Ladies and gentlemen, welcome to the Emirates NBD results call and webcast for the first half of 2025. Today's call is being recorded. Please note that this call is open to analysts and investors only. Any media personnel should now disconnect. I will now pass the call over to our host, Mr. Shayne Nelson, Group CEO of Emirates NBD.
Thank you, Dru, and welcome to our results call for the first half of 2025. Strong momentum across our footprint continued throughout the first half, enabling us to deliver another set of outstanding results. Our best hedge against falling interest rates is to drive loan growth and broaden our product offering. The success of this strategy is clearly evident as, one, we delivered 12% higher income in the first half, helped by strong loan growth, a low-cost funding base, and an 18% jump in non-funded income from new products and services. Profit before tax was slightly lower for the first half. Although we had a recovery credit, it was nearly AED 2 billion less than the credit for the same period last year. Lending grew by an excellent 8% in the first half, enabling an upward revision in the loan guidance.
Nearly half of the increase in lending is sourced from our international network, with strong double-digit loan growth in KSA, Egypt, India, Singapore, and London. Deposits increased by a further AED 70 billion in the first half, including AED 48 billion of low-cost CASA, maintaining a well-diversified and resilient funding platform. I'm really pleased to see Emirates Islamic continuing its excellent performance, delivering nearly AED 2 billion in profit in the first half as it registered an excellent 13% growth in customer financing. Emirates NBD continues to be the dominant retail bank in the UAE, with a 35% market share of credit card spend in the first half, and this translates to over AED 100 billion being spent on our credit and debit cards in the first half.
We have continued to build on this strong market position with the launch of the SHARE credit card, co-branded with Majid Al-Futtaim , and it is our fastest-ever card to reach the 10,000-issue mark. Our suite of innovative product offerings continues to expand, with new structured products, gold financing, and fuel hedging recently added. We have also enhanced our product suite, driving growth in private banking, wealth management, escrow, corporate, and investment banking. The strength of our results and financial stability was recognized through our credit rating upgrade by Moody's in May, with our credit rating now at par with some of the leading global bank institutions. As I mentioned last quarter, and as is clearly evident from the group's performances, we have not seen any direct impacts from tariffs.
Currently, the minimum tariff level applies across most of our footprint, and our regional presence also benefits from diversification through a mix of oil-producing and oil-importing countries. We have not observed any negative impact from the regional conflict. In fact, we had a significant inflow of liquidity during this period. You may have seen our name has been linked with a number of potential acquisitions in both Egypt and India. There is not much more to add to what we have already said. Strategically, it makes sense for us to explore opportunities in our core markets. We will continue to maintain a disciplined approach, and if there are any material developments, we will, of course, make a public disclosure as per our regulatory obligation. A strong balance sheet, regional footprint, world-class IT infrastructure, and agile workforce ideally positions Emirates NBD to grasp future growth opportunities. I'll now hand you over to Patrick to go through the results in more detail. Patrick.
Thanks, Shayne, and good afternoon to all of you. I'll briefly walk through the main points, the main highlights, so that we have plenty of time for questions. Just on slide three, first of all, it is worth noting some changes to our four-year guidance at the bottom row of dots. Loan growth guidance is revised higher to low double-digit, given the continued strong growth throughout the first half. With continued impaired credit recoveries and a healthy economic environment, we have improved our NPL guidance to less than 3% and lowered cost-of-risk guidance to 20-40 basis points. On the performance summary on page four, despite interest rates being 100 basis points lower than this time last year, strong loan growth across our regional footprint has helped drive interest income up 10%, and product innovation boosted non-funded income, delivering a very strong 18% year-on-year.
With that, you can see the operating profit at 16.7 billion is 9% higher. Profit before tax at 15.4 billion is slightly down after 2 billion lower impairment recoveries this half, relative to very strong recoveries last year. Bottom line profit is 9% lower at 12.5 billion for the first half, which includes the higher 15% tax rate compared to 9% last year. We also have a positive story for the second quarter's performance, with profits rising 1% over Q1 as higher income and cost efficiencies helped absorb a higher cost of risk. Now, to drill down into the components in a bit more detail, turning to net interest margins on slide five, the bottom left chart shows that margins tightened by 12 basis points year-on-year, as higher margins at DenizBank partially offset the impact of last year's rate cuts on Emirates NBD's loan book.
The margin in Q2 of 3.36% is 22 basis points lower than Q1 due to the flow-through of last year's 100 basis points cut, coupled with lower margins in DenizBank due to the higher funding costs following April's 350 basis point rate hike. Real interest rates in Türkiye are currently 11%, and the market is anticipating rate cuts in H2, which will benefit DenizBank's margins as funding costs fall. The net interest margin of 3.47% is now within guidance, and we continue to expect the margin to finish 2025 in the 3.3%-3.5% guidance range. Pending the Fed meeting next week, we assume for guidance purposes, three U.S. rate cuts this year, with rate cuts later in the year having less of an impact on margins. We also expect a recovery of DenizBank's margins from Q2's 5.6% to average around 6% for the full year.
We have split out the E NBD and DenizBank margins in the appendix. Moving to slide six and non-funded income, the healthy trend in fee and commission income continues. Up AED 1.1 billion, or 18% in the first half of 2025, with a very strong trend across almost all products such as credit cards, trade finance, wealth management, and investment banking. Other operating income is up 13% year-on-year, and the bottom right chart shows a good quarterly trend, with core client and trading income consistently in excess of AED 1 billion each quarter. This year, especially in Q1, we had a very good boost from the very successful expansion of the global market's product offering to local and international clients.
For H1, we also had a strong 74% upswing on trading securities, mainly from regional bond valuations in Q2, some of which are held against client total return swaps that have an offsetting negative valuation booked in the other operating income line, which accounts for much of the drop from Q1 per the bottom right chart. On slide seven, we see that gross lending increased 8% during the first half. Momentum has continued from earlier quarters, with retail and corporate both growing by 13%, helping absorb a further 13 billion of sovereign repayments so far this year. A really pleasing point to note is that nearly half the 41 billion increase in lending has come from the international network, with loans in KSA, Egypt, London, Singapore, and India all growing by double digits in the first half.
We are very happy with the diversification that our investment in the regional footprint gives us, and we do see that as a strong competitive advantage. Over the last three years, loan growth was on average 3% lower in the second half relative to the first half, and we continue to see Government of Dubai repayments. Despite this pattern, given the 8% growth in the first half, we have revised up our loan growth guidance for the full year to low double digits. If it were not for the government repayments, our guidance would be high teens across gross loan growth. On the liability side, another exceptionally positive point to note is that 48 billion of the 70 billion increase in deposits in the first half was low-cost CASA, a real strength of the group.
This maintained the Group's CASA ratio at an extremely healthy 60%, which helps absorb the impact of lower interest rates as we can be selective in sourcing and pricing for fixed deposits. On slide eight, we see that the NPL ratio improved by 0.5%- 2.8% during the first half on further recoveries, aided by the continued buoyant property market. Coverage is extremely strong at 156%, with stage three coverage rising to 91%. Stage two coverage declined due to a mix of repayments, model review, and movements to stage three. In H1, we had a 0.3 billion impairment credit, which equates to an 11 basis point cost-of-risk credit. Within that, E NBD's cost-of-risk credit was 57 basis points from significant recoveries on the back of the continued strong property market in Dubai.
DenizBank had a 232 basis point charge for the first half due to the effect of high interest rates on the retail and SME books. We have lowered full-year cost-of-risk guidance by 20 basis points to 20-40 basis points charge. We expect DenizBank to be closer to 250 basis points for the full year with the prolonged higher interest rates. At E NBD, more recoveries may or may not happen. These are never certain until we receive the cash, but if we do crystallize more of these, we could land at the lower end of guidance or perhaps slightly better than. On slide nine, we see the cost income ratio at 30.3% for H1 is comfortably within long-term guidance. The spend is delivering strong business growth, and digital and international investment continues.
The cost-to-income ratio improved again in Q2 to 29.8% as we maintain a strict discipline on spending, given the prospect of further interest rate cuts. I continue to expect the cost income ratio to finish the year around 31%. Slide 10 shows the Group maintains very strong liquidity with an AD ratio of 74% and an LCR of 181%. E NBD had 12 billion of term debt maturing in 2025, and we have already issued over 11 billion in debt and sukuk. DenizBank successfully upsized its June loan syndication to $1.1 billion and extended duration with 44% demand allocated to two and three-year tranches. We remain extremely liquid, and as Shayne mentioned, continue to see further liquidity inflow throughout last quarter. Slide 11 shows the common equity tier one ratio remains very strong at 14.7%.
Retained earnings have absorbed the 12% increase in risk-weighted assets in H1, which have come from strong retail and corporate loan growth across our network. Slide 12 contains divisional highlights, just to mention a few of these. Retail momentum continues with 39 billion in new lending, growing the loan book by 13% and a record 31 billion CASA added in H1. With 35% market share of the UAE credit card spend, over 100 billion was spent through our debit and credit cards in the first half. C&IB also had a successful first half, raising CASA predominantly from escrow, thanks to their best-in-class digital escrow solutions. Global markets turned in a very strong 1.1 billion profit despite interest rate cuts last year.
Before we open the floor for questions, I would like to wish Paddy well in retirement and thank him for his 18 years with the bank and heading up investor relations. A welcome Karan Goyal as our new Head of Investor Relations.
Paddy, may your golf handicap reduce accordingly.
I hope so, Shayne, Patrick. Thank you very much. With that, Dru, we can open up the call for questions.
Thank you, Patrick. We will now begin the question and answer session. If you wish to ask a question, please press one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press 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, that's one on your telephone if you wish to ask a question. Our first question today comes from John Peace from UBS. Your line's now open. Please go ahead.
Hi, thank you. Well done on the results, and best of luck, Paddy, in your retirement. First question, please, is on loan growth. How do you see that going into 2026? Do you think that the sovereign repayments might slow enough that we see more of that underlying momentum and that you can sustain double digits into next year? The second question, please, is on the NIM. Where do you see the exit NIM at the end of this year? How should we think about 2026? Presumably, you've got the further impact of rate cuts in the UAE coming through, but also maybe some positive momentum still in Türkiye. Thank you.
Thanks, Jon. Thanks for joining. Okay, just on the loans and advances question, and you're looking into 2026. Look. You're right. The underlying momentum is very strong with the businesses. Last year, both businesses are around the 23%-25% growth. We're at 13% for both of them to this year so far. We haven't seen anything just at this point that would indicate momentum would slow. When we do the guidance at the start of the year, you are looking out at that point a whole year ahead. We do have that strong pace of government repayments. We don't expect those necessarily to slow down. I think if you look back at the quarterly numbers for the last two years, sort of around the 5 billion or 6 billion per quarter that we're receiving.
We don't actually have any formal guidance on that, but we will actually more formally update our guidance when we come back in January. At this point, we're just not seeing a slowdown in the momentum from that. On the margin side of things, where are we going to finish the year? Look, we're very comfortable with the guidance that we've had out since the start of the year at 3.3%-3.5%. I think each quarter, I've reiterated that we expect the ENBD ex- Deniz margins to close somewhere between 290 and 300 basis points. You can see we have actually broken that out for Q2. They're at 297, so they're in that range. Obviously, with further rate cuts coming through into next year, you can see from our historical trend of what that margin might look like. The big variable, obviously, is DenizBank and Turkish monetary policy.
I think there's a meeting going on right now, in fact, and we'll find out whether there is a cut or not. Yes, the margins there did drop down to 5.6% for Q2. We indicated during the Q1 results that that is what we would have expected given the 350 basis point rate hike, and so that has come through. Given that real interest rates are 11%, inflation's down to 35% from the peak of 72% this time last year, there's no reason why the rates shouldn't continue to cut throughout the second half. I guess it's a matter of timing. That's also why the margin guidance is 20 basis points wide, because quarter- to- quarter in the past, we've found we've been at the top and bottom of that, usually all because of DenizBank's margins.
We only need to make 6% for the full year for us to achieve that guidance range. We think we're tracking pretty well for that. We're pretty transparent with that. Our margins are strong in the market. I think we have the highest margins of any conventional bank in the UAE. There may be some smaller exceptions. Also, we will give the guidance of what that rate sensitivity is. As the rates went up, we did not leave any shareholder value on the table. We optimized that both at the top and bottom line, and it is coming down, and we are fairly clear about the profile of that.
Got it. Thank you very much.
I hope that helps.
Yeah.
Thanks, Jon.
Thank you. We'll now take our next question from Shabbir Malik from EFG Hermes. Your line's now open. Please go ahead.
Thank you very much. Congratulations on the results. Wish you all the best, Paddy.
Thank you.
I have a couple of questions, please. First, on fee and other income, is there anything lumpy in your non-interest income and anything very concentrated that you think probably is going to normalize in the coming quarters? That is my first question. My second question is around your M&A strategy.
You may have answered this previously, but I just want to understand. Would you be open to owning a minority stake in an international bank? I think in the past, you have said that your priority is a majority stake, but is that something that you would be open to? You have also outlined India as a key market. I just want to understand how friendly is the Indian regulator towards a foreign investor, especially one that would like to buy a majority stake in a domestic bank? Those three questions, please. Thank you.
Shabbir, welcome to the call. Thanks for the questions. I'll take that first one on the fees and then maybe hand over to Shayne for the M&A one. The very short answer, and shortest answer to your question, is there anything lumpy in there? No. You can see in slide six of the deck, we just have a very good quarter-to-quarter trend. DenizBank is a strong presence within our fee and commission income, particularly on cards and what have you in there. We haven't seen any slowdown in any particular country or product. It's across a wide range of our products when it comes to fees and commissions. There's no one type of product that's really dominating that. We're very happy with that. Even on the other operating income side of things, we're not a prop bank. Our income is all derived from our customer relationships.
We've got a very healthy trend even in the FX and derivative line. That's why we've presented the other operating income line in that way to show that consistency. In fact, that's just in this year alone that started to grow more legs and get more momentum. We're very happy with that growth as well. Shayne,
On M&A strategy, just to go back on one thing I'd say just on the fee side and other income is that, yeah, exactly what Patrick said about lumpy. We're definitely not lumpy. Our view is that, that income is sustainable and repeatable. It's largely coming from client flows. Our prop trading is, frankly, a bit smaller, smaller than we want. I think where we are is a sustainable client flow of revenue that's coming through those lines.
On M&A strategy, I think minority stakes, I mean, in theory, in some markets, you could have a definition of control with a minority stake if you had a management and technical service agreement. It's certainly not our preference. Our preference is always to have more than 50%. That's how we've always been looking at acquisitions. We'd prefer 100, to be honest, rather than a minority. I think from my board's perspective, I need to demonstrate management control, board control, and shareholding voting control. I think that's really how that ends up there. On India, I really can't comment about regulators and their views on foreign banks. As you know, India is a market that is very interesting for us. We see it as a growth market that will both grow either organically or inorganically or a combination of both.
It's a market that we have lots of trade and capital flows, excellent cultural crossflows between the two countries. I think it's one of our prime targets for organic and inorganic. I could make the same comment about Egypt. Egypt is another market that we think that we're too small. We'd like to get a lot larger.
Got it. Just on fee income, would it be possible to get a more granular breakdown on fee income in terms of cards and other items?
We're quite comfortable with the level of disclosure that we have at the moment. Because it's so broad-based. It's quite broad-based, so you're not going to see one product in there that's. It'll get to itsy bitsy because it's so broad-based.
Yeah. No, thank you. Thanks for that.
Thank you. Our next question comes from Olga Veselova from Bank of America. Your line's now open. Please go ahead.
Thank you. Good day. And thank you for taking my questions. My first question is about net interest margin outside of Türkiye. I would like to ask about drivers for this non-Turkish margin in the second quarter. How much of this was driven by Saudi? And what was the dynamic so far margin excluding Saudi quarter- over- quarter? My first question. And my second question is your outlook on the cost of risk in Türkiye beyond this year. I'm hearing you are saying this year could be 200 basis points-250 basis points. What would be the normalized level for Türkiye in the next couple of years? And if you can disclose, what is your stage two and stage three coverage in Türkiye alone right now? Thank you.
Thanks for joining, Olga. Thanks for those questions. Just on the margins outside of Türkiye. And you referenced KSA. So total assets that we have outside of the UAE and Türkiye are around 12%, and half of that is in KSA. When it comes to margins, I think during the last call, we had some discussion about the margins there being reasonably close to the industry average. We're not the best. We're not the worst. In fact, we actually have some of the stronger asset yields in KSA, partly because of our product mix, but also because of the sectors that we're in, particularly in the private sector, and being able to price for risk. Obviously, as a smaller financial institution in Saudi Arabia, our cost of funding is higher.
Interest rates and margins in KSA have been coming down as they have here with SAIBOR rates coming down post Fed rate cuts. It's also a pegged currency. I'm still satisfied with those margins. When it comes to, did that have a large impact on the overall margins of the group? I think the answer is no, because you can actually see our ex- DenizBank margin. So it's 3 point. We were at 313 basis points in Q1, down to 297. The larger part of that would be coming from the UAE simply as a mathematical basis, given it's 6% of the assets versus the rest of the bank. Those margins aren't really materially enhancing or depleting the overall ex- Deniz margins. Hopefully, the margin guidance we've given you is pretty consistent as well. Then just on the Deniz cost of risk. Yeah, 250 basis points.
Remember, when we post-acquisition with DenizBank, we were some quarters 350. I think we got to 420, 430 basis points one quarter post-acquisition. I think in the last five years, they had a rolling five-year average up to the end of 2023 of about 270 basis points. Last year, they then had very strong recovery. In five years, we've gone from one end of the cycle to the other. Even if it was somewhere around the 200 basis point mark, I think we would be comfortable with that, recognizing that economy.
I think she also asked on stage three coverage off the top of my head.
For Deniz?
Off the top of my head, stage three is 71?
I'd say 65, Shayne.
65?
65. For stage three, yes.
Thank you for this. Can I just double-check on your first answer? Thank you for comments on Saudi margins. That is helpful. If this was not a meaningful factor in the second quarter, what was pressuring your ex-Deniz margin quarter- over- quarter? 16 basis points is a visible compression versus local peers. Policy rate cuts have already probably materialized in the first quarter. What were the main factors in the second quarter, excluding DenizBank? Thank you.
Excluding Deniz. That's the flow through is the 100 basis points coming through. It does take time to fully price through. I think actually the majority, when you look at our table, the ex- Deniz part on the page five chart. It's a net of 49 basis points. When we showed that at Q1, it was 42. The year- to- date, most of that had come through in Q1. Q2 is repricing. If corporates typically reprice in a three-month period from the start of those, it does take three to six months for that to fully come through. There's nothing unusual. Yes, there's some overall margin pressure, as there has been for the last two or three years from competition. It's a very liquid market. We do resist the temptation.
We do like to price for risk, but inevitably, you get some parts of the overall margins coming down through competition and not just from the base rates. That's nothing new.
[audio distortion] Y ou're seeing when you're doing the analysis of all the banks, everyone's super liquid looking for loan growth to offset rate cuts. That does translate into lower spreads, especially in the large corporate space in the UAE.
Thank you.
Thank you. Our next question comes from Aybek Islamov from HSBC. Your line's now open. Please go ahead.
Yes. Thank you for the conference call. Thank you for taking my questions. I'd like to ask about the asset quality. I can see a jump in the write-off ratio in the second quarter. Can you comment whether it's domestic or international loan portfolio where you book the write-off in Q2? That's my first question. Second question is your international business. Obviously, you opened a subsidiary in India. Can you tell us how much capital you're planning to commit into the subsidiary, right, in the context of your surplus capital position? If you decide to grow through a subsidiary level like organically during the first stages, can you tell us what is the quickest way to ramp up your funding in India, right? Can you, for example, raise wholesale funding in local foreign currency? It will be interesting to hear that. The third question is investment properties.
I was looking through the footnotes, and I can see there is a loss on investment properties, I think, AED 41 million in the first half. What has triggered that? Thank you.
Maybe, okay, I'll start at the top. I was going to start backwards, but I'll start at the top. Just on the asset quality, and they're not write-offs per se. The majority of that reduction is from recovery. Q1, stock of NPLs was 16.8 billion, come down to 16.1 billion. That's the numerator factor. You also have the denominator factor where our loan book has then grown from 548 billion- 570 billion. That's part of the factor of the ratio also coming down. It's not write-offs. You may recall when the new central bank credit standards came in for the year-end. All the banks no longer have, unless by exception, any NPLs that are older than five years. It's that stock from 2020 to 2025 in there now.
I think it's not, and from a geography point of view, the majority of those recoveries are coming in from the UAE as we've seen the past trend, albeit last year we had strong recoveries in DenizBank as well. That is more now just the UAE.
I'd say, Aybek, if you remember with the new central bank policy, some banks took up the five-year grandfather to write off the loans. We were so heavily provisioned that we didn't need to do that. We took it on the chin immediately. That's one of the reasons you see such a significant drop for us pretty quickly.
Yeah. Just from your point on India, I think you're referring to the establishment of a WOS. The capital that we have to commit there is not material in that sense. That is something that we have not. We do not know what the ultimate destination amount of that is. In the meantime, as we go through the setup, it is really not a large sum at all, dare I call it immaterial. On your third point, on the investment properties, we are disposing of properties from time to time, whether they have come from formerly non-performing NPLs or other parts of the estate. It depends on what the original booked amount was. Again, 41 million, just not material. You will get that coming through from time to time. There is nothing significant about it.
I think you will see other banks have much larger gains on disposal of properties, but that is not something that we rely on as underlying income.
I mean, we haven't got a ton of property on our books these days. The majority we've sold off over the years. We sort of had head office, our campus out at Meydan and a few branches here and there. Besides that, most of the other property assets we've disposed of over the last 10 years.
Very clear. Thank you.
Our next question comes from Kunpeng Ma. Your line's now open. Please go ahead.
Hi, good afternoon. Thank you for taking my question. This is Kunpeng Ma of China Securities. Could we have some color on the loan growth outlook in the medium term, say two or three years, about the trend, the major sectors and geographies driving that kind of growth? Thank you.
Kanpeng, thanks very much for your question. Look, GDP in the UAE is forecast to be around the 5%. The economies in our regions are pretty strong. Banks typically expand their balance sheet at 2x of GDP. That's not a guaranteed fixed number. As I said earlier, we have strong momentum across the businesses. There's nothing we can see just at this point that would indicate that would slow down.
We do have a big loan base. When it comes to percentages, our percentages may appear smaller than some other peers simply from base effects. Otherwise, we're pretty excited about the prospects. The economy in the UAE, in particular, KSA, it's just very bright and very active. There are cycles in economies. No economy is an island. We're always scanning the horizon for risk factors. At this point, we're comfortable with the pace of rate of growth. That's not any longer-term commitment because we update our guidance formally in January each year.
There is a question here in the text that was sort of correlated around property itself. Are you happy with your property exposure? One thing I would say is, I mean, the interesting thing about the big property development boom that you've seen in Dubai and Abu Dhabi is a lot of it is not funded by the banks. It's basically being funded by pre-sales with escrows. On one side, we've got the benefit of the escrow accounts, but we're not seeing the big developers come to us for large chunks of funding because they get a reward guarantee, for example, and then they're able to use, subject to contractual criteria about where they are in the development cycle, to draw down on those pre-sales, the amounts sitting in escrows.
If we go back previously, we would have had large chunks of development finance sitting on our balance sheet, and then we'd be concerned about the cycles, I suppose, a lot more than we are now because we're seeing the developers, they've basically pre-funded the developments through the pre-sales. The impact on us is far less than it would have been historically. The sort of bad of that is we don't get the loan growth out of it that we would have historically.
Thank you. Very helpful.
Our next question comes from Rahul Bajaj from Citi. Your line's now open. Please go ahead.
Hi. Thanks for taking my question. This is Rahul Bajaj from Citi. I have three questions, actually. The first two are on loans, loan growth. I see you register 27% YoY growth in Saudi during the first half of the year. That is quite a phenomenal number, actually, if I compare it to the growth that we have seen coming from the domestic banks in Saudi. I just wanted to understand, how are you able to grow at kind of this multiple of the local banks? Are you not seeing competition coming from some of the local aggressive banks on pricing, etc.? Or are you part of that competition? I mean, how are you pricing your loans in the Saudi market to grow at 27%? That is my first question. My second question is around the loan mix again.
If I compare the loan mix on your presentation end of last year versus the end of 2Q, two key differences come out. One is sovereign exposure going down quite materially. The other one is FI exposure going up quite materially. Now, on the sovereign bit, you are at 9% now of the total gross loans. Do you think, I mean, this is the level where it will stick around, or do you think it can go down further from these levels and you can probably be in the low single digit, mid to low single digit sort of sovereign exposure? Similarly, on the FI bit, the exposure has gone up from 13%- 15%. I just wanted to understand, who are you lending to when you say that you are lending to FIs on your gross loan mix?
Are these banks in the market, or these are non-bank financial entities? Who are these FIs? Are these only UAE or outside the UAE as well? My third and final question, if I may please, this one is on India. There was this question asked earlier around the conversion of the Indian branches into a fully-owned subsidiary. I just wanted to understand, what was the rationale or the strategy of the bank to go in for this fully-owned subsidiary model? What do you gain out of that sort of model compared to the earlier model where you had individual branches? Thank you.
Hi, Rahul. Welcome to the call. Let me try and unpack quite a lot of questions in those three questions. Maybe I'll just start at the top with the loans and advances up 27% in KSA. Yeah, it is a great rate of growth, and we're very happy with it because we've been investing for 20 years now there. We've rolled out. What's different between us and some of the other banks? Obviously, mathematically, if it's a large, well-established bank, then they have a higher base, and therefore their percentage is lower, our base is lower. Kind of the inverse of what I said earlier about us in the UAE. With our new branch network, we're now actually starting to get really good traction with that. We've been growing both the corporate and retail side. The corporate is about 60% of the total mix.
Happily, we're operating there in the private sector. We're able to, if it's in the middle of the PD curve, then we can price for risk and get the ancillary business. That's helping with our growth. The retail side has been very helpful with the funding. It is self-funding there. It's an excellent, self-sufficient bank there, and it doesn't rely on funding new loan growth from outside of Saudi. Just on the loan mix question that you have. Sovereign 9% going down, yes, it will continue to go down. You can see it's been repaying something like maybe on average 5 billion or so a quarter for the last couple of years. It might be a reasonable assumption that it will continue to go down.
We would like the government to borrow some more money so they can do the infrastructure spend, but at this point, the finances are in such good shape they're very much in repayment mode. FIs are going up, yes, indeed. We have a strong FI relationship business there. Are they banks? No, that is not bank bilateral lending in there. We record our bank bilateral lending in due to banks, sorry, due from banks. That's where bank lending is supposed to be recorded, not in loans and advances. This lending is to non-bank financial institutions. Obviously, I'm not going to name them, but they're across a wide range of different financial activities. I can't really say too much more about that. Otherwise, you might be able to identify, I guess, the counterparties, etcetra. Is it in the UAE or in other countries?
I guess a predominant part of that growth for the FIs is from the UAE, yes, but not exclusively. The third part was India.
I'll take that.
Okay.
I think if we look at the WOS, what advantages does it give us? One key one is we do not need pre-approval to open up our branches, and we are not restricted on branch numbers there. From an organic play, that makes a lot of sense. It also gives us capacity to consolidate a lot of our management, like our offshoring, etc., and capital markets into that WOS. It also makes it a lot more straightforward when it comes to tax in India, which is also always quite complicated. We also believe that if we acquired, we would not require a sell- down under the WOS structure. Both from organic and inorganic, it makes sense for us. I know you would probably say, why have not some of the other big international banks converted to a WOS structure?
I think the problem is that they are going to have a, because they are so big in that country, they are going to have a solo problem, solo capital problem if they did convert to a WOS because of the size of their operations there. Where we are at the moment, that does not make any difference to us. I think we are in a good position to do it from the ground up rather than try to do it at a later juncture.
Thanks, Shayne.
Dru, I have a number of questions to address that have been submitted online. We'll take one final question, verbal question, and then we'll stop there and I'll finish off with the written questions.
Understood. So our final audio questions from Rahul Rajan from Bank of America. Please go ahead when you're ready.
Hi. Thank you for taking up my questions. A couple of questions from my end. One is on the non-interest income part. Would the run rate, the non-interest income run rate, get negatively impacted with lower rates in Türkiye? That's number one. Secondly is on your earlier mentioned point, right, on the subsidiary in India. If you could just elaborate further on how having a subsidiary in India helps with your acquisition. You mentioned your last sentence. I didn't really get you there. Finally, sorry, if I can add just one more question, please. On the RWA density that is growing, clearly because of sovereigns coming down and growth in Saudi, how do you see the RWA density going forward? Thank you.
Thanks, Rahul. Sorry, could you just repeat the first question on the NFI, the non-funded income?
Sure. Would lower interest rates in Türkiye negatively impact the non-interest income that the Türkiye entity generates?
Okay. Thanks. Not necessarily, no. I think. Inflation is the thing that would have changed the income more than the interest rates per se, albeit maybe they're connected. If interest rates are coming down, there's lower inflation, presumably, and therefore. The volume and scale, or the, over time, the increasing volume of fees you earn because it's in an inflated currency, sure, partly offset by Turkish lira depreciation, that may be a variable, but it's something that you can't exactly put your finger on right now. If it does come down, there would be an offsetting reduction in the hyperinflation charge that you see further down the line.
I mean, I would see it on the basis is if rates drop. I mean, let's be clear where we are. I don't know how many of you cover Türkiye and do some questions on cost of risk for Türkiye, but you've got retail rates mid-60s, right? So. Frankly. The shape of the book and the bad debt charge for when we're charging retail clients mid-60% is q uite remarkably good, in my opinion. So I think if we have rates falling from a volume perspective and a borrowing perspective, that'll be good for us, which will also drive fees. So I think from a fee income-driven basis with interest rates falling, I would actually see it as beneficial.
To us from rates lowering there because at the moment, I mean, not only have you got very high interest rates, but the regulator has stopped a lot of growth in most segments of the market. I think agriculture is one that's a bit freer, but most of them have asset g rowth caps. So at the moment, you're growing under quite constrained circumstances in Türkiye that I think that as the pressure comes off of rates, because what they're trying to do is. They can't control, I suppose, demand purely through interest rates. So they're basically bringing out the macro prudential toolbox and saying, "Okay, I'm going to slow your growth by r egulatory caps on them." So I think as that comes down, I think we will get volume growth in Türkiye. And remember, its m id-90 million people. It's a big, big population and a big economy. You can take the second one.
Actually, I'll just cover the RWA density question you had. Yeah, you're right. When you get large repayments that are at zero risk weighting and you are growing the businesses at 13% for the first half, as an example. The risk weighting on that will vary between 50% and 100%. That will weigh somewhat on the capital base, but you can see that capital generation through earnings is covering off any RWA growth that we have. Actually, if you look and you mentioned density, I've been reasonably happy with the density level over the last couple of years. Yes, it is increasing because of those repayments. I think it cost us close to 100 basis points last year from the repayments. I think it was more like 80 basis points, actually.
When you've got 14.7% CET1 ratio, we've certainly got lots of capacity to first cover that, but also enough firepower to continue our strong track record of organic balance sheet and income growth. I think there was the question on subsidiary in India, and.
I think that was the same as the previous question. I've got nothing additional to add there.
Yeah. Great. Thank you, Shayne. Thank you, Patrick. Dru, I will have to pause the audio questions there. I'll quickly run through the written questions. Shayne and Patrick, you feel free to jump in if you want to add anything to what I say. The first one is just about international activity exclusion. That relates to the tax rate. The expectation is our tangible assets are over EUR 50 million. Indeed, that is the case.
We are very certain that we are paying 15%, and there's no ambiguity about what we will be accruing tax at. There's no possibility that we will go down to 9%.
We'd love to pay lower our [Rakesh], but n o chance.
Second batch of questions. Can you share some light on the higher tax rate? Again, if you look at the effective tax rate for the first half, it's just under 18%, again, which coincides with the 15% tax rate plus a slightly higher tax rate in two other jurisdictions, Türkiye and Egypt. Lowest NIM since 2022. What's driven this? Again, back in 2022. The Fed rate was 4.5%. Since then, it's been 5.5%. So the drop in the NIM to 3.36% is consistent with where we were when interest rates were last at 4.5%, around that 3.4% level.
Even so, these are very strong margins by any measure. International standards, any of our peers, probably only the UAE Islamic banks that would have margins stronger than this. That is a testament to the quality of our low-cost funding.
Yeah. Indeed. What led to the 18% raise in operating expenses? Again, investing. Generating additional income from the sales force and investing in the international network. GenAI and Advanced Analytics. As Patrick mentioned, he does expect the cost to moderate in the second half, so more like a year-on-year increase of mid to high single digits for the full year. Some light on the drop in the 2 billion of recoveries. Last year's recoveries, particularly in the first half, coincided with the 10th anniversary of a number of restructures and the successful recovery from those.
Yeah. Actually, you can get more insights on that from note 24 in the financials. When you compare it to last year, stage three recoveries this half were slightly stronger than last year's first half. The big difference is the stage two recoveries that were very strong this time last year, and those have not repeated this year.
Question on asset quality in Türkiye. I think most companies and most individuals are feeling the effect of the higher interest rates, which is exactly what they are designed to do. In terms of the real estate economy in the UAE, our research team are seeing and expects prices to moderate. Prices, particularly for villas, are still higher and still positive year-on-year. As the supply-demand dynamics start to equalize, they do expect prices to moderate this year from the high levels last year. In terms of our funding plans, we have had a very strong, as Patrick mentioned, we have funded 11 billion of the 12 billion maturing this year. Strong demand for private placements. We have done sukuk issuance, Aussie dollar issuance.
Of course, we are regular issuers. DenizBank successfully upsized their syndicated loan. We continue to look for opportunities to fund. In terms of tier one, our next instrument is callable in Q2 of next year. Final few questions regarding ambitions for Egypt. Again, Shayne addressed the organic and inorganic growth appetite. Nothing further to add to that. In terms of the lending strategy in Saudi, it is about roughly 40% retail, 35%-40% retail, and the rest what we would call mid-sized corporate. Focusing on corporates that we can control and influence the pricing on. In terms of GenAI, we have had a question about use cases. We have been using GenAI for various use cases around SME and FX trade opportunities, identifying FX and trade products.
Document extraction, really streamlining, particularly SME and other client onboarding. We have been using it for anti-money laundering just to add to our existing AML activity. Monitoring activity to try and identify any suspicious activity. Identifying cross-sell merchant acquiring opportunities. The info board is reducing manual searches, really speeding up responding to customers. The final question, Patrick, which I may ask you to talk about, is DenizBank's loan book. How long does it take to fully reflect the policy rate changes?
I think the average maturity in Deniz is just over five months. The average maturity on the funding side is two, two and a half months. That is why when the rates drop, you very quickly get a lower cost of funding. It does take time for the assets then to reprice down. In that time, that is when the margins can recover in the near term.
Perfect. That's us exactly on the hour, Shayne [if you would].
Okay. I’d like to thank you all for participating in today’s call. The strong momentum continues, enabling an upward revision in loan growth guidance. We remain extremely liquid, and our financial strength is recognized by an upgraded Moody’s rating during the quarter. Nearly half of the increase in lending is throughout our international network, and our strong income growth reflects the benefit of strategic investments in our regional network, digital infrastructure, and GenAI, helping offset the impact of lower interest rates. Finally, thank you to Paddy after 18 years.
Thank you, sir.
We wish you well with your golf handicap. I am sure we'll see you back in Dubai in your retirement.
Look forward to it.
Thank you. Thank you for your fantastic effort over the years. Paddy, highly appreciated. I am sure the listeners on the call would have interacted with you many times, and hopefully they are appreciative of you as we are.
[Many thanks] . Thanks again. Thank you. Okay. Just handing back to you now, Dru, for the close-up.
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.