Ladies and gentlemen, welcome to the Emirates NBD results call and webcast for the first quarter of 2023 for analysts and investors. Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should disconnect immediately. I will now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.
Thank you, Bailey, and welcome to our results call. We will have a hard stop at 2:55 P.M. because we have one of our competitors down the road that I know most of you will want to attend their presentation as well. I will first touch on the operating environment within our footprint before running through the main highlights of what has been a record quarter for Emirates NBD. We delivered record results in a quarter containing a lot of turbulence in the banking sector. SVB collapsed and the Swiss authorities announced that UBS would buy Credit Suisse. There was also a knock-on effect on tier-one securities, concerns about unrealized losses on investments. I'm pleased to say that the impact on the group from all these events is limited.
The value of strong conservative risk management and healthy capital and liquidity ratios became very apparent during this volatile quarter. Early this month, the IMF trimmed this year's global forecast to 2.8%. It expects most countries within our footprint, including UAE, KSA, Turkey, Egypt and India, to match or exceed this level. Emirates NBD Research expects the UAE economy to grow by 3.9% this year, this optimism is supported by the UAE's PMI registering a five-month high of 55.9 in March. Recent events in the U.S. and European banking sectors did not deter major central banks from hiking rates in March as inflation remains above target. Liquidity, however, in the UAE banking sector continues to remain very healthy.
Our stable and low-cost funding base enabled Emirates NBD to generate over AED 10 billion in income and deliver a record AED 6 billion profit this quarter. This is the highest ever quarterly profit from a UAE bank. There are many highlights in the results which underline our key strengths. All business units delivered an outstanding performance, demonstrating the strength of our diversified business model. Retail had its best ever quarter with over AED 8 billion of disbursements. Retail also issued over 144,000 new credit cards last quarter. That's more than one every minute of every day. Our growing regional presence is helping drive significant income growth across our international footprint, especially in Egypt, KSA, India and London. ENCAP continues to play a lead role in landmark debt and equity capital markets transactions across the region.
Global markets and Treasury delivered over AED 1 billion in quarterly income and profit for the first time, with a strong trading performance despite volatile markets. Emirates Islamic delivered a record profit of over AED 600 million as they grew income by an impressive 74%. DenizBank dealt remarkably well with the challenging regulatory environment and was able to increase profitability. Funding continues to be a key strength of the group, with deposits growing by an extraordinary AED 35 billion during the quarter, including AED 19 billion of CASA growth. Despite rising interest rates, CASA accumulation demonstrates a strong market understanding of retail and our corporate customers. Asset quality improved in Q1 with substantial recoveries, which enables us to improve our credit quality guidance for 2023.
We continue to invest to deliver future growth with our new products and services rolled out and the international strategy recharged, particularly in Egypt with the appointment of a new CEO and CFO. To sum up, the group delivered a record set of results. We have a resilient, diversified business model firing on all cylinders, state-of-the-art banking infrastructure and a rock-solid balance sheet. We are well placed to empower our customers to benefit from the growth opportunities across our MENAT footprint. I'll now hand you over to Patrick to go through the results in more detail. Patrick.
Thank you, Shayne, good afternoon to all of you. Now just running down the usual financials on Q1 2023 on page two. Total income of AED 10.5 billion is up 64% year-over-year. Within that, both NII and NFI are up substantially. Net interest income increased as our efficient funding base benefits from rate rises. All business segments are performing well, with continued strong volume growth also contributing positively to interest income. Standout drivers in non-funded income were stronger customer remittance and FX flows and interest rate hedging, increased local and international card business in both ENBD and DenizBank, increased trade finance, and higher gains from investments and property disposals. Costs increased 34% year-over-year, supporting very strong business volume growth, particularly in retail and accelerated investments in our international network and digital.
The cost-income ratio at 25.3% for the quarter is comfortably within our long-term guidance. Impairment allowances are down significantly by 66% year-on-year. As I signaled last quarter, we expected strong recoveries in both the UAE and Turkey to come through in Q1. This gives us a very strong profit before tax of AED 7.3 billion, up 145% year-on-year, and an AED 6 billion profit after hyperinflation and tax, which is up 119%. This is by any measure, an exceptional performance, and as Shayne mentioned, the highest quarterly profit ever delivered by a UAE bank. Looking very briefly at the quarter-on-quarter numbers, net interest income is down 7% due to lower DenizBank margins, which I'll touch on shortly.
Ex Deniz NII continued strong growth with the flow-through of rate rises and volume growth. NFI is substantially up from higher FX, property and investment gains. Expenses are lower due to marketing seasonality over the previous quarter. Actually, while I'm on this page, I should point out that we have added a subtotal of profit before tax and others as a key performance metric in anticipation of the introduction of corporate tax, which for us starts from January 1, 2024. We still await confirmation on whether the 15% rate for larger companies will apply, and we'll keep you updated. In the bottom summary table, you can see that the balance sheet metrics are in good shape with assets, loans, and deposits all growing. Capital, liquidity, and credit quality metrics all considerably stronger than 12 months ago. Turning to net interest income on slide 3.
The bottom chart shows that margins improved by 145 basis points year-on-year, helped by improving loan and deposit mix and higher interest rates. NIMS are down 35 basis points in the first quarter due to the regulatory impact on DenizBank NIMS, which quickly reverted back to similar levels seen in Q1 of last year. The 4.05% NIM in Q1 is trending towards our guidance range of 3.8%-4%. The regulatory impact on DenizBank NIMS has materialized perhaps more quickly than expected. However, CASA remains at 60% of deposits overall, and there is a possibility of another rate rise in May. When we condense the upside and downside drivers, we have maintained our NIM guidance. We'll keep you updated each quarter as these main NIM drivers evolve.
Slide four shows that fee and commission income is up 32% year-on-year, with a solid trend of quarterly growth, mainly from increased local and international retail card business at both ENBD and DenizBank, strong investment banking revenue, and trade finance growth. Other operating income in Q1 is significantly up by 72% year-on-year and more than double the previous quarter due to higher customer remittance volumes and FX flows, additional corporate hedging activity, and gains on property and investments. On slide five, we see that gross lending increased by 3% during Q1, helped by a record quarter for retail with over AED 8 billion of disbursements. DenizBank also delivered strong loan growth across a range of sectors, but particularly strong in personal. Corporate lending grew on healthy demand from manufacturing, construction, and trade. Strong origination volumes were largely offset by maturities.
Total deposits increased by AED 35 billion in Q1, up 7%. Within that, CASA is up another AED 19 billion. The ability to attract and retain CASA remains one of ENBD's core strengths. CASA represents a healthy 60% of total group deposits, with this percentage unchanged from last quarter despite higher interest rates, which gives us a lower cost of funding. Just to note that from this quarter onwards, we incorporate Emirates Islamic balance sheet and P&L into the respective retail and corporate segments. This reflects better the underlying business franchises and how we manage them. On slide six, we see that the NPL ratio improved by 0.4% - 5.6% during Q1, helped by strong recoveries in both UAE and Turkey.
These recoveries also meant the annualized cost of risk for Q1 was 41 basis points, substantially lower than the 108 basis points for the whole of 2022. The gross cost of risk excluding recoveries was similar to Q4 last year, including an overlay for the Turkish earthquake. The realization of healthy recoveries, coupled with a good pipeline of recoveries in both Turkey and the UAE, enables us to tighten our guidance for NPL to around 6% and lower the cost of risk guidance to 50-70 basis points. Coverage rose by 7% - 152% during Q1. That was Stage 1, increasing slightly due to the overlay for Turkey. Paddy will now take us through the remaining slides.
Thanks, Patrick. On slide seven, we see that the cost-to-income ratio improved to 25.3%. Raising income enabled us to proactively accelerate our investment in human capital and future growth in digital and international, and drive underlying earnings growth through incentives for sales staff. Other costs decreased quarter on quarter as service, legal, professional fees, and marketing costs were lower due to seasonality. As we guided last quarter, we expect this year's cost-to-income ratio to be closer to the 30% area. Slide eight, funding and liquidity shows that the group continues to operate with very strong liquidity with an AD ratio of 80% and an LCR of 187%. Given the higher rate environment, we are able to deploy excess liquidity in attractive yielding high-quality debt instruments.
There has been a lot of focus in the last quarter on unrealized losses, with some analysts estimating the impact on UAE banks to be between 60 and 120 basis points of capital. Given this heightened interest, we have made additional disclosure on page 11 of the financial statements. This shows that the unrealized loss on our AED 106 billion investments measured at amortized cost is AED 2.66 billion. This equates to half a % of capital. This is below the low end of analysts' expectations, probably because of the vast majority of these investments are in government bonds. In Q1, we issued AED 4 billion of term debt, including the first public dirham sukuk and conventional bonds following the establishment of a local currency yield curve.
We have just under AED 6 billion of term debt maturing in the remainder of the year, which is well within our normal issuance capabilities. Slide nine on capital shows the Common Equity Tier 1 ratio strengthened to 15.8% in Q1 as AED 5.6 billion of net earnings more than offset a 3% increase in risk-weighted assets. The Common Equity Tier 1 ratio is 15.3%, excluding the ECL regulatory add-back. Our first call on Additional Tier 1 securities is two years away in 2025 and any decision would be made much closer to then. Turning to divisional performance, Slide 10 shows that RBWM income improved 39% during the year. There was a record quarter for loan disbursements and credit card issuance.
Retail deposit gathering engine continued in Q1, adding a further AED 13 billion of deposits. Corporate and institutional banking delivered a strong increase in income, and this, along with significant recoveries, boosted their profit by 128%. CIB continues to roll out additional products and services to clients, including new global custody services and easier access to trading on the Abu Dhabi Securities Exchange. Emirates Islamic's results are reported in the respective retail and corporate sectors. However, it's worth noting that 74% increase in income that EI registered, helping deliver a record net profit of over AED 600 million for the quarter. Global markets and treasury delivered an outstanding performance, with quarterly income and profits surpassing the AED 1 billion mark for the first time ever. Net interest income jumped on higher income from balance sheet positioning and an increase in investment income.
Non-funded income was substantially higher on a strong trading and sales performance. DenizBank's income was up 37% to AED 861 million on higher income and strong recoveries. 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. Bailey, please go ahead.
Thank you, Paddy. We will now begin the question and answer session. If you wish to ask a question, please press star one your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. To participate in our written Q&A, just type your question into the 'Ask a Question' text area, then click the Submit button. Once again, please press star followed by one on your telephone if you do wish to ask a question. Our first question today comes from the line of Nida Iqbal from Morgan Stanley. Please go ahead, your line is now open.
Hi. Thank you for the call, congratulations on a great set of results. My first question is on the NIMS. The UAE performance is clearly impressive with NIMS up 46 bps quarter-on-quarter. Would be great to get your thoughts on the outlook going forward. Do you think margins have peaked in the UAE? If you could talk about your expectations in terms of deposit betas in the coming quarters and the potential shift into term deposits versus CASA. On the same topic, it would be great to get your thoughts on DenizBank NIMS under a scenario of post-elections return to a more normalized monetary policy. My second question is on the accelerating investment into international growth.
If we can get some more details about how you're thinking about this? Are we talking M&A or, you know, organic growth, in countries that you have presence?
Thanks, Nida. Maybe I can just take those points on the NIMS monetary policy, et cetera, and Shayne can have a go at international. Just from the NIMS in the UAE first, you're right, it is up 45, 46 basis points for the quarter. That is a combination of the flow-through from the rate rises last year, so as assets reprice
Coming through. Plus there have been two rate rises this year. There is an expected rise in May. Of course, you can never be certain of these things until they actually happen. What we've also seen, rarely is we haven't seen as much migration from current account savings account to term deposits. With our CASA still at 60%, that means our cost of funding is remained lower than we might have expected. When we set the original guidance, earlier in the year, our base assumption is that the rate rises flowing through or in the current year, less any cuts that might have been expected in the latter part of the year, would have been offset largely by migration from CASA to term deposits.
Rarely, the guidance that we gave where we were exiting at 4.4% at the end of last year, and therefore guiding from 3.8%-4%, was largely going to be due to DenizBank and our understanding of the impact of the regulation on both the asset pricing and the cost of funding there. What we've then actually seen is that the impact on DenizBank has probably come through slightly faster than we were expecting. The net-net, that's really been offset by better than expected margin in the UAE, given less has migrated to term deposits and kept the cost of funding lower. That's sort of the dynamic there.
You know, even just mathematically in maintaining that guidance, if you take the midpoint of 3.9%, and we did 4.05% for the first quarter, implies about a 3.85% margin for the final quarters. Obviously, it's not gonna be as linear as that. Just in respect of the Deniz monetary policy and what might happen, let's just see what happens in the elections through May, through mid-May, and if there's a runoff there at the end of May. Our base assumptions that we've also been making is, on one hand, if monetary policy normalizes and therefore rates go up, that will continue to tighten the margin pressure in Turkey, and we've factored that in.
If the monetary policy doesn't normalize, that will also have a negative impact on margins because of the regulation on the asset pricing and the cost of the funding. Possibly a similar outcome directionally between those two different scenarios.
On the accelerated investment, we were talking organic with that investment. We would hope to have 20 branches opened in Saudi by the end of the year from 8 branches. We'll go from 8 to 20 branches. We have a significant relocation refurbishment and opening plan for Egypt to improve that. We also are accelerating some of our investment in technology. We always have... even though we keep ramping up our technology spend, our demand from our businesses and support units always, you know, is far, far greater than the budget allocation. I think this gives us an opportunity where we are in earnings to accelerate some of that and bring it forward.
We're particularly focused on delivering new customer facing services. For those of you in banking , you would notice that we've rolled out our new app recently, ENBD X. We now have 250,000 clients onto the new app, and eventually they will migrate everyone onto that. Accelerating the services are added to that app, including wealth management services, as we go forward. For us, this is an opportunity to accelerate.
We're mindful, you know, one of the reasons we wanna accelerate is we're mindful that, as you would all point out as analysts, that rates are likely to drop in 2024 and 2025. Therefore, you know, ramping up our costs, when we have the room is a good strategy for us to bring some of that forward and hopefully thereby increase earnings for future years and build that base as we move forward.
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. good afternoon, and thank you for the presentation, and congratulations on the strong and record set of results. three questions, please. first on the retail business. there has been strong momentum all throughout 2022, but when we look at the first quarter, there was an acceleration both on the funding side as well as on the lending side. I'm referring to the strong pickup in CASA generation and then some of the retail disbursements. if you could kindly talk about what drove the acceleration during the first quarter, that would be extremely helpful. while you do that, if you could please also touch upon any changes in the liquidity situation in the UAE, given the change in reserve requirement ratio back from seven to 11%. that's the first question.
Secondly, on asset quality, if you could, please talk about which sectors drove the recoveries. The guidance, that you've changed, is it primarily driven by recoveries, or would your gross cost of risk guidance also change? Meaning that is it just a mark to market on what you've seen in the first quarter or are you also changing your forward-looking expectations around cost of risk?
My third and final question, if you could, perhaps provide an update on your inorganic growth aspirations, especially given that your domestic business continues to be in a very, very strong footing. You're delivering organic growth in some of the international markets as well, and then the international environment remains quite uncertain. Your thoughts on inorganic aspirations would be very helpful. Thank you.
Thanks very much, Waleed. Maybe I can tackle the first two of those again. Just on the retail momentum, you're right. They're very strong on both the asset and liability side. I think the business has had a much stronger focus on the asset side in the last couple of years. There are quite a combination of factors behind that. Not least, the ability for the business to run very strong campaigns and understand its market and how it goes about actually raising those assets and liabilities and the promotion of those. Actually, there's been a mega campaign on both the asset and liability side this year alone, so we usually do get off to quite a strong start in the first quarter.
There's also net migration to the UAE as well. As you'll know, the economy is quite buoyant at the moment. Also, probably a fourth component there is the increase of our digital reach means we are able to get a lot more new to bank as well, as deepening the relationship with our existing customers. That's that on the retail momentum side. You know, with the momentum that we've seen in the Q1, we haven't as yet really seen any signs that that has slackened off. I think you mentioned the liquidity side with the reserve ratio going back up to 11% from 7%.
It went down to 7% from 14% at the start of the pandemic, and that was very helpful for liquidity in the market. I think of the net impact for across the UAE is about AED 50 billion from that change in that ratio. We haven't really seen any impact on liquidity in the market from our perspective. We haven't had to start to bid up for deposits to replace that. In fact, to some extent, you know, with strong liquidity already, having to put the extra amount back into the central bank just comes out of other liquid resources. It's not really tightening the market from our perspective. Just on the cost of risk guidance and the sectors I think you asked about. The recovery has been very strong.
This isn't just the recoveries from provisions made in the last year or two. The financial recovery teams work for many years, sometimes on some cases, and it just happened quite a number of them have been coming through fairly evenly balanced between the UAE and Turkey. I would say the predominant sector from those recoveries is in the property sector. In the UAE, some of those. Sorry. That some of those have been worked on for a number of years. The property market is quite buoyant at the moment, and now's the time to be able to realize those recoveries. The same pretty much goes for the strength of the property sector in Turkey as well.
I mean, some of the Turkish properties doubled in dollar value. I think that's largely led to some of the recoveries. I think the one thing I would point out to the analysts is you only get the recoveries when you've made the provisions. You take the pain first, see if the gain later on. You know, without Stage 3 provisioning, as you've seen with the percentages, it means that, you know, when we are working these loans out, we are getting a recovery to the bottom line, which is beneficial to us. I would just on the inorganic, I'll take over on that one. The last 10 years, we've made two acquisitions. We haven't made a lot.
We've looked at many, we're disciplined around what we'll buy. I think as I said to you many times, you know, we have to have 51% control. We have to have board control. It needs to fit into our criteria as to where are our customers going, where are they investing. Importantly, most importantly, is price. We've walked away from many transactions in markets where the price did not meet our price expectations. If we don't believe that we can over the medium term generate shareholder value and that's accretive to our shareholders, we will not acquire. We obviously with 15.8% CET1, we have very strong capital position.
On the same token, we'll continue to be disciplined with that capital as we go forward.
Thank you very much. That's very helpful. Just one follow-up, please. On the gross cost of risk versus net cost of risk. Is it just a kind of mark to market on what you've seen in terms of the guidance change or is the gross cost of risk guidance also going, improving?
Just to know, we did give you a heads up last quarter that we were likely to have decent recoveries in the first quarter in particular and the first half. I think we did try to warn you because we could see some coming. We didn't try to blindside you with these numbers.
Yeah. Wally just, when we started off with the guidance at the beginning of the year, you have some line of sight, but you don't have cash in the bank at that point in time, and we have a clearer view having gone through the first quarter. Yes, we do have some actual recoveries that it's closing in on a pipeline as well. It gives us some more comfort to be able to tighten that guidance. You may recall in the past we've had fairly wide guidance, if any, on the actual impairment levels. I think previously it was 1%- 1.25%, then we moved it to less than 1%. We do have better line of sight on that now. It's not just actual plus what we thought in January.
We have updated our view on the recoveries. Of course, until you actually get cash in the bank, nothing's absolutely certain.
Thank you. The next question today comes from the line of Shabbir Malik from EFG Hermes. Please go ahead. Your line is now open.
Yes. Hi. Thank you very much. A couple of questions from my side. When I look at your investment book and compare to the some of the other banks in the UAE, you have a relatively high proportion of your investments classified as amortized cost. Just wanted to understand what shapes this decision of making these allocations. My second question. If you look at 2024, potentially there is corporate tax coming in. Rates are also potentially going to be lower.
Can we see these steps such as your inorganic strategy, you know, growth in Saudi Arabia, expansion of your branch network, investing in digital as potential offsets that can kind of mitigate the impact or maybe fully compensate for the impact of lower interest rates and corporate tax? Those are the two questions. Thank you.
Great. Hi, Shabbir. Welcome. Just on the investment book side, you're right. We have an amortized cost investment book of about AED 106 billion. That's about 75%-77% of our total liquidity book. There are accounting rules to be able to meet that definition, i.e., you hold to collect. The bottom line is we don't trade our liquidity book. We don't need to. We have a very strong LCR ratio. You know, that's the way we hold that. There's nothing really too much to add to that. Different banks have different views on that's really our business model. We just don't trade our book. On your other question, the actual...
I'm not sure if the question was so much.
No
the impact of corporate tax plus lower interest rates and what we're doing about that or whether it was corporate tax specific. As Shayne did mention before, that we are taking the opportunity to invest for the future, in new revenue streams and with digital and our expansion. When interest rates do come down, corporate tax does come along, that we have developed other engines for growth as well. I think that was the essence of the question.
I think I'll try to answer it. I'd say that if you think about what Patrick and I focus on, it's not our day-to-day business. Our focus really, the two of us is 24 bps, 25 bps, 26 bps, how are we going to generate revenue to make up for that shortfall, that will come with lower rates. You know, Obviously, we're very interest rate sensitive, and every 25 bps is about $100 million. For us, you know, we're very, very aware of that. We also know that, you know, we want to position ourselves for when those rates logically will come down.
No, that's very good. Thanks. That's what I was hoping for or kind of the response that I was expecting. Maybe one final point. You said that there are certain regulations which is impacting NIMS and DenizBank. If you kind of, I think you've mentioned this before, but can you please reiterate what those factors are?
There are two sides of the balance sheet. On the asset side, if you want to charge an amount over a specific amount and there are different bands, then you have to hold government securities almost as a penalty, as a quid pro quo. Those government securities won't have a yield as great as that lending. In essence, the whole book is.
You're taking the duration risk on that.
The duration risk. Correct. That means net-net, if you actually try and lend at 25% or 30% that was the rate, before Q4 closed last year, then you would find that you probably got an even lower yield than if you lent at around 20% or lower actually. There are different gradings of that. That's what's driving the rates down, and it's designed to funnel credit into specific sectors.
Yeah.
On the liability side, there's the specific rules that is trying to, I guess, de-dollarize the economy. It's discouraging dollar liabilities or foreign currency liabilities. Euros are prominent there. There are rules to have. At first, it was 50% of funding and Lira. It became 60%, and that'll be heading towards 70%. Therefore, banks are having to pay up more to attract Lira of funding. That's obviously gonna squeeze the margin on that side.
If you don't meet those thresholds of 50%, 60%, 70%, there's a percentage that you have to invest in low-yielding government bonds with that duration risk.
Yeah.
Got it. Thanks. Thanks for that. Thanks for the additional color.
Thank you. The next question today comes from the line of Chander Kumar from Al Ramz Capital . Please go ahead. Your line is now open.
Hi, thanks for having me on the call. Congratulations on the strong set of results. I have a question regarding effects on trading gains, which increased significantly during the quarter. Can you please provide some guidance on drivers of this increase? Were there any one-off gains or non-recurring items that contributed to this increase?
Sure. I'll take that one. Actually, if we look at page four, I guess, is the deck that sets out the quarterly profile of other income. I think you're referring to the FX and derivatives, dark blue bar, at the bottom right there. The majority, the vast majority of that is client flow business. The mix between ENBD and Deniz changes. The ENBD part of that has actually seen very strong client growth, particularly with spot FX with SME and retail customers. Plus, there are corporates that are hedging on the interest rate side as well. FX has been growing at a phenomenal rate. A substantial part of that, not all of it, is also from new to product customers. Customers that haven't been using that before.
About AED 250 million odd of that delta from AED 907 million to AED 1.4 billion is coming from ENBD as a combination of FX and other products as well. Deniz, I think every quarter, I sometimes give a potted history of some of the ups and downs of what's changing in each quarter. Within DenizBank, the larger part of it is also very strong client flow income as well. They saw foreign currency spreads widen quite significantly in the last year or so. Volumes are strong, so the business flows are strong.
There is quarter- to- quarter, sometimes between AED 100 million- AED 200 million max, of mark-to-market changes that we've discussed previously in DenizBank, depending on what's happening with their interest rate hedging and the shape of the curves or whether some event has happened. A significant part of that AED 1.4 billion is very strong client income growth.
Okay. Around, like, 70% is from customer flows. You mean, this level of trading gains are sustainable going forward, am I right?
I didn't actually hear that last part. I heard seven...
Is 70% sustainable? Or...
Well, I didn't actually give a percentage. Obviously, the client flow part is what we want to change, but you can get a delta of between AED 100 million- AED 200 million from quarter- to- quarter. AED 90 million, the prior quarter, Q4 there, that had a negative delta in DenizBank that went positive. From quarter-to-quarter, you can get. The actual movement can be, you know, AED 100 million, AED 200 million, AED 300 million, possibly from quarter-to-quarter. There is a real strong underlying client flow there. I can't put an exact number on it for you.
Well, thank you.
I think it's fair to say that the, like, the vast majority of our FX is client flow.
Yeah.
Yes, we trade, but it's small compared to the total flow, not trading. Yeah.
Okay. That was helpful. Thank you.
Thank you. The next question today comes from the line of Olga Veselova from Bank of America. Please go ahead. Your line is now open.
Thank you. I have three questions. One is about your sensitivity of CET1 ratio to Lira devaluation. If you can update us or disclose that will be useful. Second is, we noticed that the volume of sovereign loans went up in the first quarter-over-quarter. It was a small increase, but still, this is reversal after several quarters of consistent reduction. Can you please comment on that? Finally, the question again on net interest margin, coming back to the first question from Nida, I think. 46 basis points increase of margin quarter-over-quarter is a very substantial rise. Can you give us your outlook for the next couple of quarters for ENBD standalone, excluding DenizBank? Do you think that's the peak, the next move will be flatter down, or that's not the peak? Thank you.
We're just for that first question on Lira, would you mind just repeating that one just so I'm clear?
Yeah. If you can, if you decide to disclose your sensitivity of the group's CET1 ratio to Lira devaluation. Let's say if 5%-10% Lira deval, CET1 ratio goes up or goes down by this percentage point.
Yeah. Look, we don't, we don't have that as a single number for Turkey. Across our major currencies, we do look at a 30% shock rate, and that would be something in the range of 20 basis points on CET1. Having said that, what we've actually witnessed over the last two years, particularly in Turkey, is that even with the Lira depreciation, the denominator of RWA has actually depreciated faster than the numerator. Therefore, it's actually often either had a very small impact on net CET1, a handful of basis points, if not a positive impact. This quarter has been slightly positive net net on all of that. You know, the Lira's been more relatively stable in the last quarter, but hopefully that gives you a sense of magnitude. Just on the sovereign lending.
That's more we've had a ongoing trend of that going down for the last two or three years. It's gone up slightly in the quarter. That's just a timing of cash flow. The overall trend would be down. The third one just on the 46 basis points on ENBD standalone. In the back of the deck, hopefully we're being helpful. On page 13, we've also presented the NIMs of ENBD ex DenizBank, which is what you're after. It's gone up from 3.48% in Q4 last year to 3.94%. That's probably better than we might have been expected. There is room for some increase in that if we are able to maintain our rate of CASA versus term deposits.
Plus there is some of the rate flow through still to come through from the 2 rate rises we've seen so far this year and the possibility of one in May this year. If there are any rate cuts for later in the year, that's likely to have less of an impact for this year. A little bit of upside on that we think would then offset and mitigate some of the DenizBank downside.
That's great. Thank you so much.
Thanks, Olga.
Thank you.
Just, sorry, Billy. We have just under 10 minutes left. I know there's a few audio questions, and there's a few questions on the web. We'll, we did promise a hard stop at 5 minutes to 3 minutes . We'll do our best to answer these as efficiently as possible. Please go ahead, Billy.
Perfect. Thank you. The next question today comes from the line of Jazz Pasunoori from NBK Capital. Please go ahead. Your line is now open.
Hey, thanks for taking my call, congratulations on good set of numbers. Two questions from my end. NPL ratio has dropped from 6% to 5.6%. Wondering which segments have contributed to this. Is it retail, corporate or DenizBank? That's the first question. Can it go down further? It's on the follow-up as well. The second one is, you wanted to grow Saudi number of branches from 8 to 20 this year. What is the current composition of Saudi in terms of the loans to the overall loan book? Where do you want to take it forward in the next couple of years? Thank you.
Jas, hi. Just on your NPLs, you're right, it is down with our strong recoveries. Look, substantially that is in the property sector. Just more generically. There are a multitude of other sectors as well, but, you know, properties where it's been recovered most of all.
I think on Saudi, we don't disclose the specific breakout on Saudi. What I'd say is we're far too small, if is what I would say. In fact, I've been talking to our CEO there and the corporate team. I was there a few weeks ago. You know, I think there's a pile of corporate counterparties there that we're not dealing with, and we do need to ramp up our exposure to Saudi. We are growing our retail book there quite nicely.
I think from the corporate side, there's a lot of counterparties there that we don't bank with, that given the liquidity that the UAE has, whereas Saudi has been quite short on liquidity and has been a bit patchy, that we have got the capacity to ramp up our lending in Saudi. We're also mindful that if, you know, unless we can get some ancillary business there, then just pure lending for the sake of lending in Saudi, margins are quite fine, doesn't make a lot of sense. Where we can, you know, it makes economic sense for us, we do wanna ramp up our lending in Saudi, especially in the corporate space, because I think we're quite light there.
You know, if you look at the ambition of the kingdom and the development that's going on there, it's been quite exceptional. I think there's plenty of opportunities there for banks like ourselves to grow significantly in Saudi.
Okay, great. Thank you.
Thank you. The next question today comes from the line of Rahul Bajaj from Citi. Please go ahead. Your line is now open.
Yeah. Hi. Thanks for taking my question. Rahul Bajaj from Citi here. Quick one from my side. I see you booked about 300 million AED in credit charge for unfunded exposures. Just wanted to get more color on what these exposures are and are these kind of one-off charge or should we expect more of these in the future? Another question on the same topic, credit charge. You mentioned recoveries were largely in the first quarter. Should we expect more of these recoveries going forward in Q2 and rest of 2023 or you think the recoveries are largely done? Those are two from my side. Thank you.
Yeah. Rahul, hi. Just, the $300 million on unfunded. Quite simply, that's the contingent book's been growing very rapidly over the last couple of years, and we've updated our models. That's really what that's for. Just on recoveries for Q1, we do have line of sight of the pipeline for some more in Q2, perhaps not of the same magnitude. H2, we expect is more likely to be at a more normal level.
Thank you.
Thank you. The next question today comes from the line of Naresh Bilandani from JPM organ. Please go ahead. Your line is now open.
Thank you very much for taking my questions. Congrats on the results. Three very quick questions please. One is, I know you've not commented on your M&A plans in India and what's been reported in the press, but just for some color there, would it be possible for you to give us an indication of what is the minimum level of capital that you or the minimum that you would like to hold at all times during, you know, at any time when you work through the M&A process? That's one. Second is, the FX currency translation reserve. That, the reserve has the negative value has kind of been improving for the past two quarters.
Would you be able to comment on that, on what is driving this improvement? Does this have anything to do with the de-dollarization in the Turkish balance sheet? Is that a fair way to think of this? Or is there any other reason there? The third is just very keen to understand why the change in the segmented disclosure and why are you not disclosing Emirates Islamic separately as a segment anymore? Does this have anything to do with the new tax regulations that are being implemented and the presentation makes any difference? Thank you.
Maybe I can just work backwards from that. Just on the EI segmentation, that's more a redefinition of how we're managing those businesses, management reporting lines, et cetera. It also then articulates better when we talk about retail, for example, that includes the whole of the UAE, where EI has a substantial retail franchise there. If we talked about retail UAE excluding EI, it's not really giving the full picture of our market share and penetration.
Remember, EI is publicly listed still and has DFM disclosures. Those numbers are readily available to you separately if you so require them. It's.
That's fine. Yeah.
They're quite transparent.
Just on the translation reserve, I think you're looking at about page seven on the accounts and the currency translation reserve, right?
Yes. Yes, that is correct.
In OCI on page four, there's AED 755 million of translation loss. 2/3 of that's probably Egypt for that quarter. The rest is DenizBank with the Lira not depreciating so much in this quarter. I think it was down just about 2% or so.
Yeah.
The whole overall total is down significantly from the last year or two, where I think in one year we had up to AED 2 billion or so going through there.
Pardon me. That was indeed my question. What is driving the improvement overall?
Just, just less, less currency depreciation than before. The Lira, I mean, they're doing everything they can to prop the Lira up by non-monetary policy means. I think it sort of went from about TRY 18 at the beginning of this year to TRY 19. It's much less of an impact. That would have been a much smaller number even if it wasn't for Egypt, which I think there was a much more substantial depreciation through this quarter.
Okay.
Thanks.
Finally, on the capital, please. The minimum capital.
Which one, sorry? The minimum capital? No, no, that's not something that we would say. We have our regulatory minimum capital. If you do an acquisition and you're not meeting your risk appetite over that, then you have to raise capital. That's.
Discussion for way in the future, if and when anything was done with that. You can see we've got 15.8% CET1, extremely strong and a significant amount of capacity.
Okay. Thanks, Naresh. I'm conscious of time. I have a few audio questions. I'm very quickly gonna run through those. Varuna, we've answered the first three of your questions. In fact, we've answered the fourth question as well. Reason for recoveries in Turkey despite difficult operating environment. As Shayne mentioned, you know, we're seeing some property doubling in dollar terms there, and that is helping the recovery efforts.
Sometimes inflation is good.
Yeah. In terms of another question on market share within the UAE, we definitely are taking market share that is at... Not just in retail. Corporate is doing very well, given our given the consolidation we've seen in the Abu Dhabi banking sector, we are seeing improved opportunities to take corporate business in Abu Dhabi. A question on high valuations of banks. Again, Shayne addressed the criteria that we would look at and in terms of value determination. We have that price discipline. Unless an acquisition makes absolute sense, both in terms of shareholder value, you know, that would something that we would consider or only consider. High NPLs in Turkey potentially.
Again, you know, we've seen with high inflation, we've seen the ability to repay previous loans has been good. We will just see how it evolves going forward. Final question on sustainability of NIMs going forward. Again, Patrick addressed that. You know, it has come down slightly quicker than we had anticipated, but that's been offset by increased CASA and potential for another rate rise. Net-net, we were able to maintain our guidance. Okay, that's all from me.
Okay. Well, I'd like to thank you all for joining today's call and for your questions. As per usual, always some very good questions, and I'll now hand you back to the operator to provide details in case you want any follow-up questions and close the call. Thanks, Bailey.
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 for your participation.