Ladies and gentlemen, welcome to the Emirates NBD Results Call and Webcast for the Q4 of 2023. 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, Bailey, and welcome to our Q4 results call. Emirates NBD celebrated its 60th year in 2023, and it's been an outstanding year for the group. We delivered exceptional financial results that underscore our relentless commitment to excellence and the success of our strategic vision. Income grew 32% to AED 43 billion, and profit hit AED 21.5 billion in 2023, increasing by an impressive 65%. In light of the group's excellent performance, the board of directors are proposing a 100 fils dividend, and to celebrate our 60th anniversary, a further 20 fils, doubling the total dividend to 120 fils per share. These record results were driven by a buoyant regional economy, a robust operating platform, and all business units delivering an enhanced banking experience.
Every part of our diversified banking model delivered phenomenal milestones and stellar results. The past 10 years have been transformational for Emirates NBD, growing from a local bank to a leading regional powerhouse, serving over 9 million active customers across 13 countries. We built a high-performing, innovative, customer-centric bank, developed the leading bank app in the region through agile IT infrastructure, and we are now a leader and enabler in ESG. Over the past 10 years, profitability has risen more than sixfold. The contribution from international income has increased from 6% to 39%. The share price grew by an 11% compound annual growth rate, and the proposed dividend has risen nearly fivefold.
The balance sheet has strengthened significantly over the past decade, with much lower NPLs, a more diverse loan book, a stable, low-cost deposit base, and a stronger capital and liquidity. This strengthening was recognized with positive rating action from both Moody's and Fitch in recent years. Having briefly looked at over the last incredible ten years, I want to talk to you about the future. We have six clear strategic priorities to maintain strong momentum and growth. Our relentless focus on straightforward processing and digital is delivering an excellent customer experience. ENBD X quickly established itself as a leading banking app for the region, and customers now benefit from instant account opening and product approval, along with access to a vast suite of wealth management products. Advanced analytics will enable a personalized customer interaction in real time.
New products and services on ENBD X will be added, providing an unmatched one-stop solution to service our customers' entire banking and investment needs. The group continues to drive core business, develop a low-cost, stable funding base by nurturing significant customer growth across all customer segments. We have excelled in many key products, such as trade finance, regional IPOs, and debt and Sukuk issuance. In UAE, credit and debit cards, the group have cultivated a market share of over 30%. We continue to grow our business banking franchise, underpinned by trade, FX, and asset growth. Our cutting-edge technology will enable rapid credit assessments and loan dispersal. We've focused on our future potential, launching our digital wealth proposition and enabling customers to easily manage their global investment portfolio on ENBD X.
A new generation of products and platforms have been developed, introducing innovative solutions for customers, such as fractional bonds for a select list of bonds and Sukuks. Our public sustainable finance framework enabled the issue of the largest green bond from any regional bank. Our carbon trading platform empowers customers to effectively manage their carbon footprint. Customers will be offered sustainable solutions to support their transition to a net zero emissions economy. Emirates Islamic will focus on Islamic business banking to attract new customers and deposits. We will continue to grow our presence and market in Abu Dhabi, tailoring our financial products with differentiated customer service models. ENBD successfully expanded its presence in core markets such as KSA, Egypt, India, and Turkey, enabling us to attract and service multinational corporates.
This international diversification has propelled our share of non-UAE income to 39%, compared with 6% 10 years ago. The group will increase market share in key corporate, retail, and wealth management sectors, including further branch expansion in Saudi Arabia. We will develop competitive niches through our new international network, new, organic, and inorganic growth opportunities within our footprint continues to be assessed. We have built a market-leading infrastructure by investing in cutting-edge technology. Our 100% cloud-native platform enables agile through product delivery in the digital landscape, while our advanced analytics initiative is shaping ENBD as a data-first bank. ENBD will continue to adopt and leverage new technology, deepen our AI capabilities, and build partnerships for innovative solutions. We will fortify the resilience and security of our technology infrastructure.
The group is building a market-leading offering for merchant acquiring and new integrated payment solutions for our corporate customers. Emirates NBD has developed a dynamic organization, encouraging creativity and career development for all employees. Our workforce is motivated, agile, and adaptive. We are committed to gender equality, developing the next generation of NBD leadership, upskilling and reskilling the workforce, and empowering them to grasp new career opportunities in a rapidly changing business landscape. The group's growth, the profitability, is reflected in the strong performance of the share price, a beneficial increase in employee dividends, and robust capital ratios. Our healthy capital buffers are a relatively new phenomenon, enable us to explore organic and inorganic growth opportunities within our footprint. ENBD will continue to evaluate potential acquisitions and bolt-ons.
Price discipline will be maintained, and as in the past, we will walk away from opportunities that do not meet our valuation or complement our strategic aims. I'm proud of the transformation delivered. We're well-placed to fulfill our future potential. The group stands ready to benefit from the positive regional outlook. The UAE is a beacon of growth, and with a non-oil economy expected to expand by a healthy 4.5% in 2024. Given this positive economic backdrop, we expect mid-single digit loan growth in 2024. We have maintained our margin, cost of risk, and cost of income guidance, and expect NPLs to remain in the 4%-5% range, the lowest range in over a decade. I will now hand you over to Patrick to go through the results in more detail. Patrick?
Thank you, Shayne, and a very good afternoon to all of you. Let's go straight to the numbers on page four. The overall headline is that we've had an incredibly strong start with four solid quarters. Total income of AED 43 billion for 2023 is up 32% year-on-year. Net interest income increased 30% on the back of a 16% increase in assets, funded by our stable and low-cost deposit base. That meant with rising Fed rates, margins increased to 3.95%. Both retail and corporate delivered heightened loan growth, more than offsetting strong sovereign repayments. We also made good returns on surplus liquidity. Non-funded income grew by AED 3.6 billion to AED 12.9 billion in 2023.
This growth has been strong across almost all customer-focused parts of the group, but in particular, we had strong growth in customer remittance, FX and interest rate hedging, debit and credit card business, and increased trade finance. Costs have increased 26% year-on-year, supporting strong business volume growth, particularly in retail and the accelerated investment in digital and our international network. We opened a further seven branches in KSA last year, bringing the totals to 15, and are on target to add a couple more in the coming months. Even with our investment for the current and future growth, the cost of income ratio at 27.2% for 2023 is comfortably within long-term guidance.
Impairment allowances are 2/3 of what they were for the preceding year, as strong recoveries in both UAE and Turkey have come through, and the cost of risk finished the year around the top end of guidance at 71 basis points, still the lowest in recent times. This gives us a very strong profit before tax and hyperinflation of AED 27.9 billion, nearly AED 10 billion higher than last year, and a AED 21.5 billion bottom line profit, which is up 65%. Looking briefly at the quarter-on-quarter numbers on the same page, income is down 10% quarter-on-quarter, mainly DenizBank's NFI, which I'll take you through shortly. Costs are 15% higher due to higher marketing costs and seasonal events.
Impairment allowances are higher than Q3, as we have taken stock of loan quality post all the recoveries in 2023 and assessed any need to downgrade from stage 2. Q4 profit before tax and inflation was therefore down at 37% to AED 5 billion, and after the equity neutral, inflation adjustment, group profit was AED 4 billion in Q4. In the bottom summary table, you can see the balance sheet metrics are all in good shape, with total assets, loans, and deposits all growing substantially through the year on strong underlying business momentum. Loans were lower in Q4, coinciding with sovereign repayments. Capital and liquidity metrics remain healthy, and the NPL ratio improved considerably to 4.6% on write-backs, recoveries, and write-offs.
Turning to net interest margins on slide 5, the bottom charts show the margins widened by 52 basis points year-on-year, helped by improving loan and deposit mix and higher interest rates. NIMs are down 25 basis points in the Q4, as rate rises fed through to higher funding costs. The contribution from DenizBank was lower in Q4 as Turkey increased interest rates to combat inflation, which in turn increased our funding costs. Heading into the Q1 of 2024, we want to hold our current guidance of 3.8%-4%. We are exiting Q4 at 3.81%, but we do see potential upside from rising rates in Turkey. Offsetting that, we have factored in 2 or 3 Fed rate cuts starting in the second half.
As with the last few years, the market view on Fed rate changes with each piece of published economic data, and no doubt it will continue to do so through 2024. Just to illustrate that, over the last six weeks, market expectations have gone from higher for longer to 6 cuts starting in March, and then to 3 to 4 cuts starting in the second half. The other main variable in the rate and quantum of migration of CASA to term deposits, we've done well growing CASA during a period of rising rates, but there comes a point when more is likely to migrate. Nonetheless, growing CASA remains a focus in 2024. We'll come back in Q1 to keep you up to date, to see how the main NIM variables are panning out.
Slide 6 shows that fee and commission income is up 28% year-on-year, with a solid trend of quarterly growth across almost all of the group's customer-driven businesses. The increase in Q4 fee income, as per the bottom left chart, is mainly from higher retail card spend volumes in both ENBD and DenizBank, and an increase in the interchange fee in Turkey in Q3. Other operating income increased 47% year-on-year, due to an increased volume of retail customer spot, FX and remittance, additional corporate hedging, and lower swap funding costs in Turkey before the rate rises. The Q4 is lower, as you can see in the bottom right chart, due to the reversal of some of the gains made in Q2 and Q3 around the time of the Turkish election and the monetary policy pivot.
The underlying FX and derivatives client flow income for Q3 and Q4 remained quite strong at more than AED 1 billion in each quarter. On slide 7, we see that gross lending increased 5% during 2023, with net loans up 7%. Both retail and corporate lending have seen strong growth in Q4, and during the year, both growing 18%, 19% respectively. DenizBank also has strong loan growth in the local currency terms amidst the partial unwind of regulations, up 63% this year and up 5% in AED terms. You'll see that sovereign lending reduced in Q4. The government of Dubai's finances are in good shape. They have repaid a significant amount, as they did in 2022.
In our account disclosures, you will be able to see that related party deposits that stood at AED 22 billion as at Q3 have reduced by AED 14 billion to AED 8 billion. This loan repayment has reduced the concentration of sovereign lending to 17% back to the 2008 rate. We have been successful in offsetting repayments by building the corporate and retail loan books with our strong client and customer franchises across our regional footprint. For guidance, we expect mid-single-digit loan growth for 2024. On the liability side, total deposits increased AED 82 billion, up 16% in 2023. Within that, CASA is up AED 30 billion, even after a AED 15 billion decrease in the Q4. Net-net, AED 14 billion of this is from the government-related party deposits that I just mentioned.
We continue to push for CASA growth and have recently launched another mega liabilities campaign. However, clearly, any movement in CASA to term deposits will reduce NIMs, as I've highlighted in the last few quarterly calls. We continue to grow time deposits as we are able to deploy these profitably in liquid assets if surplus. On slide 8, we see that the NPL ratio improved by 1.4% to 4.6%, reflecting the strong recoveries we're seeing throughout 2023 and the related write-offs. You can see the stock of NPLs has dropped from AED 27 billion to AED 22 billion, and the coverage on the remaining book is now at 99.5%. Our NPL guidance for the coming year is a 4%-5% range.
The cost of risk for 2023 is 71 basis points around the top end of guidance. We are comfortable keeping guidance for 2024 at the same level, but within that, we do expect lower recoveries that are offset by lower levels of gross cost of risk. Paddy will now just take us through the rest of the slides.
Thanks, Patrick. On slide 9, we see the cost to income ratio at 27.2% is comfortably within guidance, as continued acceleration of investment for growth is supported by existing income levels. Cost to income ratio in Q4 was 32.4%, and this was higher than Q3 due to 10% lower income in the Q4 from lower non-funded income. In Q4, we also had higher marketing costs, including COP28 sponsorship, seasonal events, and campaigns to ensure that we hit the new year running. IT and communication costs increased as we invest to deliver market-leading technology solutions. Staff costs were flat on the quarter and increased year-on-year to drive business growth and underlying earnings, coupled with human capital investment in digital and international to deliver future growth.
We expect this year's cost to income ratio to be within long-term guidance and closer to the 30% area. Slide 10 shows that the group maintains very strong liquidity with an AD ratio of 76% and an LCR of 210%. Given the higher rate environment, we are able to deploy excess liquidity in attractive-yielding, high-quality liquid assets. In 2023, the group issued AED 22 billion of term debt, comfortably covering the AED 8.6 billion of maturities. ENBD issued the largest ever green bond by a regional bank, reinforcing our ESG commitment. DenizBank had a very successful 2023, upsizing both their syndicated loans, issuing a DPR transaction, a dual currency Murabaha term financing, as well as the MTNs.
2024 maturities are well within the natural term issuance capacity, with the largest maturity being a relationship club deal, which we are already working on. The profile also includes DenizBank's 1-year syndicated loans, which typically roll over. Slide 11 shows the Common Equity Tier 1 ratio finished the year at 14.9%, down from 15.4% a year ago, on a doubling of the proposed dividend and a 17% increase in risk-weighted assets. The increase in credit risk RWAs is from strong retail and corporate loan growth and higher lending and investment security holdings at DenizBank. The increase in operational risk RWAs is a function of higher 3-year average income and increased transaction volumes. The group continues to operate with very comfortable capital buffers. On Slide 12, we see that RBWM income improved 31% during the year.
It was a record performance with retail lending, which grew by AED 18 billion in 2023. The retail deposit gathering engine continued, adding a further AED 35 billion of deposits. ENBD Group has a one-third market share of all credit card spend in the UAE. ENBD X and EI+ are enhanced mobile banking apps, have been successfully rolled out, incorporating our digital wealth management platform, which in turn helps drive assets under management 40%. CIB profitability jumped 90% due to significant growth in revenue on higher margins and increased cross-sell and strong recoveries. AED 70 billion of new corporate lending throughout the region, across manufacturing, trade, transport, communications, and conglomerates, helped offset repayments. EI's results are reported in the respective retail and corporate sectors. However, it's worth noting the 71% increase in EI's profit to over AED 2.1 billion.
EI is a publicly listed company, and the financial statements are available on their website. Global Markets and Treasury delivered an outstanding performance, with profit doubling to AED 3.4 billion. Net interest income jumped on higher income from balance sheet positioning and an increase in investment income. Non-funded income was higher on a strong trading and sales performance, and new products such as fractional bonds and carbon trading were offered to clients. DenizBank maintained their annual profit at AED 1.6 billion, providing fresh funding to the Turkish economy and growing their balance sheet by 19% to AED 147 billion. We have a couple of extra slides in the appendix containing more granular detail and a dollar convenience translation. And with that, we can open up the call for questions. Bailey, please go ahead.
Thank you, Paddy. We will now begin with 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 question, please press star followed by two. To participate in our written Q&A, just type your question in the Ask a Question text area, then click the Submit button. Once again, please press star followed by one on your telephone if you wish to ask a question. Our first question today comes from the line of Naresh Bilandani from JP Morgan. Please go ahead. Your line is now open.
Hi, Shayne, Patrick, Paddy, it's Naresh from JP Morgan. Congrats on the good set of results. Just a few quick questions, please. One is the topic on NIM sensitivity. Could you please just talk through the NIM sensitivity that stands on the balance sheet as of the end of the period? I'm just looking at the note 46, Patrick, on the page 69 of your financial statements, which deals with the IRRBB. It just shows that there's a marked difference in the NII impact between when rates go up or down by 200 basis points. I think the impact on NII is markedly stronger on a decline in interest rates as presented in that sensitivity. Could you please just explain to us why this occurs?
Any insight there would be helpful. The second one is on the sizable write-off that you've taken in the Q4. Would you please be able to share any insights into the economic segments of the portfolios where this write-off was undertaken? I mean, equally keen to get some more insight into the pickup that you've had in the provision charge in the Q4 and to the extent to which this was linked to this write-off. My third question is on the tax charge, which has led to a positive impact in the Q4. Could you please guide us on the effective tax rate this year and any insights into what sort of like trends in tax rates this year, and especially in the Q4? That would be super helpful. Actually, you know, these are the three questions that I have. Thanks.
I think they're excellent questions, Naresh, and even better that they're all for Patrick.
Naresh, good afternoon. Let me take those. Yeah, so, so you're quite right. The NIM sensitivity, I think that's important for anyone who's got differing views through the year with the rates that can and will change. Nobody knows exactly what the rates are. You can make a base assumption, so hopefully that disclosure gives you some reasonable basis to then translate your view on rates into the impact on our top line of the interest income. So you're right. You may recall in the last year or so, the upside sensitivity for every 20 basis, 25 basis points was around $100 million or AED 378 million or so on an annualized basis.
That, because we are near the top of that rate cycle, that has actually lowered as an impact, so any rate rises, $83 million equivalent for 25 basis points. But then you'll be more interested in the downside, no doubt, where we have pointed out that for 200 basis points, it's a $4.1 billion drop in earnings. Translating that into 25 basis points, that works out at just over $500 million for 25 basis points, about 100 and-
Dirhams.
In dirhams, yes, yes. Good point. At about $140 million. Now, the reason there's a difference between the up and down is that once you hit the top of the cycle and rates start coming down, we have made pretty conservative assumptions that there's been migration from CASA to term deposits, and it takes time for those deposits then to unwind and come down. While all the while, your asset side is repricing down at a slightly faster rate. So that's the main difference. But that's pretty much the rule of thumb as well for everybody else on the call, around $140 million per 25 basis point cut. The second one there, just on the write-off in Q4.
Look, it shouldn't be a surprise to anyone that after such strong recoveries through the year, it's you then, just as a normal part of accounting, have to do the write-offs when you've got back everything that you think you will from those aged, impaired loans. So yes, you book the credit for the recovery, but you also then write off the nominal amount of the loan as well. Is it coming from any particular segment? I think in the previous quarters, and we're seeing these recoveries through the year, it's not any industry sector per se, but the recoveries themselves are typically coming from the realization of property collateral.
That was true in Turkey, particularly in Q1, and then consistently through all four quarters this year, we're seeing property related recoveries in that the property market is strong. Now's the time to realize that collateral. Just on the insight of the the increase in impairment, yes, so impairment overall for the group has gone up from AED 0.6 billion in Q3 to AED 1.9 billion in Q4. That is more a function of us taking stock of the stage 2 book, looking at what's in there and making that annual assessment on the migration of that through to stage 3. So in the detailed notes to the accounts, you can see a table of the migration between the stages.
So if something goes from stage 2 to stage 3, you would have seen typically the impairment coverage was around 30%, up to 30% or so, up to more like 26%-27% through the year. And therefore, if it's gone stage 3, then you have to top that up. And because you can see- a ctually, if we can just move it to the impairment page, whoever.
Yeah.
Yep. We, you can actually see that we now have 99.5% cover. So anything that went from stage 2, that was typically on average at 30% and goes to that, and obviously there's a, an impairment charge that comes along with that as well. Hopefully, that answers that. Just your third point on the tax charge. Yes, we did have a credit in Q4. We are taxed in Turkey and Egypt, Turkey being the main part of that. I think I mentioned in Q3 that there had been a retrospective adjustment of the tax, corporate tax rate from 25% to 30%, so we had an increase in the tax for Q3, so that would skew the cost of, the cost of tax or the effective tax rate a bit at that point.
But also we have been able to release some of a deferred tax liability with the clarification of certain deductions on depreciation and other various allowances, where through the last year or so, we've been taking a very conservative approach as to the tax liability on that, and that's now been clarified. It's less of a liability, so you get to release some of that and take a credit. So that's just a one-off. Just thinking about tax into the new year, yes, we will have the 9% tax coming in for the UAE.
We will be back in Q1, and then you'll be able to see the overall group effective tax rate, but I think you can pretty much do the math based on what you think our results are going to be by the quarters through next year, take 9%. I don't think the UAE effective tax rate specifically will be ± more than 1 or 2% from that 9%, just generally. And obviously, that's just for this year. And then we are anticipating, but it's not legislated, an increase of that tax rate to 15%.
Thank you very much. A very small follow-up. The point that you mentioned in a reply to the second question on stage 2, with regards to the provisioning. Pardon me, but unless I have this correct, I think the stage 2 exposure, the total mix kind of remained relatively flat quarter-on-quarter, and so did the coverage. So pardon me, I'm not very clear with regards to the linkage between the increase in the overall impairment charge and the coverage on stage 2, as you mentioned.
Yeah, I mean, for after the call, I'll point you to note 46H. That'll give you all the details of the flows from stage 1 to 2 to 3 and the 2s to 3, et cetera, the back and forth. So there has been migration from stage 1 to 2. So that overall pool then sees an increase, and then some move out of stage 2 and into stage 3. So if it was provided on average at 30% in stage 2, and it's moved into stage 3, and on average the cover is 99%, then you've had to pick up 66-almost 70% additional coverage on those loans. So that's what causes the impairment charge. But, you know-
Okay. Yeah.
Yeah, and then-
Well, we also have increased the stage 2 coverage as well.
Yeah.
That's now 29.6, right?
Yeah.
The coverage, which is also quite higher at stage 2 than it was previously.
Yeah, and, and Shayne, that also goes for stage 1, where that cover has gone from 1.1 to 1.4. So that's all model driven as well. So that's also driving part of the 1.9 impairment charge for the year. So it's across all the Stages.
That is clear now.
Yeah.
Yeah, that is clear. Thank you very much.
Thank you. Our next question today comes from the line of Waleed Mohsin from Goldman Sachs. Please go ahead. Your line is now open.
Yes, thank you much, and congratulations on the strong set of results. Three questions, please, from my side. The first one, you briefly touched upon, growth in Saudi. Just wanted to get a sense of how you're approaching some of the opportunities coming up in Saudi Arabia, more specifically on syndicated loans and large corporate exposure. So any thoughts on that, how you're approaching that, would be very helpful. Secondly, I wanted to touch upon your comment regarding net interest margins, your guidance of 3.8%-4% for 2024. Now, Patrick, you did mention the exit is 3.81, and you expect some positive tailwinds from Turkey.
My question is that, given the contribution of inflation index bonds or CPI linkers in Turkey, and inflation expected to come down during 2024, I would have expected your Turkish NIMs to decline on a net basis, despite the positive impact from rates on your core spread. So if you could please comment on that and help reconcile that, that would be very helpful. And my third and final question is on the doubling of the dividend, which is great to see, but I was wondering what prompted that, because you've had, you know, last two, three years have been very strong in terms of profitability, but we did not see, you know, dividends increasing in line or above profitability.
So is this an indication that you see lower credit growth going forward, or is this a reflection that you are rethinking your view on inorganic growth? Thank you.
Hi, Waleed. Good afternoon. Thanks very much. Maybe I'll cover off the NIM question to start with, and maybe I can hand to Shayne on the Saudi one. I'll have a look at the divvy one as well. Just on the margins, on the 3.8%-4%, and within that, Deniz, yes, you can actually, in the appendix of the presentation, we are also splitting our Emirates NBD and Deniz's margins to be helpful there, so you can see the different dynamics. So Emirates NBD actually closed out Q4 at 3.58%. There we do see some risks, and we have stressed that in assessing our guidance.
So we look at what a 6 times 25 basis point cap would be, migration of CASA to term deposits, et cetera. So that's one that is much more stable and not well understood. You're right, in Turkey, that there are a lot more variables within that margin, including the CPI linkers income. And in a way, it's a good thing if their income comes down from lower inflation. And I think the central bank's survey results for inflation next year is around the 40% or 42% mark for next year. So that would inherently be lesser, lower. They did exit Q4 at about 5.1%.
We do see upside on that because of the increased base rates, which has gone from 8.5% and up to 42.5%. I think there's an MPC committee today, so let's see what happens with that. The regulations that they had to redirect lending or slow certain lending, a lot of that on the interest rate caps is actually being removed. So there was this cap at Q3 of being able to lend at 1.8 times the base rate or a compound rate, and that's been removed now. So we can lend to the market. There are some regulatory limits on the volume that you can do, so that might be constrained.
But then the rates that you can lend at are heading up towards the 60% odd. So sort of a range of 50%-60%, while the cost of funding, yes, that's also been going up as there's competition for lower deposits, as they also unwind the regulations around that. And some of that lending, sorry, that cost of funding can be around the 50% mark. So there's quite a range there, where we see there's the positive upside on pricing on the lending versus the funding costs, within the overall calculation, we would need, within that 3.8-4, we would need Turkey's these banks' NIMs to be somewhere in the 6%-7% range. But obviously there's translation risk in that as well, depending on what the FX risk.
So look, we've held the guidance. There are a lot of things going on, but you have to start somewhere. Let's just see how all of that's panning out through Q1 and into the first half, and I'm sure we'll have more clarity around that, at that point. Shayne, Saudi, maybe?
So, I'll start. I think the first thing I'd say is that you can see just how robust our liquidity is at the moment and how robust our capital is. If I look at the Saudi banks, actually, liquidity at the individual banks and the sector as a whole is pretty tight. So there is big opportunity in Saudi because, you know, purely because of the liquidity that we hold. And we are joining syndicated loans in Saudi. However, what I would say, we're trying to be quite disciplined when it comes to syndicated loans, because the pricing in Saudi, despite liquidity being tight, is the margins aren't great.
So we're participating where we can see there's absolutely business that we can either win in Saudi or within the region as a whole. And we just we certainly see there's opportunities not only right at the top end of the market there, but also in the upper and middle of the corporate space. So I think there is very strong opportunity for us. We, you know, we have got a good network built there now. We have, we have brought on a pretty good new team in Saudi in the corporate space. So we think there's very good opportunities out there for us.
But not only that, but because of our distribution capabilities with Emirates NBD Capital to distribute, we're certainly being invited more and more into syndicates there because we-
Unfortunately, it appears we have lost audio from the speaker line. We'll be back with you in just a moment.
Sorry. We dropped by you?
We have reestablished audio. Unfortunately, there was some silence there, but we have reestablished audio.
Did you hear the Saudi reply or not?
Yes. So, Shayne, we were at, when you're talking about the distribution network, which was strong in Saudi, and you talked about Emirates NBD Capital there, also helping get you deals.
Okay. Yeah, you're right. Thank you. Thank you for diving into the technology. On dividends, we've historically paid 30%-40%, but largely around the 30% dividend payout ratio in the last few years. You notice how we structured the dividend announcement? We broke it into 120, and the 20 being very much around the 60th year. And therefore, I think, hopefully we've created the right expectations. And if you look at the 100, it's just around 30- 30 mark. So I think the answer on that is, we had an exceptionally good year, and it was our sixth year, and we decided to reward a little bit extra this year.
We structured it so that we didn't want to create undue expectations, so to speak. So if you, if when you talk about, does that mean we don't think there's a lot out there to buy at the moment? Well, we didn't buy, right, in 2023. We had lots of spare capital. We had the profitability and the dividend payout ratio is still about 36%?
Thirty-six.
So it's not extremely high, so there's still a lot of capital retention in there. And remember, with our earnings power, we have the- w e're gonna be extremely capital accretive quarter- by- quarter as we go through. So we still think there's heaps of room given that we're massively over the regulatory minimum for an acquisition, if and when one comes along. But as I've said many times, we're very disciplined about this. In 11 years, we've made two acquisitions. We've looked at dozens in bits, and we haven't got any across the line that we thought made sense for a strategically and on price. So yes, we are looking, but we've been looking for a long time.
Got it. Thank you much. And if I could just follow up, please. So that means on the dividend part, it's reflective of where you were with the capital and the ability to pay? It's not a change in strategy, it will remain.
No.
I mean, discipline and looking for-
No, no, it is. Not, not a change in strategy. This, this is not- I mean, even, even at, at 120, it's not that outside our normal range between 30 and 40, right? We don't have, we don't have a declared dividend policy. That's up to the board. But that's been the range for us for a decade.
Perhaps another way of putting this question is what, I mean, why not do it a year ago or two years ago? Why do it this year? I mean, in fact, I think most of my questions on prior calls were, why not increase the payout ratio? And something prompted this this year. That's the reason I asked this question.
Why not increase it more?
No, no, no-
You doubled.
You did it this year. In the prior years, you also had the opportunity going to the 30%, et cetera. So,
Yeah.
That's why my question, why do it now? Why not do it the year before?
In the end, Waleed, that's a board decision as to how much dividend they pay, and that was a board decision this year.
Okay.
Yeah. And then the last two years before this year, we had increased it 50%.
Yeah.
We were on the path.
It's been, it's been moving up every year. And then we're the only bank, I think, in the last five years, that has not cut their dividends.
Yeah. The last four years.
Got it. Got it. And that's okay. And final follow-up, please, on the Saudi lending. Fair to assume that most of your originations are in dollar versus rial, given the syndicated loans being in dollars?
Believe we, we lend in both U.S. dollars and Saudi riyals in the Kingdom. I'm conscious of time. We have other questions, so I'm gonna move on. Waleed, if you- a nything else, you can follow up with me.
Thank you.
Thanks, Waleed. Bailey, please go ahead.
Thank you. The next question today comes from the line of Rahul Bajaj from Citi. Please go ahead. Your line is now open.
Hi, Shayne, Patrick, Paddy. Thanks, thanks for the call. Rahul Bajaj from Citi here. Two questions remaining from my side. The first one is on the non-funded income at DenizBank. This line has been pretty volatile on a quarterly basis, and the number was around AED 600 million in Q4. You mentioned earlier, there were some sort of reversals that you saw in Q4 on this line. If you could help us understand what's the kind of normalized quarterly run rate for this line that we should use to model in 2024, is AED 1 billion maybe a ballpark right estimate for a quarterly run rate for this line? That would be very useful to kind of build our models. My second question is around Egypt.
I know you have a smaller business in Egypt compared to the Turkish one, but with the potential deval in Egypt expected in 2024, what kind of risks - what kind of potential risks do you see emanating from that business? Those are the two questions. Thank you.
Thanks, Rahul. Thanks for joining as well. Yes, just on the DenizBank, and that's on page 6 of the presentation, or we're there now at the moment. Yeah. Look, every quarter, I think I'm doing a sort of potted history of what's going on in that FX and derivatives dark blue bar there. So a couple of things. Do we have a normalized rate for you? Not specifically. I won't fill that one in for you. But in Q3, when it was 208-7, that was particularly strong around- s orry, yeah, Q2, that was the strong FX, spot FX, that DenizBank had during the period of the election.
I think in the last quarter, I gave an indication that between Q2 and Q3, around 70% of that FX and derivative income was client flow, ENBD client and trading, plus Turkey client business. That was that sort of proportion. That gave you an idea of how much that would be. For Q4, some of those gains over and above the client flow business have reversed. Where they have a net open position and you get some FX gains, if there's a sharper currency depreciation, also on the swap funding costs, while we rely less on swapping dollars and euros into lira for funding, the cost of that has actually gone up, and IFRS actually requires us to put that cost of funding through this FX and derivative line.
So, that and some of the reversal of some of the hedging gains we made in the previous quarter. Those three components have really all come through as a reversal in Q4. If you actually step back, for the full year, there's actually, on a full year basis, and we split out the total of this other, the FX and derivative in the account, actually only about AED 300 million or AED 400 million of the net AED 1.7 billion growth is from Turkey non-client business. So the main point is, this is a very strong client flow business underlying these FX and derivatives numbers. It's just that they do go up quarter-to-quarter, and we have seen strong growth on the client business year-on-year, when you actually aggregate all of that.
So the underlying, that 661, the client-related business there is just above AED 1 billion. And I think you can calculate 70% of 1.7 is about 1- just under AED 1.2 billion or so. So that's sort of the ballpark of where the client business is there. Hopefully, that answers that one for you. Just on Egypt. Look, Egypt's one- less than 2% of our assets, so even with currency depreciation and structural FX, it just hasn't been material. Maybe it's-
2.5, certainly not.
Yeah. So yeah. So I mean, the whole even from a net asset value risk to us, it, it's really not material even to our capital base and the impact from that.
Despite all that on profitability, is it earns $100 million?
Just under, yeah.
Just under $100 million for the year? Having said that, are we watching Egypt closely? Yeah. I think the black market yesterday, the currency was about 65 against the official rate of 32. So, you know, there is something that, you know, we do watch very carefully when it comes to the performance of the Egyptian economy. It is a good franchise for us, so we continue to grow there very nicely. But, you know, the reserves are an issue for the country. And, you know, we're hoping that some asset sales and some IMF programs will help also the reserve position. And certainly the Houthi attacks in the Red Sea is not helping Egypt with their volume through the Suez Canal dropping by about 50%. That revenue is worth about $10 billion to Egypt, which is important as an owner.
Understood. Thank you. Thanks so much.
Thanks, thanks, Rahul. Yeah, Bailey, if you can move on to the next. We're actually quite short on time, and there's a few more people, so we're gonna try and get through these remaining questions as quickly as possible.
Thank you. The next question comes from Jon Peace from UBS. Please go ahead. Your line is open.
Hi, everyone. Thanks for taking my questions. Let me just ask two in the interest of time. So, firstly, should we think of the big increase in risk-weighted asset density this quarter as permanent, if the higher operational risk and the DenizBank reserve requirements persist? And then secondly, just in terms of the bottom line performance of DenizBank, any, any thoughts on how that might progress through 2024? Should we see some stabilization or improvement of the loss in the first half, and when do you think it could turn back into profitability? Thanks.
Yeah, maybe I, maybe I can just take that second one first. With Deniz, you can see the track record over the last 4 years since acquisition, that they've been delivering 1.6 or thereabout billion dirhams per year. That's about 150 odd million dollars per annum. Every year there seems to be some new headwind or change. They've had the unconventional monetary policy. There is going to be some pain from the unwind of the regulatory intervention that they had in lieu of conventional monetary policy. You know, the group's in good shape, so if there's a year or two to weather that, now is the time.
But, but actually, you, you know, looking through into the new year, there will be pressure on their margins just from the price of layer of funding versus what they can lend at. There may be some dip of that through the first half because their deposits can reprice faster than their assets. We've been through that cycle before. And then with that margin coming back through the latter part of the year. They also have very strong impairment coverage. They've had strong recoveries, actually, as well. So from a credit risk point of view, they're in good shape there.
Just, just to add on that. It's one of the few times where your accounts get qualified, and we wear it like a badge of honor, because with the auditors is the same whereas the provisioning. So, I think that's yeah, we have been quite conservative with how we run the Turkish operation.
Yeah. We won't give any specific guidance on the, you know, number for next year. There's so many things that can usually do happen, but management team there has just been superb at navigating all of that, and you can just look at their track record in the past to get an idea. From RWA, yes, with government or separate sovereign repayments where you have zero risk weighting, and then you replace that with corporate or retail lending, that can be between 50 and 100% risk weighted. Essentially, you do get that RWA then baked into your overall base. Having said that, you then do get income and growth and adding to the capital, that means you then get overall strengthening of your capital ratios over time. In a way, as sovereign repays, you get a bit of a reset on the RWA base.
Unfortunately, we seem to have lost audio connection with the speaker line. We'll work on this and we'll get that back for you shortly. Apologies.
Thank you. Sorry, it looks like we just dropped off again there. Jon, if you, if you can actually hear me, where, where, where did I get up to? And I'll- I think I closed off the NPLs and maybe talking about RWA. Is that correct?
That, that's right. Yes. You were talking about how the drop-off in the sovereign had caused a bump in the RWA density.
Yeah . No, and that's right. And that's just, it just means that we have to then manage RWA even more efficiently and drive the returns on that, and keep the capital base. It's been pretty strong for quite some time. So from a density point of view, it does bake in once you have changed from 0 risk weight to a 50 to a 100. Okay?
Yeah. Got it. Thank you.
Thanks, Jon. Appreciate it. Bailey, next question.
Thank you. The next question today comes from the line of Shabbir Malik from EFG Hermes. Please go ahead. Your line is now open.
Hi. Can you hear me okay?
Yes, again, Shabbir. Hi, welcome.
Yes. Hi. Thank you. Thanks. Just a question on corporate tax. Do you think you have any potential offsets available to mitigate the impact of corporate tax? And secondly, you talked about, you explained the provisioning in the Q4 quite well. Just want to get maybe a big picture view. Do you see any signs of worry or concerns that that might have led you to be more cautious and you made the decision to boost coverage? So, those two questions for you. Thank you.
Yeah, just so Shabbir, on that first one with the offsets from a, you know, tax point of view, no, the rules are pretty straightforward, with relatively few permanent or even timing differences for that matter. So I think I indicated earlier that the effective tax rate will be pretty close to the actual tax rate. Might be 1% or 2% either side. Let's just see how that goes in Q1. But there's not tax planning per se that you would need to do to mitigate any of that, other than grow revenue and profit before tax more is probably the best solution to that one, which we will-
What I meant was- s orry, what I meant was, like, is there any other lever available in the P&L? Like, could spreads, loan spreads, could those be adjusted, or there could be, you know, potential cost efficiencies that could be realized to help mitigate the impact of corporate tax?
Well, yeah. Yeah, well, I guess that's what I meant by we, we just need to grow the profit before tax, and that's doing all of those things. So we're always obviously striving for income growth. We've been investing quite heavily in the last couple of years, to generate new streams of revenue, build the business volumes, 'cause we're very mindful that heading into the latter part of 2024 and then 2025, with the prospect of further rate cuts or, well, rate cuts. So that's what we are planning for. That's not just to mitigate tax, it's to mitigate the impact of rate reductions.
You know, Shabbir, that's one of the reasons why we've had that big investment push, and you can see it in our costs of growing our network out in Saudi, more headcount in UAE to drive volumes, 'cause we need that asset build. And you know, thankfully we have, because you know, the offset massively the sovereign payments. You know, the best defense for this tax and for interest rate decreases is growth, and that's what we've been trying to do for a while. And certainly from my perspective and Patrick's perspective, you know, our focus is you know, medium long term, not just you know, the 2024 performance. It's really down 2025, 2026, we're trying to position ourselves for.
You had a point about just the-
Cost of Risk.
Yeah, the cost of risk, and was there anything in particular driving it?
No, no, I think I sort of went through that.
Were we concerned anything?
Yeah. No, no, no. I think what it really means is by being able to boost the coverage across all of those stages, it just puts us in really good shape as we head into 2024, particularly with our prospects of lower rates in the latter part of the year, hopefully the latter part of the year. So no, you know, we've had strong recoveries. We've had a good look at the book just to make sure that we've, you know, really flushed out any residual risk in there. So there can't be too much residual risk if you're at 99.5%. But obviously, the stage 2 book is something we watch like a hawk for any possible further downgrades.
But there wasn't any sort of single thing in the macro economy, et cetera, that said, you know, we'd better take all of that now, thinking something's coming along just in the future, a forward-thinking aspect. It's what was in the book today.
Great. Thank you. Okay.
Okay.
Thank you.
Bailey, next question?
The next question today comes from the line of Jag Pasunoori from NBK Capital. Please go ahead. Your line is now open.
Hey, can you hear me?
Loud and clear. Yep.
Sure. Okay, great. Congratulations on good set of numbers. So if, if you exclude Deniz and-
Only good?
Hello?
Only good?
Great set of numbers.
Thank you.
Yeah. Yeah. If you exclude UAE time deposits rose significantly quarter-over-quarter. Just want to know if they are transient or sticky. And on the same thing, the current loan-to-deposit ratio, excluding Deniz, is like 83%. What is the optimal ratio that you are planning? I know sometime back you were at, like, more than 95. So that's one question. And second question is: What is the risk rating of a sovereign bond if it is not in the UAE?
Okay, thanks.
Yeah, those are two of my questions.
Yep. Yep. No, I'm sorry. Yeah. So just on the UAE, when you said excluding, excluding what, sorry? For the first question.
Excluding- y eah-
UAE
-excluding Deniz. No.
Oh, Deniz.
I meant excluding Deniz.
Yeah. Yeah.
Yeah.
Look, look-
So your loan deposit ratio is 83. What is optimal?
Yeah.
What are you trying to do?
Well, we don't prescribe an optimal ratio around there. There are some international banks that operate at around 75%, and there are some in the region that operate near the top end of that. We're actually not regulated to the AD advances to deposit ratio. We're regulated to the LCR, which is a better indication of your liquid resources covering the possibility of outflows of deposits, et cetera. So you can see on- which page was it? That that is now in the 200% range of the LCR. So I mean, there's a regulatory minimum on the LCR of 100, and we're at 200%. Obviously, with some of the repayments in the Q4, we have some surplus liquidity that we're in the process of then redeploying.
But we don't really prescribe, you know, a, a optimal AD ratio. For surplus liquidity, happily, in this phase of the interest rate cycle, you can still make very good returns on that surplus liquidity. You need to maintain a, a good proportion of surplus liquidity for, for that very point of liquidity management. So, you know, if it's, if it's 80 or around that mark, that, that's pretty good. If it's, if it's lower, because we have surplus liquidity, that is still earning a return. Obviously, you get a better margin overall, the more you have deployed it. So it's, it's somewhere in between to find the balance of liquidity management and the returns overall. And you had a question on RWA? So international-
Yes.
Yeah, so do you mean that you've got sovereign? It often depends on the rating of the sovereign and also which currency it's in, in that country as well. So, if something could be risk-weighted at 0% in Turkey and Egypt, but when it gets risk-weighted from a group CET1 point of view or RWA, it can be translated back to a 100% risk weighting. Yep.
So let's say if, if you have invested in a double-A Saudi sovereign bond, what is it typically? Is it like 20%, 50%?
Within Saudi or within consolidated?
Let's say if it is US dollar or-
But as a consolidator or within Saudi itself? Because in Saudi, Saudi is zero.
Yeah. In consolidated, let's say.
Yeah. Look, I won't get- I don't have the specific one for that. Let- we can take that one offline. Yeah.
Sure. Okay, great.
Thank you.
Good luck.
Thanks. Bye.
Zero.
Yeah. Bailey, any more questions?
We do, yes. The next question today comes from the line of Aybek Islamov from HSBC. Please go ahead. Your line is now open.
All right. Well, thank you very much for the conference call. You answered already many, many questions. But what I'll just add, just small clarifications. Speaking of Saudi Arabia, can you comment how big is your Saudi loan book today? That's my first question. And are you thinking of any sort of inorganic growth in Saudi Arabia, that that's additional to this? And secondly, you elaborated on your risk-weighted asset density increasing and so on and so forth. Can you comment a little bit on your internal CET1 ratio target? You know, there's a slide where you discussed the regulatory minimum, but I would like to know your internal CET1 ratio target.
And I think thirdly, like, cost income ratio, you know, the guidance is quite a wide range, 33% at the upper end, right? And you hit that 33% in Q4. Is there a possibility that your cost growth will be higher than normal because of more investments in the international? Is that what you're discounting in your cost income ratio guidance? That's all. Thank you.
Okay, let me catch those last two ones. CET1 target. No, I can't give you that. Well, we don't, you know, that's not something that we provide as guidance. You can see how we've been operating typically for the last four or five years, typically around or, you know, the 14%-15% mark. It's been very strong CET1 in the last year or so, with strong earnings, paying a high dividend has then brought that back down to around the 14.9%. But we don't provide a sort of target range, as I know some international banks do. Just on costs, yeah, I mean, our long-term guidance on that is less than the 33%. It's at 27% for 2023.
Looking into 2024, we expect it to be closer to the 30% area, if I can give you that sort of general feel for- b ecause I know 33% is not always helpful, but that's just our long-term commitment, so 30%. What were the other two questions there? It quite muffled again. Yeah. In terms of percentage KSA, it's about 2%-3% of our total asset book. Given that we've opened more branches there, we've seen very strong growth this year. So, retail lending, for example, in KSA, has grown 27% over year-on-year. So yes, we are seeing strong re- particularly strong retail growth and good corporate growth in Saudi.
You did ask a question about inorganic in Saudi as well. I think I've said it before on these calls, that Saudi is a market we would like to acquire into. But it's somewhat difficult given that there is a cap on foreign ownership of 40% there. And that does make an acquisition there difficult, but because from our perspective, any acquisition, you know, we'd want board control, we'd want consolidation, and we'd want price. So I think, as much as we would love to acquire in Saudi, it's somewhat not that easy given the 40% cap on foreign ownership there, and a path to consolidation is not so easy.
Hence, why we have quite aggressively grown in Saudi organically rather than inorganically. And, you know, we saw the opportunity when some granted us an extra 20 branch licenses to grow organically, and we invested heavily into Saudi off the back of that.
Thanks, Shayne. In the end of the time, we're gonna have to bring the call to a close. We have received some questions, which I will respond to directly over the web, and I know there's still a couple of people maybe wanting to ask a question. I will also reach out to you. So Shayne, if you can just wrap up, please.
Thanks, Tony. Yeah, we delivered a record set of results in 2023 and capping a successful ten-year transformation of the organization. Our investments, strong balances, strategic position us to continue the strong momentum of growth. Thank you all very much for joining the call. We're very proud of the results that we've delivered in our 60th year. And I look forward to talking to you again in the end of the Q1. With that, Bailey, I'll hand it back to you.
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, that concludes today's conference call. Thank you all for your participation.