date. Within that, strong demand for CASA, not just from escrow, but from proactive initiatives within corporate and retail, have helped maintain the group's CASA ratio at 59%. This is a very healthy ratio when you bear in mind that DenizBank's CASA ratio is typically around the 25%-30% mark, so ENBD's CASA ratio is in excess of 65%. On slide six, we see the NPL ratio improved by 0.7% to 3.9% year-to-date, reflecting the continued trend of strong recoveries that we've seen in recent quarters and an increase in the lending denominator.
On the bottom right, you can see that Stage Two loans also improved by 0.7% to 4.6% during 2024 as a result of repayments and staging transfers. Overall, this has contributed to the AED 1.3 billion cost of risk credit. In Q3, we had a AED 0.9 billion cost of risk charge, as there were lower recoveries and repayments of Stage Two loans in the first half. Last quarter, I signaled the possibility of some further recoveries to come through in Q4, but as a matter of timing, we may not see that materialize. We are also seeing higher DenizBank delinquencies with the very high interest rates.
As a result, we have revised our cost of risk guidance to a 10-20 basis point charge for the full year, and this implies a final quarter cost of risk charge of around 150-190 basis points, not too dissimilar to the Q4 of the last three years. As I mentioned, NPL ratio is 3.9%. We've maintained guidance at 4%-5%, given the possible higher cost of risk in Q4 that I've just noted, and that's without any write-off of loans older than five years. Paddy will now just take us through the remaining slides.
Thanks, Patrick. On slide seven, we see that the cost-to-income ratio at 29.4% is comfortably within guidance as we continue to invest for future growth. Staff costs increased to drive business growth and to invest in human capital for future growth in digital and international, including the branch expansion in KSA, coupled with an inflationary impact from DenizBank's cost base. IT costs increased year on year as we continue to invest in our market-leading technology solutions. Depreciation is higher on accelerated depreciation of some systems being replaced as part of our ongoing technology investment program. Other costs are higher as some seasonal costs come through in Q3, with professional costs higher in relation to our advanced analytics project. And we expect this year's cost-to-income ratio to be closer to the 30% area.
Slide eight shows that the group maintains very strong liquidity with an AD ratio of 77% and an LCR of 194%. We have refinanced AED 23 billion of term debt into Sukuk so far this year, which more than fully covers 2024 maturities. The bulk of this year's remaining maturities is DenizBank's one-year syndicated loan, which they are currently working on. Next year's maturities are comfortably within our normal issuance capabilities. We published our green bond report, which shows that within the first year, we've already allocated over 95% of proceeds to qualifying projects. We also became the first bank globally to publish an SLLB framework under the new ICMA/ LMA guidelines.
On capital adequacy on slide 9, it shows that the Common Equity Tier One ratio strengthened in the first nine months to 15.5%, as retained earnings more than offset a 15% increase in RWAs. The increase in credit RWAs is from strong retail and corporate loan growth. The group continues to operate with healthy capital. On slide 10, we see that RBWM income grew 11% year on year, with the highest ever revenue, strongest ever loan acquisition, and a substantial growth in balance sheet. Lending grew by an incredible AED 27 billion in the first nine months, and we enjoy a 1/3 market share of UAE credit card spend, which grew 17% year on year. AUMs grew by an impressive 50% year on year, reflecting ongoing success of our wealth management strategy.
CIB delivered an excellent 49% increase in profit on higher, on profit before tax, on higher income and healthy recoveries. Non-funded income grew 18% due to higher lending, a strong contribution from investment banking and improved cross-sell. Corporate lending grew 10% in the first nine months, driven by AED 70 billion of new lending across our network. CIB continues to grow CASA, backed by the group's market-leading and best-in-class digital escrow capabilities, including APIs and virtual accounts. Global Markets and Treasury delivered another excellent performance, generating over AED 2 billion of income in the first nine months. Net interest income continues to be strong at AED 2.1 billion, despite the general increase in cost of wholesale funding and term deposits due to higher interest rates.
Trading income remained robust, and sales delivered strong results, driven by new products and expanded commodity offering and innovative structured solutions for clients. We launched an enhanced FX process, providing competitive rates and rapid turnaround for customers. DenizBank delivered a AED 1.1 billion profit in the first nine months, providing fresh funding to the Turkish economy. We do have an extra couple of slides in the appendix containing more granular detail and a dollar convenience translation. With that, we can open up the call for questions. Lydia, please go ahead.
Thanks, Paddy. We'll now begin the question- and- answer session. If you wish to ask a question, please press star followed by one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star and then two. To participate in our written Q&A, just type your question into the Ask a Question text area and click the Submit button. Once again, it's star followed by one on your telephone if you wish to ask a question. Our first question today comes from Shabbir Malik with EFG Hermes. Please go ahead. Your line is open.
Hi, thank you very much for the presentation. I have a couple of questions. The first one is around costs. So when we look at your staff costs, is it possible to give a mix of fixed versus variable costs? Trying to gauge if revenue comes down next year, how much can costs adapt to that, so that's my first question. The other question I have is regarding your strategy, international strategy, any update or change of thinking on growth plans for India or any of the other international markets, and finally, your segment note, when I look at that and look at the margins for retail, for the retail segment over the last couple of quarters, they have been trending lower.
I think, if I look at NII to assets for retail, in 3 Q versus 2 Q, they're down about 37 basis points, a bit higher than what is observable for the corporate segment. So if you can shed some light on that, why is retail margins coming down faster than corporate margins? And finally, just a big-picture question, on digital banking and neobanks, how big of a challenge are you seeing in this space? So there's some Buy Now, Pay Later companies coming up as well. Interested to hear your views on those. Thank you.
Hi, Shabbir, Patrick here. Welcome to the call. Thanks for joining. Maybe I'll just take the cost item and then the retail segment margins, and maybe Shayne can think about the digital in India. Just on the costs and the you mentioned staff costs specifically. The costs have risen principally from the investments we've been making to drive volumes, and you can see in the top line and in the balance sheet that is coming through very nicely. Inevitably, as you go through a year, you get flow-through from the timing of hiring, plus any increments, et cetera. Overall, in the costs also, we did have an item where we have to write off system that haven't been fully amortized, where new ones are coming online.
So that doesn't necessarily happen every quarter. Plus, we have been investing a lot in technology. It's not all just CapEx. So yes, with CapEx, you get an increase in depreciation or amortization, but there's also an OpEx element associated with that. And then you're also really asking about, you know, what can be done, how much of that's fixed or variable, and whether anything can be flexed. We are very mindful that we're actually operating at a very lean cost-income ratio in the first place. We've guided to around 30%. In the UAE, the cost-income ratio is actually lower than that. It's at the 30%, principally from the investment we're making around the region.
And we also have some inflation coming through from DenizBank, where Turkish lira inflation is rising at a pace faster than the FX depreciation. So those things have really all accumulated to increase the cost by 16% overall. But we're very conscious about managing the costs, and we have seen through history, whether it was the end of 2019 or through the pandemic, when we need to manage the costs relative to income, if it is coming, likely to come down, that is something that we have shown that we can do and we do do. Just on your retail segment point, look, there's nothing really specific around the overall margins on the retail side.
Inevitably, they, well, they actually have a higher yield on their products, whether it's personal loan, credit cards, auto, mortgages, somewhat lower, of course, so I think that's partly just timing. A nd mix r ates had been rising through to last year, and then they've started coming down, so there's no really specific thing about that other than timing, Shabbir, I would think. Shayne, do you have any comments on the other two questions around?
I've always got comments on lots of questions, right? I think on the cost growth, what I would say is that one of the things we wanted to do, as you know, why did we invest heavily into Saudi when we did? And with the commensurate cost increase, and I'll sort of try to weave this into also the international strategy, was that we saw there was a market there that we could grow quite aggressively, and we have 49% growth year to date in lending there. That's a pretty outstanding achievement, albeit off a low base, admittedly, but it is quite sizable what we've grown.
So I think, yeah, we wanted to get that growth into our back pocket as quickly as we could, you know, when rates were either rising or stable, so that when rates started to come off, that our asset build was such that it could offset some of that decrease in spreads as U.S. starts to reduce rates, which then flows into us. So I think from a cost and a growth, you know, we specifically said to you that we were going to go and invest heavily into some of these offshore markets and even onshore markets, to drive asset growth and liquidity, and we've been quite successful at that, as you can see from our numbers.
To Patrick's point, you know, those of you who have been covering us for a while, you know, twice we've taken out 1,000 headcount if we needed to, but at this stage, I don't see that requirement. But certainly from our perspective, you know, our cost management has been historically very good, and we will continue to go down that path. On international strategy, obviously, Saudi, we still haven't finished there. There is gonna be some more cost growth in Saudi. We've got another four or five branches to go. We're up to 19 now. We'll probably be at 21 by the end of the year, we think. And so there'll be a bit more cost growth in Saudi as we complete the rollout of the network there.
If you remember, we got 24 licenses given to us by summer, so we're the only foreign bank there that's got that many licenses, and we are actually now the largest foreign bank in Saudi by assets. I'm not counting HSBC, 'cause they've got an investment, not. It doesn't consolidate. You know, we've done a good job there, but you know, to be honest, if we were five times bigger, we would get to the lower pecking order of the local bank, so there's still a lot of growth opportunities there. Obviously, Turkey, we've been growing quite well, especially in the agri and SME segments, and Egypt's doing quite well, and obviously UAE itself has been driving quite well.
On inorganic, no new news to tell you, except that the markets that we've spoke to you before that we're interested in in inorganic plays with spare capital would be Turkey, Egypt, Saudi, and India. We're aware of our regulatory obligations. If we have something to update, we will give that update. On digital banking strategy, well, if you look at where we are, we now have the top-rated app in both Google and Apple stores for the country. We've come a long way. We've gone through a complete transformation of our architecture. We're 100% cloud native, and you, I hope a lot of you are using our app.
Maybe not the Citibank and the HSBC coverage guys, but hopefully you're using our app, and you'll see that, you know, we continue to add features onto the app, including, you know, now mutual funds on top of a lot of the other stuff we've done around wealth. So that's growing really nicely. We're watching the space closely, but we're attracting clients, not losing clients to the competition. We're certainly ready if any of the mooted, you know, we hear rumors other players from offshore may come into the country, but we're ready for them. We think we've got the technical capabilities and now the apps to compete head-on-head with anyone that comes in. I think we're very close to being best in class with our apps at this stage.
So I think digital strategy for us, it's now our bread and butter, and as we're driving more advanced analytics and AI into it, I think that also we can improve also, not only the customer experience, but some of the fee income that we derive off things like wealth. That was a very long answer to your question, Shabbir. Next one, please, Lydia.
No, no, no, thanks. There you go.
Thank you. Our next question comes from Rahul Bajaj with Citi. Please go ahead.
Thanks, Shayne. Thanks, Patrick. Thanks, Rahul Bajaj from Citi here. I have three quick questions, actually, if I may. The first one is on margins. So you mentioned, Patrick, that in the fourth quarter, we'll probably see the headwinds from rate cuts domestically being largely offset by tailwinds coming from Turkey, if my understanding is correct. So, basically, thinking about flat sequential margins in fourth quarter, how should we think about margins as we progress into 2025 , as rates begin to come off in Turkey? Should this kind of offset work in 2025 as well, wherein Turkey sort of cost of funds going down will more than offset or largely offset the asset yield pressure that will come domestically? Or you think one side will be bigger than the other?
So that's the first part of the question. The second one is on the repayments that we have seen, the sovereign repayments that we've been seeing for last so many quarters. Just wanted to understand, I mean, what will take these repayments to kind of stop and that specific part of the portfolio to begin to grow again? We're seeing some of the Abu Dhabi banks, Abu Dhabi-based banks, continue to strongly grow their sovereign portfolios or government-linked portfolios, but a kind of opposite trend is being seen in Dubai. So one, what is driving this difference? And what will take this to change? Are you expecting a change there? That's the second one.
And third and final quick one, this one is on any update you might have on the 15% corporate tax from next year. Is that coming through? Is that finalized, or is it still work in progress? Thank you.
Yeah, thanks, Rahul. Thanks for joining. Just going down those, just on margins, Q4, DenizBank versus ENBD. We think DenizBank, the repricing has pretty much completed. We discussed that a bit at the half year, and I think we said we were sort of around 2/3 of the way through that, just given the duration of the book. So I think they will flatten off. It's pretty stable cost of funding there now, in the mid-40% range. You can originate new lending in the mid-50% range. But obviously, there's still some of the book that can reprice if it's on the retail side, and it's got a duration of longer than six months or a year, for example, as opposed to corporate lending, that's typically three-month repricing.
So it would rarely take looking into 2025 for the need for rate cuts. If we see any rate cuts, that would, in the near term, be positive for them, because the cost of funding will fall faster than the asset repricing, so the inverse of what we're seeing over the last nine months. And then on the E NBD side, we've seen a downward trend in the margins since around Q2 and Q3 last year. That's pretty similar to any other international market when the rates are falling. So for the fourth quarter, I think it'll be pretty neutral and flatten off, and that's why we sort of updated the guidance to be more towards the lower end, not right at the bottom. Obviously, there are some variables that can and often do happen.
I think the 50 basis point cut was more than we had been expecting when we did the first half results. We had, at that point, I think I said, we expecting around two times 25 basis points, and then that got off to a faster start, so that will put a bit more pressure than we were expecting at the half year on the fourth quarter, but the good news is we have seen that upside in Turkey come through. Obviously, we'll come back in January and update the guidance for the full year.
But I hope and I think in the past, we've given you the overall sensitivity for a 25 basis point cut, which is around $140 million or just over AED 500 million, AED 510 million per 25 basis point cut of the Fed rates and the IBOR rates on an annualized basis. So whatever you have as a view on interest rates, you can work that into the models. Just on sovereign repayments, I think at the peak, that was at around AED 160 billion, now down to AED 62- odd billion, so almost down AED 100 billion in the last five years. Again, you will see in the notes to the accounts, we saw another AED 4 billion or so reduction in that. That seems to be the trend at this time and the repayment schedule.
How Dubai and the UAE choose to fund further investments, whether it's infrastructure, drainages, airports, I think that remains to be seen about what channel will be used, whether it's some of their existing debt facilities or through GREs that are involved in that. So that's something to watch for, but it may not be specifically through us and the sovereign exposure that we have at the moment. Just on the 15%, it is. You should assume 15% for next year. It's more a question of whether we pay the difference between 9% and 15% to a European country or pay it to the tax authorities in the UAE. That's just the way that works. So 15% it will be, it's just a question as to who you pay it. It's safe for you to put 15% in your model.
Yeah. The way the tax is working, the Pillar Two tax is working, is that even if you paid an average tax rate of 15%, it's every entity. So even, for example, we pay higher tax in for example, Austria, Germany, Turkey, Saudi, et cetera, if you're paying less than that within the UAE, you would have to pay that 9%-15%, that 6% difference, somewhere else. In our case, it would be Austria, because that's where we have an operation that would qualify under the Pillar Two European tax regulation. So it's a matter of, for us, is that we're budgeting 15% because we're gonna pay 15%. The question is, will it be in the UAE?
We know no more or less than you do on that, but we've certainly been budgeting for 15%, and I think your model should say 15%. I would be very surprised, given that if someone like us would have to pay the difference to Austria. I'd be pretty surprised if the government wouldn't prefer the money in their pocket in the UAE. I think I'd be very, i n my opinion, I'd be very surprised if the UAE doesn't enact Pillar Two tax of 15%. Very surprised. Because it's just companies that they own, like ours, that well 56% own, there'd be an outflow of tax to another jurisdiction, where we didn't even earn the money in that jurisdiction. They've already paid their tax.
Understood, all clear. Thank you so much.
Our next question comes from Olga Veselova with Bank of America. Please go ahead.
Thank you. Good day. Thank you for taking my questions. I have three. The first one is, again, on net interest margin for ENBD, excluding Deniz. I hear your logic that there was margin pressure coming from lower IBOR, but we were also looking at your interest rates on deposits, interest rates were going down in line with IBOR. So what exactly is causing erosion of margin for Emirates NBD, excluding Deniz? And to what extent this erosion has been coming from expansion in Saudi? So this is my first question on margins. The second question is, could you possibly give us some updates on the status of consultation paper about changes in NPL regulation or potential changes in NPL regulation in the UAE?
Third, what would be your fair assumption for cost of risk for Turkey in the next several quarters, given that the asset quality has been deteriorating? Thank you.
Hi, Olga. Thanks for joining. Let me just canter through those, ENBD NIMs. That's really entirely a function of the strength of our CASA funding base. With almost 60%, we have one of the lowest cost funding bases in the country. That means when IBOR falls, the assets reprice, and on the corporate side, it's a three-month repricing, plus you've got any surplus liquidity and bonds. That happens a lot faster, whereas much of your funding cost is not falling because it's already near the bottom. So it really is as simple as that. The erosion is not coming from KSA. We don't provide specific margins by country, but actually our lending growth, the 49% that's been very strong, is substantially all private sector.
So the sweet spot has been in the middle of the PD curve, where you can actually price for risk, get a good margin, get the ancillary business. So it's, it's not erosion from that, it's more a function of the extremely strong CASA ratio that we have. So, margins have been significantly higher than most of our competitors, but with that rate sensitivity and the rates come down, yet, yes, our margins will come down because we're not so reliant on term deposit funding. Just on the second one, NPL regs from the central bank, no, no, no news to report on that, I'm afraid.
At the half year, we gave an indication of what our NPL ratio would be, just coincidentally, if we were to write off any of our loans over five years, and at that point, we said the NPL ratio would be around 3.6%. Portfolios move over time. I think that NPL ratio would be a little bit lower than that now, given changes, but no news to report. Cost of risk. Sorry, what was ?
Turkey.
Turkey, yeah. So just with the high 50% interest rates, and over the last six months now through six and nine months through that rate cycle, we are seeing more pressure on the retail side. It's not extreme, but it's also comparing to a period where in both ENBD and Turkey, we're seeing very strong recoveries and historically low levels of cost of risk. So in a way, our cost of risk is more normalizing. When we bought DenizBank in 2019, we actually hit the impairment line fairly hard with them, and we were experiencing almost 400 basis points cost of risk. Then it was coming down to the 300, 200.
So for cost, for Q4, for Turkey, we'd probably see it very similar to the Q3 levels. And we don't split that cost of risk out specifically, but you can see the impairment numbers on page 11 of the deck.
I mean, my comment, Olga, would be, I'm pleasantly surprised at how little the deterioration has been. I'm admitting there's deterioration, right? Don't get me wrong. But you know, in any market that I've worked in historically, when you get rates go, you know, retail rates are over 60%, right? And yet the book is held up, in my opinion, unbelievably well, given where rates have gone. And it does reflect the resilience that Turkey has as an economy, but also the individuals. As you know, Turks are very big gold buyers historically.
So they just seems to be, i t doesn't operate in, from my experience, how I would expect the market to operate when rates have jumped so massively, so quickly. You know, you had a credit card and it was 18%, and now it's 60%. It's like a massive increase in those service levels, but the book's held up, you know, in my opinion, extremely well, albeit with some deterioration, but not nearly as much as putting on my old chief risk officer's hat would expect.
That's great. Thank you very much for the answers. Can I clarify your answer to the second question? What is the status of this p rocess? Have you provided the feedback?
Could you repeat that please, Olga?
Yeah, apologies. So, just for better understanding, this is about the second question, consultation paper about NPLs. What's the status now? Have you provided the feedback and the work continues, or this has been pushed aside for some time by the regulator?
Olga, you know we can't possibly comment on the regulator with any new rules that they're publishing, right? When the regulator's ready to publish a rule, they publish a rule. But what we have said to you is, that if they apply the rule that you all think they're going to apply, the effect on us is negligible. And in fact, our NPLs will drop a little bit, but when you've got, I think UAE Stage Three s, it must be, it's like 100, right? Standalone, right? It's 100. So it's super close to 100, right? So the effect on us, when you've got such Stage Three coverage, and stage two over 25%, the effect on us is like zero. I can't speak for the other banks, but for us, it's not a material change, if and when it comes.
That's great. Thank you very much.
Thanks, Olga.
I'm sorry, but I can't help with your modeling on the other banks.
Are there any more?
Next question.
Yeah, please go ahead.
Yes, our next question comes from Jon Peace with UBS. Your line is open.
Yeah, thanks, everybody. So appreciate that you'll give 2025 guidance with the full year results, but I just wanted to ask some questions anyway about next year. So firstly, it's great to see the higher loan growth guidance. As you push on loan growth to hedge against lower rates, would it be feasible to see again a repeat of high single digit, low double digit growth in 2025 ? And then my second question on the cost of risk. You said part of the change in the Q4 guidance was a delay to recoveries. So again, if we push those through into 2025 , should we potentially anticipate the cost of risk next year being well below the through-the-cycle rate? Thanks.
Hi, John. Yeah, thanks for that. You're right, we will come back and update the guidance more specifically in January. I can't give specifics on the pace of growth through next year, but I, you know, from a UAE point of view, we're still expecting to see GDP at around the, you know, 5%-6% area.
Normal.
Yeah. So from our research team. So, you know, still strong economic growth in the UAE. There's nothing to suggest that there would be a significant slowdown in demand, even through the higher interest rate cycle on the retail side. We've seen every quarter there will be a month with a new record of origination of lending across all of the four main credit products that they have. We've seen a resurgence in demand on the corporate side, in both the private sector, which has been good, and continued demand on the GRE side as well. The momentum should stay there. We have to work hard at that. It's very competitive, a lot of liquidity in the market. We are disciplined about maintaining the price for risk, so it's not lending just to put it on the balance sheet at any cost.
You have to have the margin and salary and returns on the capital, as importantly, on that. So we maintain discipline, but otherwise, the economic outlook is looking quite positive, I guess. And just on the cost of risk
I mean, as long as the UAE continues its strong population growth, which they're forecasting and, you know, obviously are delivering on
Yeah.
You know, we would see, you know, there's more population, more banking requirements. So, and, you know, and w e've got a relatively small market share in a place like Saudi, which we're growing quite well. And, I think as Turkey turns the corner, again, I think there's a lot more growth opportunities in quite a few areas. You know, the corporates will come back, the middle market, the SMEs will come back a lot harder, you know. But pretty hard when rates are fifty, the base rate's 50%, so pretty hard to be swallowing a lot of debt in Turkey with those sort of rates.
And Jon, just on your cost of risk, you know, recoveries, you know, they're not linear in timing. There are recoveries in every quarter. It's just that in the first half, we've seen some exceptionally strong recoveries. A number of them have been recoveries from ten-year-old facilities that had a repayment schedule at, on the tenth anniversary. So through 2023 and 2024, we saw more of those, and augmented also by Turkey also experiencing very strong recoveries, both of those built on the back of the very strong property markets in both the UAE and Turkey, as well. That continues, but it's not, you know, t he NPL book, you can see, is starting to shrink. There is AED 20 billion in there. The vintage of that is getting shorter and shorter.
And through the cycle, does that mean for next year we would be less than the through the cycle range? Not necessarily. I think what it means is our range rarely we would estimate have been sort of 85-125 basis points, but we'll be able to firm that up a bit better when we come out in January. So, I don't think there's going to be some big lumpy ones in Q1, Q2 last year.
We wish, but
It would be nice, yes.
But the reality is, Jon, the stock and trade for those workouts has dropped dramatically.
Got it. Thank you.
Thanks, Jon.
Thank you. Our next question comes from Aybek Islamov with HSBC. Please go ahead.
Yes, thank you all for the conference call and your answers so far. I think I would like to ask a few things, right? The first one is, your return on equity, right? It looks like in the third quarter, your ROE is at around 22%-23%. And obviously, it was quite high last year for obvious reasons, peaked around 34%. But obviously, as Turkey's normalizing, as UAE margins are coming under pressure with rate, and we expect more rate cuts, and Turkish margins, as you explained earlier, will eventually also go lower. Like, where do you see your normalized return on equity, right? That, that's my first question.
I think, secondly, you know, in Saudi Arabia, I believe this is the first time that you are, like, ramping up your growth in the Saudi market, I mean, proactively. Is this correct? Right, and I think with regard to that, you know, what are your thoughts about the credit quality of these loans, your credit write-offs? Because in Saudi Arabia, you know, through the cycle, has that habit of discriminating foreign lenders versus the domestic onshore lenders, right? And I've seen that with other banks in the Gulf, right, in the past. So how do you see your credit write-offs, the quality of these loans should economic activity in Saudi Arabia continue to slow down or cool down, basically? That's the second question. Yeah. Thank you.
Hi, Aybek. Maybe I can tackle that first one, and maybe Shayne will have some comments on the second one. Just on the return on equity, you're right. A return on tangible equity is around the 24% mark, so extremely strong by any international standard. And from last year, I think we're around the 27%-28%. Yes, rate cuts are coming, but we have been investing in the underlying client business to build volumes to offset that. To us, that's the best hedge we can have, build volume to build returns, even though it is on a lower rate. You can see the strength of our non-funded income. It's been growing very well, and that really reflects partly the investment in our sales team, but also the depth of our client relationships.
So, you know, we're very conscious of that and working on that. And, you know, you mentioned Turkey NIMs through next year. As they cut rates, in the near term, within the first six months of that, if it's significant sharp cuts, that has a net benefit to us. And then the margins may tighten if monetary policy is settled down, inflation or what have you, but that will take some time to complete that program. So, you know, the cost, the return on equity ultimately is an outcome of our earnings and our equity base. So we'll have to see what that looks like through next year, and I think you'll probably have a better idea when we refresh guidance in January.
So that's the first one. KSA, Shayne, around, I think that was ostensibly around private sector.
Yeah, I mean, I think the first thing to say is we're not a new entrant in Saudi. This is our 20th year in Saudi. Yeah, we're not a baby in the woods, so to speak, and we've always had a lot of Saudi clients within the UAE as well. So our knowledge of that market's pretty deep. From a risk appetite perspective, it's no different to the risk appetite we'd have in Saudi than we would have in the UAE, with structured loans, covenants, pricing, return on risk capital.
So I think from a risk management perspective, it's got very similar attributes that we've seen in the UAE, both in retail and in corporate. So yeah, we're comfortable where we are with the growth we've had in Saudi. We haven't done a lot of what I would say is the top end of town in Saudi, because a lot of it's PIF-related, which is very narrow fees and pricing. And the majority of the inventory goes to the local bank. So I think you've got to tailor your needs for what your return dynamics can be in a market like that.
Not that we don't love PIF, we love PIF, but on the same token, it's a matter of can we get a decent return on capital there? So I think from a book perspective, we're comfortable with where we are. We think there's a lot of growth. Obviously, in Saudi, you know, there's very sizable lending demand, and actually, with liquidity not that great there, the banks are having to raise a lot of money offshore to bring back to Saudi because you've got deposit growth is nowhere near the same as lending growth in Saudi. So there's an opportunity for growth for us there at the moment, and we're taking it.
Thanks, Shayne. Thanks, Aybek. I'm very conscious of time. There's a few questions have come in on the web, which I'll just do a quick wrap up on. Shayne, I may ask you to answer the last one, b ut let me just go through the various questions. So there's been a question about the pivot away or the increased density of risk-weighted assets. That's absolutely right. As government lending, which is 0% risk-weighted, has reduced and been replaced by higher risk-weighted lending.
And is that, why is that not flowing through to the margins? Actually, when you look at the year-on-year margin, you can see that loan yields, the contribution from loan yields is actually up. So the main pressure that the ENBD level that we're seeing is more on the deposits, and again, or the funding cost, I should say, and that's really the fact that, you know, the CASA, a large chunk of the CASA is very low cost for us.
But with an RWA effect of the transfer between sovereign and a nd capital.
Okay. Then, in terms of agriculture, yeah, DenizBank have been very much, you know, t hey are the number two in terms of agriculture lending, and have a very good and long track record in terms of agriculture lending. So, you know, they are able to price that appropriately. In terms of the mortgage book, about a quarter of our consumer lending is mortgages. And then the growth in balance sheet lending, balance sheet lending's gone up by about 12%, so it's actually quite reflective of the growth in lending, and the growth in the loan book in general. There was a question on the tax rate, we've answered that. And, in terms then of. Sorry, just reading this out. Main sub-segments contributed to the strong loan growth. Again, yeah, that's really coming through across all the major sectors for loan for retail lending.
I'll just elaborate on that one a bit more. I think that if you look at a lot of the growth, it's personal loans, car loans, credit cards, and some mortgage lending. It's basically coming across just about every segment of the portfolio. Our concentration's more on the first three than mortgages, but that's really where the drivers are.
Thanks for that, Shayne. And then in terms of depreciation costs, yeah, if you look at our slide on costs, you'll see that the depreciation and amortization, it's roughly been about AED 220 million each quarter, stepped up to AED 348 million this quarter, relating to the increased depreciation. We've talked about KSA, and yeah, again, there was a query on the non-interest income. Actually, again, when you look at the trends in foreign exchange and derivative, it's been very positive in terms of core fee income. Most of the volatility, as I said, that we referred to, relates to other fee income such as DenizBank, Aegis, et cetera, DenizBank.
And then final question is in relation to the Tier 1s , any approach in terms of calling that? We again, the decision to call would be made near the time, and that will be based on a capital need and economic, the economics of it, and the reputational considerations as well. We can't give any indication whether that will be called or not called, until much nearer the time. That's it. Lydia, are there any further audio questions?
As a reminder, if you'd like to ask a question, it's star followed by one on your telephone keypad. No further audio questions.
Thank you, Lydia. Okay.
Okay, if there's no further questions, I'd like to thank you all for participating in today's call. As you can see, we continued our strong financial performance into the third quarter, and our investment in the network and digital are delivering results, and we are well placed to benefit from the strong regional economy and new sources of income, which will offset the impact of falling interest rates. I'll now hand you back to Lydia, to provide details in case you have any further follow-up questions and to close the call. Over to you, Lydia.
Thank you. For any further questions, please contact our investor relations department, whose contact details can be found on the Emirates NBD website and on the press release. A replay of this call and webcast will also be available on the Emirates NBD website next week. Ladies and gentlemen, that concludes today's conference call.