Gentlemen, welcome to the Emirates NBD Results Call and Webcast for the first half 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 first half results call. We have built upon the very strong performance in the first quarter to deliver a record profit of AED 7.1 billion in the second quarter of 2024. This gives an overall first half profit of AED 13.8 billion, up 12% year-on-year. There are many highlights in these outstanding results. The record profit in the first half was driven by a 6% increase in lending, as our loan book reached a half a trillion dirham milestone and substantial impaired loan recoveries. Quarterly profits surpassed AED 7 billion for the first time ever, helped by the strongest ever results from Emirates Islamic, improving margins in DenizBank, and sizable recoveries bolstered by a buoyant economy. All business units achieved an outstanding performance in the first half.
Retail grew its loan book by AED 16 billion in the first half, commands a one-third market share of UAE credit card spend, and grew assets under management by an incredible 41% over the last year. Corporate lending originated AED 48 billion of gross new loans in the first half, securing landmark deals across the network as it leverages the group's growing regional presence. Emirates Islamic delivered a record profit of AED 1.7 billion in the first half, as its balance sheets surpassed AED 100 billion and now serves over 700,000 customers. Global Markets and Treasury broadened investment opportunities for our customer base, offering fractional bonds and sukuk through ENBD X in accessible denominations. DenizBank delivered an AED 800 million profit, providing fresh funding to the Turkish economy as their balance sheet grew to over AED 160 billion.
We're now seeing real benefit from our branch operations in KSA, with a tremendous 33% loan growth in the first half, as the branch network doubled to 18, with several more branches scheduled to open in the coming months. Loan growth guidance has been revised upwards on strong regional demand, while cost of risk guidance was positively revised downwards on a healthy credit environment. Net interest margin improved to 3.65% in the second quarter, as DenizBank's NIMs increased on favorable loan pricing and stable funding costs. Moody's improved the outlook on Emirates NBD's credit rating to positive. Generative AI is being implemented across our businesses' operations in partnership with Microsoft.
The Advanced Analytics Initiative has now 50 use cases, right through from the incubation to scaling phases, spanning every business unit and control function, with a focus on customer experience and improved efficiency. We are the first UAE bank to publish our climate strategy through an assured TCFD report. Green fintech companies are being empowered to develop innovative solutions that support a climate-resilient future through our global SustainTech accelerator program. Retained earnings have boosted capital ratios, and the rock-solid balance sheet, coupled with market-leading banking infrastructure, makes Emirates NBD a regional powerhouse to continue driving future growth. In summary, the group continued its strong and consistent performance to deliver a record quarterly profit. We have excellent IT infrastructure and a regional presence, which position us very well to keep delivering profitable growth.
I'll now hand it over to Patrick to go through the results in more detail. Patrick?
Thank you, Shayne, and a very good afternoon to all of you. Just to reiterate the strength of our results for the first half, all business and product lines continue performing very well. NIMs are improving in DenizBank, and we have seen strong impairment recoveries. And as such, we are upgrading two key guidance metrics: loan growth and cost of risk. Let me first take you through the summary results table, then dive into a bit more detail by component. Just starting with the performance summary there on page two, you can see our business momentum from the first quarter has continued into Q2. The group's ongoing investment in the UAE and the region is delivering at both the top and bottom lines.
Total income of AED 21.4 billion is up, is in H1, is up year-on-year, and income is also up 1% quarter-on-quarter. Within that, net interest income increased 6% year-on-year on the back of a 15% increase in assets, which more than offset margin contraction. Quarter-on-quarter, NII was up 7%, helped by loan growth and an improvement in margins in DenizBank. As usual, we've split out the contribution from ENBD and DenizBank in the appendix, that's on page 11. From a volumes perspective, retail lending grew very strongly, with 14% growth in the first half, and corporate delivered 7% loan growth, with AED 48 billion of new origination throughout the region.
Non-funded income is lower year-on-year, but client and trading flow income has grown steadily, and the decrease relates to more variable non-client income, which I'll go into in a bit more detail shortly. Costs have increased 12% year-on-year, supporting strong business volumes, particularly in retail, the accelerated investment in digital and our international network, in addition to the inflationary impact of DenizBank's cost base. The cost income ratio at 12%... however, remains well within guidance. We have registered an impairment allowance credit in the AED 1.2 billion on the back of cash repayments and recoveries. As a result of this strong credit performance, we have lowered our full-year cost of risk guidance to a 0-20 basis points credit. More detail on that shortly.
This gives us a very strong profit before tax and hyperinflation of 17.5%, sorry, AED 17.5 billion dirhams and AED 13.8 billion bottom line profits, which is up 12% year-on-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 year-on-year on strong underlying business momentum. Finally, capital and liquidity metrics remain robust. Just turning to net interest margins on Slide three. The bottom left chart shows that margins tightened by 37 basis points year-on-year due to higher funding costs, increased cash reserve ratios, and competitive loan pricing at Emirates NBD. NIMs improved 13 basis points in the second quarter to 3.65%, as shown in the bottom right chart, and are now within the guidance range.
There is a small net impact of ENBD's margin with the increase in the cash reserve requirement, that DenizBank i s, the primary driver for higher margins due to loan repricing feeding through and stabilization in deposit costs following the sharp Turkish rate hikes. We have maintained our guidance on margins at 3.6%-3.8%. Although ENBD's NIM was six basis points lower in Q2, we're not expecting it to drift too much lower, but will depend on CASA and Fed rates. We signaled last quarter that we expect DenizBank's NIM to widen in the second half, averaging 4%-5% this year, and we are now seeing signs of that. This remains our expectation.
The two variables to keep in mind are, first, reduce access to cheap swap funding from the central bank in Turkey, reflecting the country's improved cash reserve position, which could lead to higher funding costs. And secondly, the potential for rate cuts in Turkey, given the favorable June inflation print, with inflation expected to fall further in the second half. Although we've not factored in rate cuts in Turkey before year-end, any such move would be positive for margins. Moving on to Slide four and non-funded income. Fee and commission income is up 64% year-on-year and up 10% quarter-on-quarter, with a solid trend in 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 from 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. Brokerage and asset management income increased in the second quarter, reflecting the growth in AUMs. Now, we have reconfigured the other operating income chart at the bottom right to make it easier to determine and emphasize the amount of client income. Other operating income has a stable client and trading flow income component of around AED 1 billion-AED 1.2 billion per quarter. Non-client related income was lower year-on-year and quarter-on-quarter due to higher swap funding costs in Turkey.
There was also higher mark-to-market gains in the second quarter of last year, coinciding with market volatility around the election time. On Slide five, we see that gross lending increased 6% during the first half. Retail had its strongest-ever half year, adding AED 16 billion in loans. Corporate also had a very strong half of AED 48 billion in gross lending. There was also strong financing demand in industry sectors such as trade, transport and communication, utilities, and conglomerates throughout the region, which more than offset sovereign real estate and other scheduled repayments. DenizBank has a strong loan growth, up 20% in local currency terms and 8% in AED, with regulations favoring a pivot towards sectors such as agriculture. KSA is benefiting from the network expansion, registering an excellent 33% loan growth in the first half of 2024.
Now, we have revised our full-year loan growth guidance to high single digits following the strong loan growth in the first half, the continued positive economic outlook, and further announcements on infrastructure investment. We are, however, mindful of a fair amount of loan refinancing in the second half, competitive loan pricing in the UAE, given the abundance of liquidity and our disciplined approach to pricing for risk. On the liability side, total deposits increased AED 39 billion, up 7% in the first half. Within that, CASA and time deposits up by a roughly similar amount. In the second quarter, there was a clear preference for time deposits, and we have been signaling for some time that we expect to see this shift. And as you can see, that since Q2 2023, that has been the overall trend.
We have added AED 47 billion of term deposits against a net AED 8 billion of CASA in ENBD ex-DenizBank since this time last year. Yet CASA, as a percentage of total deposits remains very healthy at 69% for the whole group. On slide six, we see that the NPL ratio improved by 0.4% to 4.2% in the first half, 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 the Stage two loans also improved by 0.9% to 4.4% during the first half as a result of repayments and staging transfers. Overall, this has contributed to a AED 2.2 billion cost of risk credit. As ever, our recovery team works hard to clear legacy loans.
There may be some further recoveries to come through in Q4, but the most substantial recoveries have already occurred. As a result, we have revised our cost of risk guidance to a 0-20 basis points credit for the full- year. Now, this implies a second half cost of risk charge of around 70 basis points as we start to see normalization of the cost of risk. Having said that, from time to time, we can get recoveries sooner than expected. Now, as I just mentioned, NPL ratio is 4.2%. That's drilling down by vintage. is nothing over 10 years old, and around AED 4 billion is five years or more. If we were to write these off, the NPL ratio would mathematically, improve to around 3.6% with no material P&L impact. Paddy will now take us through the remaining slides.
Thanks, Patrick. On slide seven, we see that the cost-to-income ratio at 28.6% is comfortably within guidance, as continued acceleration of investment for growth is supported by existing income levels. Staff costs increased to drive strong business growth, 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. 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 76% and an LCR of 111.99%.
We've refinanced AED 20 billion of term debt and Sukuk in the first half, including a $2 billion syndicated loan and a $750 million debut sustainability Sukuk from Emirates Islamic. DenizBank significantly upsized their one-year syndicated loan with a 178% rollovers to nearly $1 billion in June, attracting 20 new lenders and 42 participants. The bulk of the remaining maturities in 2024 is DenizBank's one-year syndicated loan in the second half of the year. Slide nine shows that the Common Equity Tier 1 ratio strengthened in the first half to 15.4%, as retained earnings more than offset the 9% increase in RWAs. The increase in credit risk RWAs is from the strong retail and corporate loan growth. The group continues to operate with very comfortable capital buffers.
On slide 10, we see that RBWM improved, income improved 12% year-on-year, with the highest ever revenue, strongest ever loan acquisition, and a substantial growth in balance sheet. We enjoy a one-third market share of UAE credit card spend, as card spend grew 15% year-on-year. AUMs grew by an impressive 41% year-on-year, reflecting the ongoing success of our wealth management strategy. CIB achieved an excellent 64% increase in profit before tax on higher income and increased recoveries. Non-funded income grew 21% due to higher lending, a strong contribution from investment banking, and improved cross-sell. Corporate lending grew 7% in the first half, with strong growth in trade, transports, communication, utilities, and multinationals, which more than offset, sovereign real estate and other scheduled repayments.
CIB managed to continue 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 solid performance, generating AED 1.3 billion of income in the first half. Net interest income continues to be strong at AED 1.4 billion, despite the general increase in cost of wholesale funding and term deposits due to higher interest rates. Sales delivered strong results, driven by an expanded product offering and new innovative structured solutions for clients. Fractional bonds and Sukuk are now available through ENBD X, broadening investment opportunities for customers. Global Markets expanded the suite of commodities now actively available for customers. DenizBank delivered an impressive AED 800 million dirham profit in the first half, providing fresh funding to the Turkish economy as their balance sheet grew to over AED 160 billion dirhams.
We do have a couple of extra slides in the appendix containing more granular detail and a dollar conversion, sorry, dollar convenience translation, but with that, we can now open up the call for questions. Lydia, please go ahead.
Thank you, Paddy. We'll now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. To participate in our written Q&A, just type your question into the "Ask a question" text area, then click the Submit button. Once again, it's star one on your telephone if you wish to ask an audio question.
... Our first question today comes from Shabbir Malik with EFG Hermes. Please go ahead. Your line is open.
Hi, thank you very much. I have a couple of questions, please. Your NIM in the first half is currently around 3.59, 3.6%. Your guidance is pretty wide, about 3.6%-3.8%. Where do you expect the bank to end the year in terms of NIMs? Do you expect it to be within somewhere in the middle of this range? And what are the variables that you think can change this outcome? That's one. The other one is that, on fee income. And thanks very much for providing some extra color on non-interest income, between client-related and non-recurring fees, or non-recurring other income. But are there any elements of one-off in fees this quarter?
Because that was very strong in 2Q versus the previous quarter and even last year. And, thirdly, your NIM sensitivity to rate cuts is quite high. How do you plan to shield yourselves from the headwinds of potential rate cuts this year and next year? And finally, is there any update on the sale process of IDBI? Have you been given the green light from the central bank over there to participate in this bidding process? Thank you.
Shabbir, Patrick here. Welcome. Thanks very much for joining the call. Thanks for those questions. Maybe I'll just take the first three and then hand over to Shane for the last one. Just on the NIMs, you're right, we're at 3.59 so far, so we're just at right at the bottom end of the range. You may recall, you may recall that we had to revise the range at Q1, after the sharp increase in the Turkish interest rates. Even at that point in time, I think our overall margin was about 3.52, so we're below the range. So you can see that we've actually made some good progress, even through the second quarter, with the NIM of 3.65. We're in that range.
The main variable is going to be what happens in DenizBank with the tightening of monetary policy. The rates are at 50% now. One thing that's been happening there is the cost of funding goes up a lot faster than the repricing of assets. We have started to see the repricing of assets, it just takes longer than the repricing of the deposit side of things. And from the ENBD side of things, I think I mentioned there were just a couple of variables that could affect us there, one being the Fed rates, depending on the timing, that story can change, but we have made that assumption of a rate cut in September and December. That really won't be so material for this year, more something for next year.
The whole point in giving a range is, it is just that, there are a number of variables where it could go towards the higher end or say, nearer the, the lower end, and that, that will be more a function of what's happening within monetary policy tightening, in Turkey.
The second one, just on the income, were there any one-
Maybe I'll just get through those, and if you can ask follow-ups after would be good. Just fees.
Sure.
Fees, were there any one-offs? No, it was a particularly strong quarter in half. There's been a lot of activity in the market, so sometimes even if you have larger transactions, you have... That goes into the overall PNL, and it's not something that. There's nothing really there that we would call off, call out as exceptional or lumpy, that sort of affects that overall good trend of growth of client income that we have there. Just on the NIM sensitivity, have we done anything to protect ourselves from that? Look, broadly, we are a floating rate bank, so as rates go up and down, so does the income on the asset side. But with the strength of CASA part of the portfolio and our low cost of funding, we are more sensitive perhaps than others.
But in the meantime, we haven't left any shareholder value on the table because we optimize the earnings with that low cost of funding. There are certain things you can do, whether it's in the treasury book of extending the tenor to lock in higher yields for longer, but that's really just tinkering around the edges in many respects. So and we do provide quite a lot of information in past calls and in our annual accounts on what that rate sensitivity is, so you can model that quite well. Go ahead.
I would add on to that, Shabbir, that you can see our loan growth where it is and our guidance for loan growth, and one of the offsets, obviously, for us, going into a lower rate environment is bulking up. So, you know, we have been driving loan growth quite aggressively because, you know, we are taking market share within the market, and that is off the back of, you know, we are positioning ourselves for lower rates in 2025, 2026. And, you know, we've been doing this for quite a while, as you know, bulking up. And having to offset against the sovereign repayments that we've had, which as you would know, have been quite substantial.
So it has been a strategy for us to get loan growth up a bit. On acquisitions that you mentioned, I won't mention a name, any one name. But I would say, there was another question on the board, similar to this. What I would—and that one was around what are the attractive markets for an M&A? And I'll just stick to what we've said many times. You know, our strategy with acquisitions is to go deeper, not wider. And that means that for us, attractive territories are Saudi, Turkey, Egypt, and India has been on the table for a long while now.
All of those that we're, at the moment, we're growing organically. But inorganic, if the right deal comes up at the right price, we are, we are, are interested. We have the capital, and, you know, we have the liquidity. So we are looking, but, I would just reiterate, in 12 years, we've done two deals. So as long as if we're doing one every fiv- seconds, it, it, it's, for us, we look at a lot of transactions, we deliver very few. And that is largely because we walk away if we don't believe we can generate, value to our shareholders in the medium to long term.
Thank you. Just maybe a follow-up on the NIM response. So the upper end of the guidance would require interest rates in Turkey to start coming lower, or is that what's driving the upper end of the guidance?
Okay. Yeah. So, to be in the mid of the range, the margin in Deniz would be, need to be within the 4%-5% range. So they were at 4.44, at 4.22. So they're in the range, but I need that for an average for the full year, so I still need some more upside, through the second half to get an average, of in, in that range of 4%-5%, and then we'd be in the middle of the range. But there are a number of variables that, you know, may mean it's either side of that midpoint.
Got it. Thank you very much.
Lydia, can we have the next question, please?
Absolutely. Our next question comes from Naresh Bilandani with J.P. Morgan. Please go ahead.
Thank you. It's Naresh Bilandani from J.P. Morgan. Congrats on the great set of results. Just a few questions, please. One is, could you please share some more insight into the strength in the Turkish NII? I mean, this is contrary to what the peers are seeing or guiding. I mean, our recent meetings with the Turkish banks and also from the results from some peers indicate that, the NIM in Turkey was expected to be under pressure in the second quarter and probably also going into the third quarter. So I'm just keen to understand how were you able to achieve, the strength in the Turkish NII? Some more color there, would be very helpful. That's one. Second is, could you please share what sectors or accounts are actually driving the, provision reversals here?
I mean, are these benefits? Am I right that these benefits are being accrued mainly from early repayments? And I guess there's no change in the impairment assumptions or changes in the due to changes in the outlook, which is leading to this benign impairment charge. So any further color that you can share there would be extremely helpful. And my third and final question is on the loan growth guidance, which of course, now we've already seen 7% year to date. You're guiding high single digits. So I'm just trying to get a sense, are we really focusing or forecasting any sizable repayments to come through in the second half? Or is the pace gonna materially slow down?
Or I'm just trying to get a sense if this is just a conservative expectation and this pace can easily move into double digits as we go into the second half of this year? So any thoughts there would be super helpful. Thank you.
Yeah, thanks. Thanks, Naresh. Welcome.
I think they're all yours.
Yeah. Thanks, Shayne. Yeah. So just on the NIMs in Turkey, like, it's mainly about the repricing of the loan book in Turkish lira. So when the rates went up to 50%, the cost of funding went up to a range of, you know, 40%-50%, depending on timing. There is a preference for 1- and 3-month time deposits there, so there's relatively little CASA. So that goes up very quickly, and then you can actually reprice up assets. There are some limits on growing the portfolio. So if you were able to grow the portfolio rapidly in an expanding economy, then you can get a faster repricing with that new origination. But with the limits, it means it does take longer to reprice the book. So I-
You might want to explain that.
Yeah. So it might take three or four months to reprice the liability side, and it can take five, six, seven months to reprice the asset side.
Now, what I meant, Patrick, is there are macro-prudential controls around loan growth-
Yeah, I agree.
in Turkey, limiting growth of 2%, with some per month.
Yeah.
With some sectors that are actually exempt from it. Agri is one sector that we've always been big in, in Turkey, that is actually exempt from that growth.
That is one sector that has been growing, and when you grow that, you can actually reprice more quickly. I can't speak for the other banks. Another variable in there are the CPI linkers as well. So the second quarter was a pretty high inflation level, that's topping out around that sort of 72%-75% level. With that higher inflation, it just means you also get a higher yield on your CPI linkers. So that did help somewhat. So that's just the overall trend we've been seeing month by month, and so we do see that as positive.
But there is one thing that is potentially slowing other banks down as well, and that is the sharp increase in the swap funding costs when you swap euros or dollars into lira with the central bank. The central bank has less need for foreign currency they have than they did before, so there is not as much of that swapping to local currency going on. That was, historically, a good cheap source of funding of lira, and that might be something that's putting pressure on the other bank's margins as well, but that is not so much the case, for us. It does impact us, but the others may be more affected by it. So that's the one on the, Turkish margin side.
Just on the sectors for impairment, the actual collateral recovery that's been sold is substantially connected to, on the, in the NPL side of things, connected to realizing property-related collateral. It's a very buoyant market. Now is the time to be able to realize that, and it's very realizable as well. So it doesn't mean that they - that is from all the property sectors. There are some legacy loans that were connected to the construction or property sector that it relates to, but not all of it. Actually, around half of the net recoveries, and I think if you look in our notes, the accounts where we spell it out, more clearly, around half the recovery, and it's probably a net AED 3.3 billion or so, for the half.
About half of that is coming from Stage two cash repayments, where customers that, or clients that have been in Stage two, have fully repaid or perhaps refinanced, and therefore, any provisions against that can be released. So that's a cash recovery, as well.
Look, I just would add to that, Niraj, is that, you know, if you look at the Stage two coverage that we've had, or we still have, some of that is specifically allocated to certain counterparties where we see the risk as higher than others. And our Stage three coverage means that, you know, our Stage three loans are just about an income generating asset now because of the coverage, right? This is a liability. And our Stage twos, you know, we've had quite a lot of repayments and refinancing. And again, you know, they've led to quite a lot of releases in that portfolio.
So, you know, our conservative provisioning that we've built up over many years is really coming to play. And I hear when I read some of the analysts, you know, well, maybe maybe it's not a great beat on the provision, but because a sub- you know, a significant part of it's coming out of the provisioning side. But hey, we took the provisioning, right? No pain, no gain. And you know, we took it all up front, and now we're getting it back. So we sort of didn't get many kudos when we took it up front, and we don't get any kudos when we recover it, so we sort of can't win now.
Naresh, on your third point, just around loan growth, you know, we are-
Sorry, I called him Niraj. Sorry, Naresh.
Naresh, yeah. Just on loan growth, we are at 6%, year to date, and we are guiding to high single digits. We are always quite cautious about that pace of loan growth. One thing. There are two, probably two components. One is DenizBank, just with the tightening monetary policy, there could be more of a slowdown in overall growth. They grew their loans by about AED 5 billion equivalent in the first half. Whether we can repeat that, we need to manage risk. We're not going to put that all into agriculture. So that's one factor. But also we do have government of Dubai and sovereign repayments that have been coming through.
You may recall around, there was around AED 30 billion repayments in Q4 last year, about AED 10 billion in the first half this year. And so that can be factored in as well. The government's finances are in very good shape, so if they had surplus funding, that can from time to time be used to repay any of that debt. So we are a little bit cautious on it. If it slips into double digits, it's not gonna be massively higher double digits.
Okay?
Understood. Thank you, Patrick. Thank you, Shayne. Thanks a lot for the color.
Thanks, Naresh.
Our next question comes from Rahul Bajaj with Citi. Please go ahead. Your line is open.
Yeah, hi, this is Rahul Bajaj from Citi. Thanks for taking my questions. Two questions, basically from my side. Sorry, I'm repeating again on DenizBank margins. Just wanted to understand, if you could give us a sense of percentage of, for example, the loan book, which has been repriced and what is pending to give it a sense of how much of that kind of yield expansion can we expect, specifically in DenizBank, if rates do not change? Because my assumption is that cost of funding increases are already done in Turkey, so if any margin expansion that would come in CQ will come on the back of these kind of loan repricing.
So if you could give us, give us a sense of, are we kind of in the middle of the repricing, at the start of the repricing cycle, or just towards the end? Something like that, that would be useful. My second question is around provisions. So there has been some chatter around this new regulatory rules on provisioning, which we could kind of necessitate banks to amortize the collaterals that they hold on NPLs over a period of time. And this will, if it eventually basically lead to higher provisioning in the UAE over a longer term. Have you seen the draft? Have you had these discussions? What are your initial views on this kind of new regulation? Thank you.
Maybe I'll take the regulation ones, and you can do the other ones. I'll do that one first. We certainly can't comment and preempt the regulator on regulations, yeah? That would be very unfortunate for us if we did that. So we really can't comment on that. We did, in the commentary, make some comments about that we had written off the last 10 years, and we did make some comments in the commentary that if we wrote off everything over five years, that our NPLs would drop down to 3.6%, and that the P&L effect would be immaterial. That's all we can say.
And then, Rahul, just to your Deniz margin part. So, it can take, you know, four, five, six months to reprice the asset book. I think the sharp rate hikes happened around March, or so, the extra 500 basis points. If it wasn't March, it might have been earlier April. So, I would say we're maybe two thirds, three quarters of the way through the repricing on the asset book. Obviously, in a book, you've got a range of tenors from 3-month repricing on the corporate side to, say, personal loans that might be three, four, five y ears. So it's a bit of a blend overall. But more generically, you'll get most of your repricing done that will have the biggest effect within 6 months.
So it's only been one quarter of that. So through Q3, we would see more of that repricing coming through, and there has been a stabilization on the funding side of things as well. So we still see there's positive upside, from that. Hopefully, that answers that question for you.
Thank you. Yeah, that's it. That does. Perfect. Thanks. Thanks, Shayne. Thanks, Patrick.
Yep. Yep. Yep.
The next question comes from Ashwath P.T. with Goldman Sachs. Please go ahead.
Thank you. Congratulations on the results. I've got two questions. The first is on the cost to income. Some positive trends that quite below the 30% that you are, you are expecting for the year. I just wanted to understand in terms of that 30%, do you expect some more, in terms of investment into the digitalization front and/or an inflationary pressure in Turkey to lift that up towards the end of the year, towards that 30%? Or put it in a different way, where do you see the cost to income settling over, say, the medium term for Emirates NBD? The second question I have is on the capital allocation front.
So with strong results, boosting internal capital generation for the business, and assuming, like you said, if there's nothing on the front of, M&A, could we actually see more of this capital in terms of, capital returns to the shareholders in terms of higher dividend payouts? I understand it's, board decision, but I wanted to understand your thoughts behind that as well. Thank you.
Ashwath, welcome. Just on the cost income ratio, yeah, we're at 28.6%. Our actual medium, long-term commitment is to keep the cost income ratio lower than 33%. That's the actual guidance. But to be more helpful, we've given verbal guidance updates indicating that, you know, we'll be around the 30% mark for the year. We are continuing to invest. As we invest in CapEx, you get the amortization starting to come through. We have been building out the branch network in Saudi Arabia, and that amortization and the cost base of that starts coming in. ENBD's actually relatively stable in that sense, and quite predictable. DenizBank does also have an inflationary element that we're seeing coming through, where Turkish lira inflation is higher than the rate of FX depreciation that we're seeing.
So that it's not been fully offset in AED terms by FX depreciation. So that will increase the cost income ratio a bit further in the latter part of the year. But stepping back, you know, we still will be at or around that 30% mark by any corporate metric. For a bank, that is a very good, low cost income ratio. Just on capital allocation-
Just, just—sorry on that one. Just for your model purposes, just take note of the cost base that we normally have in the fourth quarter as well for your model, because traditionally, fourth quarter for us is—there's a lot of annual expenses that land in the fourth quarter. And just for your model purposes, just to remember that when you're actually modeling it, yeah?
...And just on capital, capital allocation, we are very capital generative. I think we generated about $1.3 billion net dollars, $1.3 billion dollars, in the first half, adding to the overall capital base. That just means we have a strong CET1 ratio. It does not mean we will go and spend all of that. I think also we have demonstrated in the past that we have listened around the dividend, and last year, the dividend was 100 fils + 20, celebrating the 60th anniversary. So that was a substantial increase on the 60 fils dividend that we had the year before, i.e., double. But when it comes to, as Shayne was talking a little bit about, any of- in the corporate, any corporate acquisition activity, these things don't happen overnight.
Things aren't there on the supermarket shelf. Things take time. So it would be premature, very much so, to be talking about capital return other than how we assess our dividend each year, which is an annual board decision.
Yeah. But the other thing I'd just add, Rahul, I talked earlier about, you know, the question was about how do you keep earnings up in 2025, 2026 if rates are falling? And we talked about, okay, one of the things we've been doing is aggressively backfilling the sovereign repayments and aggressively going after loan growth and taking market share, which we have been doing. But that also has, you know, unfortunately, there's no free lunches, and that also has our RWA implications. So if you see, we've had quite a big RWA growth in the first half, with on the back of that loan growth. And also, you remember that the sovereign has zero risk weight, right?
So it's backfilling with, with largely 100% RWA lending. So there is an offset there for us when it comes to capital as well. And with the sort of growth rates that we've been looking at, you know, it has been eating quite a bit of our capital on, you know, rather than it just being a free ride on capital that we had with the sovereign growth.
Next question.
Our next question comes from Chiro Ghosh with SICO Bank. Please go ahead. Your line is open.
Hi, this is Chiro Ghosh from SICO Bank. I just one more, one last question on Turkey. So I just want to get a sense on the four key parameter, and how would that, those get impacted if interest rate remains at 50% and inflation around 60% after 70%? So net interest margin, asset quality, cost, and loans. So net interest margin, you very clearly explained that, you know, what will be impact. I want to get a sense, how would the asset quality and the cost, and the loan growth in Turkey would remain going ahead, if we assume that the interest rate remains at current level? That is my first question. And second one, also very quickly, how are you seeing your other international growth plan?
Of course, you cannot comment much on the inorganic plan, but organically, how are you seeing those? Yeah, these are my two questions.
I mean, on organic growth, I think Egypt has been growing quite well in pounds, but obviously, the devaluation of currency there has affected it. Now, I think the good thing about Egypt is, you know, we're not seeing the inflation impact that we thought we'd get from the devaluation, and we're getting a stabilization of the currency there. So that's good from an organic growth perspective in Egypt going forward. Saudi's been doing actually extremely well. And you know, I think from a revenue perspective, you know, that will be as big as Egypt, if not this year, certainly next year, from a top line perspective.
So we're quite happy with, you know, they've had, as we said earlier, massive, loan growth there. And, and it's not just corporate, retail's been doing very well as well. So we're very happy with, with how, Saudi's doing. It's, it's growing very well, and it's basically given us another Turkey when it comes to revenue now. So, you know, happy with, with that organic play. That's with the cost, obviously, the cost income ratio in, in, in Saudi is, is not where it, it will be in the future, because it's still in the expansion phase as, as we open more branches and headcount, et cetera, and technology, et cetera, needs to go into these new branches. But, you know, very, very happy with where we are on the, in Saudi on, on the organic growth.
I think India is still quite small for us, but India for us is as important when it comes to its contribution in the Gulf region, even our London office and our Singapore office. So India for us feeds a lot of pieces of our network. So that's doing very well. And, you know, more organic growth in India, more branches, I'd be quite favorable on, that's for sure.
Thanks, yeah. Chiro, just on the margins at DenizBank, if you look at the appendix, you'll see the we do break out ENBD, excluding DenizBank and DenizBank margin. You will have seen that, you know, the DenizBank's margins were quite high. In fact, they touched about 9% before the interest rates started to rise. Then they were down as low as about 3.3%, and in Q2 have widened to 4.4%, so 114 basis point widening. Patrick explained that very clearly when he said it, that, you know, the loan pricing had effectively caught up with the rate raises. Obviously...
And you were then asking about, well, what, what happens if we stay at 50% interest rates and, and have high inflation? You know, the, the guidance that we've given in, assumes, we actually assume no further rate cuts this year. So any rate cuts that we get, in Turkey would actually be positive, for DenizBank. But, you can see that the Q2 margins around 4, 4 and a half, 4.44%, and what we had signaled was that that's sort of in the range, to meet our 3.6%-3.8% guidance. So there's, you know, it depends, if there is rate cuts, then we will benefit more from those.
If there's no rate cuts, then, you know, that will depend whether we're at the higher or the low end of the guidance.
But loan growth and asset quality? No, sorry. Net interest, net interest margin part was very clear. I just wanted to know about the other factors, like loan growth and asset quality. How do you see those?
Yeah. Shayne mentioned that, loan growth, there is restrictions on certain sectors, most sectors, where there's banks can only grow at 2% per annum. Sorry, 2% per quarter. There are exceptions to that, such as agriculture, and DenizBank is the second largest bank for agriculture in Turkey, so they've been able to grow. We mentioned they've grown 20% in local currency terms in the first half. And that's because there's been a pivot towards agriculture lending.
Just one quick follow-up on the previous answer, that all your international business operate on their own? Or say, for example, you have higher liquidity in your UAE market, you can use that money to, you know, finance growth in the other economies.
Sorry, Shayne, I didn't get that question.
I got the question. I mean, from a policy perspective, we expect our businesses to self-fund. Will we inject liquidity into a market where we see there's an arbitrage there between our funding and the market? Yes. But our policy is businesses offshore should self-fund. That, that's our policy.
I just because we keep getting a lot of questions on Turkey, we never hear too many positive comments on it, but I would just point out that, you know, if you look at the price-to-book multiples on Turkey, where they are, and some of the multiples you've heard about with potential acquisitions, you know, we bought this bank, which has grown very nicely and contributed nice profits a number of years ago, at a price-to-book less than one. So if you do the back-of-the-envelope calculations on where the price-to-book is now for Deniz Turkey, we've made a sizable gain in potential value if we sold it, which we're not going to on that.
So I think, you know, you also need to bear in mind that there is considerable value in, in this franchise, which I know a lot of you don't seem to attribute a lot to, but there is a substantial amount of value in that, that franchise that we bought, and we're very happy that we bought it.
Thanks, Shane. Okay, Lydia, I'm conscious of time. We've got 6 minutes left, and I've got quite a few questions to get through, so I'd like to spend 3 minutes on that. I think there's 1 final voice question. If you could open the line up, and we'll take that final question, please.
Absolutely. The next question on the line is from Aybek Islamov with HSBC. Please go ahead.
Yes, thank you for the conference call and all the color, very useful. I just had one question: You know, what are your thoughts about your cost of risk in the longer term, as in, like, normalized cost of risk? Keeping in mind that your loan mix has changed, there is a much lower contribution from the government sector, from the public sector, and also your incremental exposure to international is rising. And I think there's another factor that you might have to write off those NPL, which are more than four or five years old, more than five years old, right? So what's your thought process around the normalized cost of risk? Thank you.
Hi, Aybek, thanks for joining. Just on the cost of risk long term. It wasn't so long ago, sort of more longer-term guidance was 100-125 basis points. Just with the strength of the economy, recoveries, et cetera, I think we've typically seen it more around the 50-70 basis points. But that was earlier guidance before we started seeing a lot of these recoveries. So you know, I don't know what that full long term will look like, because we are in a cycle at the moment, so I can't give you what the long term is, but we can actually look back with reference.
Even, even in some of the downtimes of more recent times, you know, during the pandemic, it wasn't so much more than the 100 to 125 basis points in a significant downturn. Just on the NPL write-off, I think I did say in the remarks that if we wrote off anything over five years, there would not be a material PNL impact.
Just add on the cost of risk, but on that question is, just remember, when you're trying to do medium, long-term review of our cost of risk, we're very heavy retail compared to a lot of banks in the country, and therefore, the risk reward equation normally means that you're gonna have a higher percentage of NPLs in that retail portfolio. So, you know, if you're big in revolver credit cards, well, obviously, you know, that's extremely profitable business for us, but, you know, the cost of risk on that portion of the business is much higher than a corporate would be. So,
I think when you're building your models for, you know, medium, long term on us, you could also gotta look at the mix we have, and which we disclose.
Great. Thanks, Shayne. And there's a few questions just come in on the web, so, I've got 2 minutes left. I'm very quickly gonna scan, go through those. People have asked, some people have asked not to be named, so I'll not name anybody asking the questions. And we've answered quite a lot of them. Is NFI sustainable? Again, if you look at the slide 4, you can see that the fee and commission income and, the new display that we have for other operating income, and we've really tried to sort of split out the client flow income, which tends to be more persistent, as opposed to the, the non-client's flow income. Question on why the loan growth guidance been revised up?
Again, given the geography, increased talk about infrastructure, the buoyant economy in the region, that, you know, that's very clear why, why that. We've talked about the DenizBank growth, loan growth. A question about tax rate 9 versus 15. Yeah, we need... There, there's nothing been formally published by the UAE, but our working assumption is that, if a 10% implementation in the EU would trigger other countries to implement it. Why the growth in interest expense? Again, that's the flow-through coming from the cost of higher deposits, given a higher rate environment, the increases over the last year. What percentage of the loan book is variable? Again, the majority of our loan book is floating rate.
If you look at our annual financial statements, you'll see the split of that, in terms of the reset, the profile of both loans and deposits. And then finally, last question, hyperinflation adjustment for Q2 was down 16%, compared to Q1, that was down 33%. Is there room for a big improvement in hyperinflation adjustment? Again, we've said in the past that that's quite... If you look at the movement, it's quite comparable from a relative. So, if you take the move in inflation, you can prorate it on a variable basis.
Whatever you wanna make your assumption about hyperinflation, as I say, you can sort of prorate it to the adjustments that we have been making.
But, just, just on that one, Paddy, just be cautious if you're doing that in your model, but also have a look at the CPI linkers-
Yeah.
- because that's also then offset at the income line versus the hyperinflation deduction at the bottom line. Yeah?
Perfect.
So they'll, they'll correlate.
Yep. That is all the questions on the web, and we are exactly at 3:00 P.M. UAE time. If there are no further questions.
Well, thanks, Patty. And, as you can see, we've continued our strong growth and our consistent performance, delivering another record quarterly profit. And, you know, our solid balance sheet makes us a powerhouse in this region, and we have a really good platform for future growth. And I'll hand you back to Lydia, in case you've got any further follow-up questions. But thank you all very much for attending the call. Those who are going away for summer, which is really hit us now, please have a good break, and I look forward to talking to you all on the next quarters call. Thank you, all.
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 results press release. A replay of this call and webcast will also be available on the Emirates NBD website next week. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your line.