Hello, and welcome to the Emirates NBD Q3 2023 results announcement call and webcast. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press Star followed by One on your telephone keypad. You can also type your question into the Q&A chat box. I'll now hand it over to your host, Shayne Nelson, Group CEO of Emirates NBD. Please go ahead.
Thank you, Alex. Thank you, Alex, and welcome to our third quarter results. I think it's the first quarter results I've ever done in the rain, so very unusual. The GCC economies have been resilient against a weaker global backdrop and higher interest rates. PMI surveys indicate robust activity across the region. Our research team revised up their forecast for non-oil growth in the UAE to 5%. UAE's National Energy Strategy expects up to AED 200 billion of investment as it triples the contribution of renewable energy by 2030.
Other economic sectors, such as tourism, are flourishing, with Dubai tourist numbers recovering to pre-pandemic levels. In the wider MENAT region, Egypt continues to explore asset sales, reflecting their commitment to revamp the economy, and Turkey increased rates to help address inflation, which is a significant and positive change in policy.
The strong regional economy helped us deliver another excellent set of results. This is the third consecutive quarter that the group has delivered over AED 5 billion in profit. There are many highlights which underline our key strengths. All business units delivered higher income. Retail lending grew 16% this year, with strong momentum across all products, including a one-third market share of all credit card spend in the UAE.
Corporate lending climbed 15% as they closed landmark deals for large multinational customers. SME lending increased 34% in the UAE as we continue to support this bedrock sector of the economy. We grew deposits by AED 67 billion, including AED 33 billion of low-cost CASA. CASA was stable in the third quarter, reflecting the high quality of our deposit base.
Even when we see an outflow of deposits, it is often into our wealth management platform, which has grown assets under management by 28% this year. We successfully rolled out the ENBD X app, which uses the latest technology, security, and user experience trends. We expanded the digital wealth platform onto ENBD X, giving customers access to over 11,000 global equities. This propelled ENBD X to be the number one banking app in the region. We introduced Signature by Priority Banking, offering ultra-high net worth customers unrivaled benefits, services, and privileges.
We opened four more branches in Saudi, widening the branch network to 13. This has helped drive loan growth in the kingdom 26% higher year-on-year. Fitch upgraded our unsupported rating, and we are now one of only three UAE banks to have an investment-grade viability rating.
COP28 will convene in the UAE next month, bringing the world together at a critical moment for transformative climate action. Emirates NBD is proud to be the principal banking partner of COP28. Our sustainability strategy is lined with prominent global and national frameworks, including the United Nations Sustainable Development Goals and the UAE's Vision 2030. We are signatories to the UAE Climate Responsible Companies Pledge and the UAE Gender Balance Pledge.
For our customers and clients, we are focused on delivering innovative financing and transition solutions, becoming the first UAE bank to offer carbon emission offsetting solution to customers with the introduction of carbon trading. Helped customers access $11 billion of green bond financing in 2023. We collaborated with Emirates Global Aluminium to pioneer an innovative ESG-linked supply chain financing program.
We are leading by example, reducing Scope 2 emissions by 5% between 2022 and 2023. Our digital drive helped reduce paper usage by 84% between 2020 and 2022. We published our sustainable finance framework and issued our largest-ever green bond from a regional bank.
Women now hold 18% of leadership roles, up significantly from 15% last year. COP28 is a big opportunity for ENBD to showcase our ESG credentials, engage with our customers, and play a lead role as the national energy strategy pivots to renewable energy. So to sum up, ENBD delivered profits in excess of AED 5 billion for the third consecutive quarter, as a transformational platform is successfully meeting the changing needs of our customers.
The UAE's ambitious ESG national goals provide exciting future growth opportunities, and Emirates NBD is well-placed to support customers and innovative solutions. I'll now hand 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 three. The overall headline is that we've had another incredibly strong quarter, building on the first half with almost all metrics better than Q2 and last year. Total income of AED 32.7 billion for the first nine months is up 44% year-on-year. Continuing the trend this year, both NII and NFI are up substantially. Net interest income increased as our stable funding base continues to benefit from higher interest rates.
All business segments are performing well, with 8% loan growth contributing positively to interest income. Retail lending had a record performance in the first nine months, and corporate interest income is substantially higher as it closed the number of landmark transactions for large multinational customers.
Non-funded income grew by three point three billion year-on-year to ten point five billion. We see a strong growth trend in client business flows, such as customer remittance, FX and interest rate hedging, debit and credit card business, and increased trade finance. DenizBank's non-funded income was substantially higher on increased customer transaction volumes and margins, and increased income from hedges and swaps.
Costs have increased 31% 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 four branches in KSA, bringing the total to 13, and we're on target to add a further five or so in the coming months. Even with our investment for current and future growth, the cost income ratio at 25.5% for nine months is comfortably within long-term guidance.
Impairment allowances are half of what they were this time last year, with strong recoveries in both UAE and Turkey have come through, and the low cost of risk trend continued into Q3. This gives us a very strong profit before tax and hyperinflation of AED 22.9 billion, nearly AED 10 billion higher than this time last year, and a AED 17.5 billion profit after hyperinflation and tax, which is up 92%. Looking briefly at the quarter-on-quarter numbers on the same page, net interest income is up by 8%, reflecting strong loan growth, wider margins at DenizBank, and higher CPI linkers income as inflation picked up in Q3. NFI is stable against the very strong Q2. We delivered higher fee-related transaction volumes at DenizBank, offset by lower FX and derivative income, as FX spreads tightened post-election in Turkey.
Expenses are 3% higher due to business-driven staff costs and Turkey inflation. Q3 profits before tax and inflation was up 6%. We did, however, see a step-up in the equity-neutral inflation adjustment in Q3. It was AED 1.8 billion for that quarter against AED 0.5 billion in Q2, which is entirely the factor reducing the group's profit from AED 6.2 billion in Q2 to AED 5.2 billion in Q3.
In the bottom summary table, you can see the balance sheet metrics are in good shape, with assets, loans and deposits all growing substantially. Capital liquidity and credit quality metrics are all considerably stronger than 12 months ago. Now turning to the net interest margin, slide 4. The bottom chart shows that margins widened by 90 basis points year-on-year, helped by improving loan and deposit mix and higher interest rates.
NIMs are up 21 basis points in the third quarter as DenizBank's NIM widened due to improved loan pricing following regulatory changes, higher CPI-linked and indexation income, and more than offset higher funding costs and competitive loan pricing at ENBD. The year-to-date margin of 4.0% is at the top end of our guidance range, given the higher than anticipated contribution from DenizBank.
For the full year, I do expect DenizBank margins to be the main variable as to whether we remain at this level. The repricing is positive so far, but this depends on how the monetary policy transition progresses. Another variable is the migration of CASA to term deposits in ENBD. There has been some migration, and with rates where they are, we expect more to occur going forward.
Slide 5 shows that fee and commission income is up by 33% year-on-year, with a solid trend of quarterly growth across almost all of the group's customer-driven businesses. You'll notice a step-up in Q3, the bottom left chart, driven mainly by increased card spend volumes, particularly in DenizBank, coupled with an increase in the interchange fee rates in Turkey.
Other operating income in the third quarter is lower due to a smaller contribution from FX income, in line with expectations post-election that I indicated at Q2. We are seeing tighter FX transaction spreads in Turkey and lower gains from mark-to-market adjustments. On Slide 6, we see that gross lending increased by 8% during the first nine months, with both retail and corporate lending has seen strong growth in Q3 and year to date.
DenizBank also had strong loan growth on local currency terms amidst the partial unwind regulations. It's up 33% this year in local currency, down slightly year to date in AED terms due to FX depreciation. Total deposits increased TRY 67 billion, up 13% so far this year. Within that, CASA is up TRY 33 billion. We saw a modest TRY 4 billion drop in CASA in the third quarter. The total deposits are up 3% in Q3 alone. We have been signaling for some time that this migration may start to happen, so no surprises there. CASA, at 59% of total group deposits, is still the key component of our relatively low cost of funding.
We continue to grow time deposits as we're able to deploy these profitably in liquid assets. On Slide seven, we see that the NPL ratio improved by 0.5% to 5.5% during the first nine months, helped by strong recoveries in both UAE and Turkey. These recoveries also meant the annualized cost of risk for the first nine months was 42 basis points, substantially lower than the 108 basis points for the whole of 2022.
The gross cost of risk, excluding recoveries, was slightly lower than last year. Our full year cost of risk guidance remains unchanged at 50-70 basis points. I noted at H1 that recoveries can be somewhat lumpy and exact timing harder to predict. But of course, if we see the current trend continue, then we would be at the lower end or better than this range.
We have, however, refined the NPL guidance from around 6% to less than 6%, given where we are at Q3 and from what we can see of NPL flows at this point. Coverage remains a healthy 145% during the first nine months, similar to the level at the beginning of the year. Paddy will now just take us through the remaining slides. Over to you, Paddy.
Thanks, Patrick. On Slide 8, we see the cost income ratio at 25.5%. It's comfortably within guidance as continued acceleration of investment for growth is supported by higher income. Staff costs increased year-on-year to deliver strong business growth and drive underlying earnings, coupled with human capital investment in digital and international to deliver future growth.
IT and communication costs, as well as depreciation, are up slightly on the investment in technology, and this is more than offset by a quarterly reduction in other costs on lower marketing, service, legal and professional fees due to seasonality. We expect this year's cost to income ratio to be comfortably under the 30% area. Slide 9 shows that the group operates with very strong liquidity, with an AD ratio of 80% and an LCR of 190%.
Given the higher rate environment, we are able to deploy excess liquidity in attractive, yielding, high quality liquid assets. In the first 9 months of 2023, the group issued AED 14 billion of term debt that fully covers 2023 maturities. Emirates NBD issued the largest ever green bond by a regional bank, reinforcing our ESG commitment.
DenizBank further diversified funding through the issue of a $230 million and EUR 50 million euro Murabaha term financing agreement. Slide 10 shows the Common Equity Tier 1 ratio has strengthened to 16.9%, as AED 14.6 billion of net earnings more than offset a 7% increase in RWAs. The CET1 ratio, excluding the ECL regulatory add back, was 16.4%.
RWAs grew by 5% in Q3, reflecting 3% lending growth and higher investment security holdings at DenizBank. As Shayne mentioned earlier, the strong balance sheet helped ENBD become one of only three UAE banks to have an unsupported investment grade rating from Fitch. On Slide 11, we see RBWM income improved 36% during the year.
It was a record performance for retail lending, which grew by AED 15 billion in 2023. The retail deposit gathering engine continued in the first nine months, adding a further AED 29 billion of deposits. ENBD Group has a one-third market share of all credit card spend in the UAE. ENBD X, or enhanced mobile banking app, has been successfully rolled out and is now the number one banking app in the region.
AUMs grew by an impressive 28% in 2023, reflecting ENBD's full service platform on the back of our digital wealth platform expansion. CIB profitability jumped 104% due to significant growth in revenue on increased lending activity, higher cross-sell, and strong recoveries. Corporate lending closed a number of landmark lending facilities for large multinationals, reflecting our presence throughout the region. EI's profits are reported in the respective retail and corporate sectors.
However, it's worth noting the 56% increase in EI's profits to over AED 1.6 billion. EI is a publicly listed company. The financial statements are available on their website. Global Markets and Treasury delivered an outstanding performance, with profit exceeding AED 2.75 billion for the first nine months. Net interest income jumped on higher income from balance sheet positioning and an increase in investment income.
Non-funded income was higher on strong trading and sales performance. DenizBank's profit is up 63% year-on-year to AED 1.9 billion. We have a couple of extra slides in the appendix containing more granular detail and a dollar convenience translation. With that, we can open up the call to questions. Alex, please go ahead.
Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. You can also type your question into the Q&A chat box. Our first question for today comes from Nida Iqbal from Morgan Stanley. Your line is now open. Please go ahead.
Hi, good afternoon. Thank you very much for the call. I have two questions. So firstly, on the margins, we saw about a 20 basis points sequential increase in 3Q margins, which was very impressive, but UAE margins were down 24 basis points quarter-over-quarter. Just want to understand that a little bit better. Is this decline being driven by increase in funding costs, or is there any pressure on loan spreads given competition?
And then secondly, linked to that, the repricing linked to rate hikes so far, is that all reflected into asset yields already, or is there more to go? Just trying to understand better how to think about the UAE margin trajectory from here. And then secondly, Turkey margins, this quarter are clearly very impressive. Is this sustainable?
What do you see as a normalized margin for Turkey, looking forward? And my second question is on capital. So CET1, as of nine months, is 16.9%, well above minimum regulatory requirements. Yet ENBD's dividend payout is around 30%, typically. So how is management thinking about deployment of excess capital? Are you open to M&A? And if so, what regions are of interest? Thank you.
Nida, hi, it's Patrick here. Thanks for joining the call. Maybe I can have a go at the first couple, and maybe Shayne will add something as well. Just on your NIMS in the UAE, coming down 24 basis points that we've set out there on page four in the walk, it's a combination of factors. We had been at Q4 last year, Emirates NBD, excluding DenizBank, had been at about 3.48%. Then for Q1, Q2 this year, around the 3.94%, and then yes, it has come down 24 basis points. So we're benefiting from the rate flows coming through from the rate rises through last year and into the early part of this year. And then a couple of things that we have seen in the dynamic.
On one hand, yes, there has been some competition on loan pricing that I think for probably more than a year now, I've been indicating that we are starting to see that. There's a lot of liquidity in the market. It's obviously better to deploy that in loans and advances, helping the real economy. There is competition for that, and there has been some tightening of pricing on that as well. Nonetheless, the overall yields and returns are far superior if you have proper loans and advances versus liquid assets on the bond book. And then the second component really is the dynamics and the mix of the funding. So there's been only a very small reduction in our overall CASA.
So we were at 60% in Q2, 59% now, so it's still very strong by any industry standard. We have overall, though, grown total deposits by 3%, therefore, that means most of it's in term deposits. That costs more, and that's really changing that cost of funding in the overall mix as well. Having said that, there has been something, an offset from the investment book. It's pretty well known that yields on bonds is reaching all-time highs at the moment, so we've benefited from that, and that's what we mean about being able to continue to raise deposits and still profitably be able to deploy those, even if it's not all going into loans and advances. So given loans and advances, demand has been strong in the third quarter.
We're definitely finding a good home for that funding as well. There was the part on Turkey, what's a normalized rate? So yes, they have benefited from an increase in yield on the CPI linker bonds that they have. Inflation did step up in Q3 significantly. It was somewhere between 25-30% just for the quarter alone, compared with Q2, had been around the 5-6% in Q2. So with that delta, you do get a more significant add-on to the margin. So we had been down at, what, 3.5-4% at Q2, and with the add-on, with the CPI linkers, some indexing, and combined with some positive repricing, that means we have seen that big tick up.
I think the important thing with the margins in Turkey, though, is the change in the regulation and the ability now to price much higher. We're seeing the base rates go from 8.5% to 30%, and therefore, we are able to price, and quite a number of categories of loans of up to 1.8 times, a reference rate of something like 38%. So technically, you can reprice up to 70%. So that will take time to come through in the margins. So when you ask about, sustainability, I think that's exactly why we have a range in our overall margin guidance, because there may be some upside, but the cost of funding may also increase, and there may be some downside.
If inflation is lower in the fourth quarter, then the yield on CPI Linkers would be a bit lower as well. But I think if you step back and look at the overall guidance we continue to give, we're still confident in the 3.8%-4% range. Just on capital, yes, you're right. We're operating with a very strong capital base, and by the way, also delivering a strong return on the tangible equity of around 27%, year to date.
So even with that surplus capital, definitely good return. Now, I think it's a pretty recent phenomenon with the strong earnings that the capital base has built up so much. So it might be a bit premature to say exactly what we are going to do with that, to date. There may be other growth opportunities that arise, and when it comes to dividends, that's a decision that is with the board, come the year-end.
And on the M&A side, I'd say probably exactly what I said last time. We're still very interested in our core markets, Saudi, Turkey, Egypt, India, for acquiring. But I think in 11 years, we've done 2 deals, and we've looked at many. So I think, you know, if we can get the right acquisition for the right price with, and as I've said before, we will not do an acquisition unless we control board and have 51% and can consolidate. If we can get acquisitions going, that's great, but you know, it, it's always a long-term process. I can assure you, we know every bank in every country, back to front, upside down, that is a potential target.
Thank you very much. Very helpful.
Thank you. Our next question comes from Waleed Mohsin of Goldman Sachs. Your line is now open. Please go ahead.
Yes, thank you much. Good afternoon, thank you for the presentation. Four questions from my side, please. First, if you could please provide an update on any changes, if any, in the large exposure regulation. I understand there have been some, and if you could also give us an update on how you're doing in terms of compliance.
Secondly, on corporate tax, as we head into corporate tax next year, I wanted to understand if the income earned or the capital gains from local bonds would also form part of taxable income. Thirdly, on loan growth, you seem to be tracking better than guidance, down 8%, already, versus, you know, high single-digit guidance. And this is despite public sector growth remaining muted. You had almost 4% domestic growth on a sequential basis.
If you could please talk about the growth that you've seen on the private sector, which sectors are driving it, and if, I mean, and from our perspective, it seems there's upside risk to your full year guidance. And my final question is on your cost income ratio. I understand this 33% target, you know, was put as more a medium-term target, but, I mean, you're clearly way, way below that 33% at this moment, at around 25.5%. So any commentary around that would be helpful. I mean, does the 33% target still hold? And how should we think about the guidance that you have of 33%? Thank you.
Yeah, Waleed, thanks for joining the call. Maybe I can just take those in reverse order, just on the cost income. I think just as Paddy had said, that we expect the, under the 30%, 33% longer term, commitment to cost income is definitely a lot lower than, many international banks, and broadly aligned with, the, the market around here as well. With last year-
But Waleed, I think one of the things when I look at cost-income ratio, the target of 33%, and I get your point that we're delivering massively below that at the moment. But for me, it's an important benchmark that as we look forward, as when rates, when the rate cycle goes the other way, that we're making sure that we're delivering below that percentage.
So for us, it's an important metric internally as well, as to how do we invest going forward and what effects when rates start to fall have on that cost-income ratio. I appreciate your comment about where we are, but also for us, it's an important yardstick as to where we're going to be when we get a situation where rates start to fall.
Okay, just on your loan growth point, yes, 8% year to date, 3% in the quarter. We did update the guidance at the half year to high single-digit. We've kept it at that level, partly. We're taking some caution in that we did see in Q1, on the corporate side, we originated around AED 11 billion, that had AED 10 billion of repayments, so we only saw a net 1 growth. The government repayments—there hasn't been a lot of repayments in Q2 and Q3, so that's another variable that we need to factor into the guidance for the over the rest of the year.
If it does go slightly above that, then I guess that's an upside risk from that point of view. But we've remained pretty happy with keeping that guidance as it is, rather than changing it, every quarter through the year. Just on tax,
Sorry, did you mention the 150?
Which 150?
Yeah, it, the new regulation, Waleed, is the 150% of Tier 1, yeah? And we're miles below that. So we're very compliant within the new central bank guideline of 150% of Tier 1.
Yeah. Actually, that was bringing back to the first question there, Shayne. And then just on tax, yes, the 9% will come into the next year, and then we're expecting the 15% from 2025. I, I think you asked specifically about capital gains on bonds. Yeah, yeah, they will be taxable. That's the short answer for that.
Also the interest income on these bonds, right? Including the interest income on bonds. So capital gains, interest income, everything is taxable.
Yes, I don't. There are very few exclusions for income in the tax rules, if any.
Got it. Got it.
Yeah.
Understood. Understood. Thank you much. Very helpful. All the comments, especially on the compliance with the regulation as well as the cost income. Just one last follow-up was on the sectors, which I might have missed, you might have touched upon, but sectors in particular, where you're most kind of constructive in terms of loan growth from here on the private sector corporate side?
Actually, good, yeah, good point. I mean, just within the, thirteen billion increase in the corporate side, when we did see a noticeable step up on the private sector origination. I think about three quarters of that growth was on the private sector, when in prior quarters, the growth had been more skewed towards GREs and commercial GREs.
So that, that was good news. Whether that continues at that pace or mix is, to be, determined. But just from a segments point of view, we do set out, the details of the segments, in Note 6, in the accounts that can tell you sort of quarter to quarter and year to date.
But I guess from the transport and communications probably being the standout sector, for a year to date point of view, and for the quarter. So that's up over AED 12 billion this year already. FIs has been strong, just under AED 5 billion, and management companies is just under AED 10 billion for the year, and almost AED 7 billion in the quarter alone. Trade's also noticeable, but also let's not forget on the retail side, just the personal lending is up just under AED 13 billion this year, and AED 5.6 billion or so for the quarter as well. So pretty, pretty good mix in there.
I'd say, Waleed, you may think living in Dubai, that there must be a lot of increase in property finance, but, you know, the reality is that there's not a huge demand in property finance at the moment. Most of the big developers are selling off plan. You know, we end up giving an escrow guarantee, and they're financing through the cash that's sitting in the escrow account. So, you know, despite the what you see in supply coming in the pipe with property, we're not seeing a lot of increase in real estate financing.
So it's sort of a very good signs for the market at the moment because, you know, we're just not seeing the developers, as we have historically, needing lots of funding to complete their projects. That they're self-funding through the escrow accounts with a guarantee from us. Having said that, we also have got a big buildup of escrow balances from those. So that's also very positive for us on the deposit side.
Perfect. Thank you so much, Shayne. Thank you, Patrick. Thank you for your comments. Very helpful.
Thanks, Waleed.
Thank you. Our next question comes from Naresh Bilandani from JP Morgan. Your line is now open. Please go ahead.
Thank you. Hi, Shayne, Patrick, Paddy, it's Naresh from JP Morgan. A few questions, please. One is, can you please throw some light on what portfolios have led to an increase in the impairment charges in the UAE segment? That's one. And just staying on asset quality, I mean, there seems to be some steady pickup in the pace of write-offs year to date. I mean, currently they're at AED 1.95 billion versus AED 1.9 billion for the whole of 2022.
So could you please share some composition on the sector and geography where these write-offs are coming from? That's the second question. The third is, could you please and kindly repeat once again the drivers of strength in the fee income in the Turkish business?
You mentioned some points. Apologies, those went quite fast. So if you could please shed some light on that, that would be great. And my fourth and final question is, so within the economic segments of the loan book, there seems to be a sizable growth coming from what is defined as management of companies and enterprises in the current quarter. Could you please throw some light on that, on what that composes of? Thank you.
Naresh, welcome. Let me just see if I can work down through those. The impairment side, which portfolios? So if you look at the segmental analysis in the accounts and the Note 23, that shows all the impairments and the movement between stages. I would say we're seeing very strong recoveries on the corporate side, so, AED 27 billion books of non-performing loans with the property market where it is.
We've had a lot of recoveries coming through from that, but we have also been building the provisions on the retail side. We are a leader in the market on retail. We've been growing very quickly with that as well. And also with IFRS 9 and the ECL models, means you have to build in forward-looking factors.
Rising interest rates are a factor, so that partly explains the buildup in the flow of provisions being made in the quarter this year. Actually, that was a trend that we saw from Q1 through to Q2 as well. So you know how we operate, we like to cover any potential risks like that off as early as possible, and then move on from that.
I think there was a question also about the Stage 2 build, right? That was in the, Might as well to cover that at the same time.
Yeah, yeah. So that, well, I mean, that's the timing of, I mean, if it's in the retail book, if you go over 30 days, then you're moving to Stage 2, and then it'll go to Stage 3 after 150 days. But then within 30 days, you've either got a recovery or a charge-off. So it's just, it's a part of the natural sequence going from, through the, stages. And hopefully, you can then see that in the detailed notes to the accounts. Also, with retail, you get a, you get a much faster write-off as well. Just so, and you had a question on the write-offs year-to-date, the sort of mix of that, geography, et cetera.
Well, the write-offs, we also have very strong recoveries, and you can see that in the notes to the accounts, as well. So that's what's really balancing down—I mean, reducing the non-performing loan is predominantly the recoveries, and then we have flows through into that Stage 3 , mostly offsetting those recoveries as well.
But I have to add my normal comment, Patrick.
Yep.
No gain without pain. I mean, we, you know, we're, when you've got stage recoveries in the high 90s%, as we have, and we've built that up over many years, you know, we're getting those recoveries because we took the pain upfront. So, you know, they're flowing because, you know, we took the medicine early and, with the strength of the property market we've got now, we're getting the gains back. So, you know, it's helping us quite a bit.
Just on the geography part there, Naresh, Turkey saw strong recoveries in Q1 and has been relatively neutral since then. A lot of their provisions are getting offset by further recoveries, albeit at a much less of a pace. So they've got a net credit of what? AED 400 million or AED 600 million for the year to date.
So any of the increases are rarely coming through in the UAE, but likewise, substantially all the recoveries for the third quarter have also been coming through from the UAE as well. You asked about fee income in Turkey. It might be helpful to take everyone back to the NFI page in the deck there, just to show, to illustrate that.
I think on the fees, maybe it's elaborating on what I was saying earlier in the presentation. So on the bottom left-hand chart there, you can see that the fee and commission income has stepped up from AED 1.6 billion-AED 2.0 billion. A substantial amount of that is coming from Turkey. So with the inflation, the actual value of card spend, et cetera, is going up very quickly. Yet the FX depreciation is at a lesser rate when you bring that back to dirham. And at the same time, with the rising monetary policy rates, the regulators are also allowing higher interchange rates.
So underlying all of that is good quality fee and commission income, which we would expect to be sustainable, with a slight caveat that it depends on the rate of card spend and inflation that we might or might not see in Q4 for Turkey. I think that answers your question for that one, Naresh, if that's where you were focused. And just on the FX side of that, I might as well cover that off while I'm on that page. I think I did indicate at Q2 that the AED 2.1 billion was or had a lot more valuation gain that we had been seeing in Turkey just around the time of the election. That included widening spreads on spot FX, strong volumes in spot FX in Turkey as well.
And so post-election, those volumes have rarely come down, and that's the main driver of the return to AED 1.8 billion. I think at Q2, I gave an indication of how much of that is client flow versus trading. At Q2, it was around 60%-70%. I'd say Q3 is around the 70% is client flow, and pretty, pretty stable income that we're seeing.
And even within the trading book in Turkey, they have a core of pretty regular recurring trading gains. And then their variable is some of the interest rate hedges, net open positions, and their swap funding costs, et cetera, that we've been through many quarters over the last couple of years as well. So that's the dynamic that's going on there. There was a fourth question on segments, wasn't there? What was the, Sorry, Naresh.
That's right. The definition of management of companies and enterprises. That's right.
Are you, are you looking at the notes to the account for segments?
Yeah, when you show the split of the loan book by segment, by segments, and that includes the ten.
Okay. Okay, look, they are principally holding companies for both multinational, large corporates, but also some of the large multinational domestic corporates as well. So it's principally a holding company or a conglomerate.
Understood. All right. Okay. Thank you very much for your replies. That's very clear.
Thanks, Naresh.
Thank you. Our next question comes from Shabbir Malik, from EFG Hermes. Your line is now open. Please go ahead.
Hi, thank you very much. I think my questions have been answered. Maybe if I can just ask one question about any early indication that you can give on 2024, particularly on loan growth and/or asset quality, or at least what kind of factors would you be considering when you, when you're thinking about next year? And secondly, I think just on Turkey, just want to get understand the dynamic on the NIM dynamic. If I remember from the earlier calls, you know, sharply higher interest rates tend to be short-term negative for margins. Is that dynamic still? Does that dynamic still hold for DenizBank? Some clarity on that would be very helpful as well. Thank you.
Thanks, Shabbir. Look, just on the loans and advances for next year, let's go through the fourth quarter, and we will come back with our view for that and our guidance in January. I think it's probably safest for that one. And just on Turkey, yes, in the past, when you have rate rises, the deposits typically reprice up faster than lending did. The industry across the banks in Turkey, including DenizBank, the duration on the asset side has shortened, so there's a better matching between the timing of repricing liabilities and the asset side as well. So we hope to see some of the net benefit of that come through in the fourth quarter.
But, you know, I think it'll be something more for updating in our guidance for January, as well. There are quite a number of variables. We really have to see how that monetary policy transition evolves.
Great. So maybe on the earlier question, do you think that the geopolitics could play out negatively, or do you see any signs of that playing out negatively for your business in the UAE?
I think that's a pretty difficult question. I think if the events remain isolated to where they are geographically at the moment, I don't think we're gonna get much effect at all. Obviously, you would all have noticed as it unfolded, equity prices plunged across the region, have somewhat recovered, but not to where we were. So obviously, there is some nervousness from foreign investors into the region, and you saw that just through equity values. At this stage, we're not seeing any effect on our business, and inshallah, we won't.
Great. Thanks for that. Thank you.
Thank you. Our next question comes from Rahul Bajaj of Citigroup. Your line is now open. Please go ahead.
Yeah, hi, thanks, Patrick, Paddy, for the questions, for the call. This is Rahul Bajaj from Citi. I have a few quick questions, actually. The first one is on UAE margins. So, in response to a previous question, you talked about the drivers of margin trends in 3Q and why they've been subdued. I just want to kind of build your thoughts into the future.
So if I think about higher for longer environment over the next 6-9 months, how should I think about margins in the UAE? Given asset repricing, to my understanding, would be largely done by now. So it is basically cost of fund movements, which will impact NIMs going forward. Is that thinking correct? So that's my first question. The second question is on the other segment.
So in your segmental disclosure, the other segment seemed to have seen a big jump in profit this quarter. Just wanted to understand what is there in this other segment, and why the profit of the other segment has gone up so much in 3Q, over the preceding couple of quarters. Third and final question on Turkey.
We've been seeing these write backs in Turkey, but now that interest rates have gone up or are going up quite steeply in Turkey, is it fair to assume that we will revert to kind of a normalized level of cost of risk in Turkey over the next few quarters, and what that normalized level would be? I mean, you used to have cost of risk in Turkey, I think upwards of 200 basis points. Will that be the new normalized level or the new normalized level will be somewhere between, I don't know, 100, 150? I mean, any thoughts there would be most useful. Thank you.
Yeah. Rahul, thanks, thanks for joining. Maybe I can just take that one last. I think it's a bit too early to determine what the new normal is in that sense. They've had strong recoveries this year. We haven't seen too much of NPL flows through this year. They're maintaining strong levels of Stage Three cover.
I think they're around 50% cover when we acquired them. I think they got up towards 80%. That with their strong recoveries, that has come down a little bit. But from a cost of risk point of view, historically, you know, we were in the first year of acquisition, it was around 4% or 400 basis points. And we knew consciously that we would have, for the first couple of years, that high level of impairment coming through. And then, through-
And remember, that was us pushing-
Yes.
- Turkey to get up to the level, so we have a group.
That was to get to the,
Because that was essentially below what group would normally be.
Yeah. And so then in over the years, they, that sort of came down to the mid-300s, and then in 2022, they closed out at around 250 basis points as a cost of risk. I think the big variable here is the impact of the higher interest rates. Sure, we can price higher, but what will that do to the companies and the credit quality is something that has yet to emerge and distill that.
So I really wouldn't be able to give you a proper answer on what a new normal is. But I think when we get to January and we update our guidance for cost of risk, we will factor that into the overall group cost of risk. Just on other segments, just working through them backwards, actually. Yes, you're right.
In our segmental reporting, we've got a column called Others. It has about AED 2.7 billion-AED 2.8 billion of income for the nine months year to date. But the short answer to that is, that's what we charge the businesses for the use of the group's capital. We've got about AED 105 billion of group capital, so that's what we charge for them, for using that. It's kind of free funds.
And then when we do the segmental, we're just not allocating that back to the businesses. There are some central costs in there as well, whether it's certain head office costs and certain IT costs that aren't business specific, that then don't get allocated. So that's really what's in that. And then your first question, working backwards was the UAE NIM.
Yeah, so I think the rate rises will work themselves through on the asset book. That doesn't take too long to do, so I think you're right on that. The main variable will be the mix of funding and increase in term deposits, which is obviously at a higher rate. But a third variable is whatever the yields on the bond portfolios.
We have about AED 150 billion bond book. So yields have been very strong on that for the last year or so, and increasing. But that, you know, if that starts reducing, if there's a forward view that rates will come down, that's another variable in the overall margin that we need to factor in.
I just would add that we are seeing pressures on corporate spreads. There's no doubt about that. There's a lot of liquidity in the system, and there's not massive amount of new loan formation in the corporate sector. There's a lot of refinancing that normally means lower spreads. So you know, we have seen pressure on spreads in corporate. And in certain pockets of retail, we've also seen a contraction of spreads. Home loans is a good example. I'm sure a lot of you who are based in the UAE would see that there's some offers out there that frankly are lower than your equivalent cost to funds.
So, there are institutions working hard in market share, and especially in mortgages. For us, mortgages has never been a big product. We certainly do mortgages, but it's not been one of our key anchor products. And the reason for that is, as I'm sure you've all worked overseas, the traditional factor around mortgages was it was a very big hook product. But as markets mature, mortgages do not become a hook product because they're shopped around to the lowest common denominator, because the rate's important financially for individuals, and they can move and get half a percent, they'll move. But that doesn't mean that your main banking relationship moves, 'cause actually that's more complex.
Moving away from the app, you know the payments that you've loaded up, the credit cards you use to another institution. So I think for us, it's been a place that, yes, we offer customers mortgages, but it's not really a massive push product for us versus cards, personal loans and car loans.
All clear. Thank you. Just one follow-up, if I may, please. Not follow-up, a new question. On the recoveries in UAE, just wanted to understand, what is driving these recoveries? I mean, I understand in Turkey, the recoveries are coming on back of inflation and salary adjustments, so you're probably getting paid back on some of these loans. But what is driving these recoveries in the UAE?
Yeah, yeah. So look, for Q3, the vast majority of the total recoveries of about AED 1.3 billion was in the UAE. And it, it's more a function of the property market, which connects back to the collateral.
That doesn't mean it's necessarily a recovery from the property sector per se, but you've seen the size of our NPL book currently at AED 27 billion. You know, we've been working through those with our recovery team. When the property market is at this point in the cycle, it's a good time to actually execute the recovery of that, and it's actually easier to execute when the market is as buoyant as that. So that, that's the main factor.
and I'd said previously-
Thank you.
I'd said in previous calls that, you know, now is the time for us to push hard on these recoveries because, you know, where property prices are where they are, you know, then now is the time to get out of these issues that have been hanging around us for quite a long time.
Makes sense. Thanks, buddy. Thanks, Duncan.
Thank you. Our next question comes from Olga Veselova from Bank of America. Your line is now open, please go ahead.
Oh, thank you. Thank you. Good day. I have two remaining questions. One is, again, about domestic net interest margin. So my question is, is this intentional strategy to go for volumes growth, compete by pricing and sacrifice margins? And the reason I'm asking this is because your margin erosion was significant in the third quarter.
So I'm wondering, is this intentional or not? And also in which segment is pricing competition more severe, in the UAE? My second question is about corporate income tax. You mentioned that you expect 15% corporate income tax in the UAE from 2025. How certain is this, or this is still TBC? And the reason I'm asking this is because many other local businesses say that there is still uncertainty, while you sound pretty confident.
Do you have any insights from talking to the tax authority? The last point on the taxation, am I right that the corporate income tax in Turkey also goes up from 2025 to 30% from 25%? Will this be valid for DenizBank or not? Thank you.
Yeah. Why don't, why don't we just do that tax one first? Yes, the Turkish corporate rate has actually gone up to 30%. It was retrospective back to January as well. So actually, our effective tax rate for Turkey in Q3 was a bit higher than normal for exactly that reason. So that's already come in. Just on for the rest, from a group wide point of view.
The reason we're expecting 15% from 2025, is because there is actually an EU directive that intends to... That is sort of scheduled to implement that for 2025. And the UA, sorry, not the UA, the UK is also drafting legislation. I'm not sure if that's actually enacted, but they, too, would also be planning to implement that OECD agreement in 2025.
And if Europe does it or the UK does it, because we have businesses there, then we're essentially caught by that. We presume, we are making a presumption, that the government here would prefer to tax us at 15% instead of us paying 15% to another government. But that, that-
I think that's a pretty good assumption.
It's a Yeah, it's a pretty good assumption. But that in itself has not been enacted in the UAE. But that's the basis of our assumption when we say 15% by 2025. And if it doesn't come through, that's, that's nice, too. Just on the NIMS, I think you were, first of all, alluding to, are we pursuing growth internationally through margin competition? Is that right, or-
It's domestic.
Domestic. Okay-
No, domestic, domestic. Mm-hmm.
Oh, domestic. Okay. Well, that, that's I, I think we've covered that to some extent already, but, that's, that's the market, particularly around the segment you asked. It is more around large corporates, I would say, but no, no individual sector.
I think the only segment that I see under pressure in retail is mortgages. I think that's the one area where there is market pressure, where there's fixed rate mortgages being done at pricing that frankly it's loss-leading. I think if you look at cards, personal loans, car loans, I don't think there's much pressure there.
The other pressure, which I said earlier, is really around the corporate space where refinancing, given the liquidity in the market, there is strong competition for loan growth in that area. So we are seeing margin contractions within the corporate space, no doubt. And that really depends on-
Thank you.
That really depends on the counterparty, you know, what, what risk profile they got as to what price you put it down to.
Okay, um-
There were no one-offs in margin in the third quarter, correct? So no specific one big, large corporate.
Yeah.
So it was just broad. Yeah? Mm-hmm. Okay.
Yes.
Thank you.
Thanks, Olga. Alex, I'm just gonna pose the verbal questions because we're very much on time, and there have been questions submitted online, which I just want to quickly address. Paddy, maybe you can address the first one, which is about the cost of risk at Emirates Islamic in terms of the Stage Two jump in.
So, but we address that.
Sorry.
That's basically... The Emirates Islamic is pretty similar to the flow that you're seeing-
Yeah
in the consolidated, as we've built that credit card book up.
Perfect. I'll take the rest of the questions. There's a question on the latest NSFR. We do disclose that in our Pillar Three report. If you look at the... So we don't disclose it on a quarterly basis, but if you look at that on a, at the end of the 31st of December 2022, it was 121.4. It was 121 the year before that, and you can see that the bank still remains very liquid, so a strong NSFR. Also a question on retail. Retail profit's only up 15%, so much less than the jump in profits on other parts, such as CIB and Treasury, which are both up over 100%.
Again, just to, you know, make the point there, if you look at the recoveries, for example, that have come through Corporate, we've actually seen a AED 1.5 billion delta. There's actually a net credit this year in Corporate, where there was over a billion DM charge for provisions last year. So that's one of the main drivers, why we're seeing a bigger delta in profit, on Corporate. And for Treasury, of course, the investment book has grown. Yields have grown as well, so they are a beneficiary of that.
Let me see what else we have. In terms of credit exposure, how much is below investment grade? Just total credit exposure. In terms of the loan exposure, most of our sovereign exposure—Sorry, which, what, how much of sovereign is non-investment grade? In terms of our investments, most of that would be HQLA, and there would be some... So only ones such as maybe to Turkey to Turkey and Egypt would be below investment grade. All others would be above investment grade. And then a few other questions. Percentage of the loan book, the retail loans, which is mortgages. That's just under a quarter. And again, Patrick addressed the question on cost of risk, below the guidance level.
Okay, Alex, is there one more question? We have time for one very quick question.
Yep, we have a final audio question from Chandra Kumar of Aram Capital. Your line is now open, please go ahead.
Hi, good afternoon. So my question is related to FX and derivative gain. So NBD is consistently reporting higher gains every quarter. So should we expect this trend to continue or this trend to subside in the future? And just want to know what unique strategy NBD employ to set itself apart from other banks when it comes to achieving higher trading gains.
Chandra, when you were talking about higher gains-
Now, we see, like, every... Yeah. Yeah, this affects on derivative gains. Every quarter, we see, like, around AED 2 billion every quarter, these gains.
You're talking about the FX and derivative income that we were talking about earlier?
Yeah.
Yeah, because-
So, like, in the previous call, you mentioned the 50%-60% is a normalized level, right? So but we see every quarter, it's like, persistently going up.
Yeah. I think I probably answered that question earlier, where I gave the percentages of what I see as the sort of underlying client flow type amount.
It was about 70%.
Yeah. And there is the variability with DenizBank, so you need to factor that in. Gains from this quarter may reverse next quarter.
The, the, the-
Okay, so should we?
The majority of that flow is client flow. 70% of it is client flow.
Yeah.
You know, we're not a big trading bank. We do get some bits and pieces of flows from DenizBank with their positioning. But our trade, our trading position, our prop position is quite small. Our market risk on that is super low.
Okay.
Okay?
One last question. So we saw a sequential increase in DenizBank margin, and you attributed this to higher income from CPI-linked bonds due to higher inflation. So just wanted to know whether higher inflation is good for DenizBank margin or is detrimental?
Well, we would prefer a low inflation environment and better quality of earnings, but these CPI-linked bonds essentially provide something of a hedge against that inflation charge that we take each quarter. It is real income, whereas the inflation charge is actually reversed back through equity. So that income also goes through to supporting the capital base there as well. But, you know, I know how much the inflation next quarter will be as much as you do. So it's a pretty important variable when it comes to their earnings and margins as well.
Yeah, and I think my last comment on that one would be: We can't wait for the day when Turkey comes out of hyperinflation and has just bottom line earnings rather than a deduction for hyperinflation. And, you know, hopefully, that's in the next couple of years, that we get back to normalization there on inflation. So I think the answer for us is, we want inflation to be low in Turkey, and we want Turkey to come off of hyperinflation, because any benefit that we're getting out of those inflation-linked bonds has been more than offset by the hyperinflation adjustment. That's it, Shayne and Patrick, there's no further questions. Well, if there's no further questions, I'd like to thank you all for participating in today's call.
NBD delivered a very strong set of results, delivering over AED 5 billion in profit every quarter this year. Our investments have positioned us for growth, and we are well placed to support our customers and our innovative ESG solutions. With that, I'd like to hand you back to Alex. Thank you all for participating.
Thank you for joining today's call. You may now disconnect your lines.