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TRANSCRIPT
NBAD Q1 2016 Results Call
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Company: NBAD
Conference Title: Q1 2016 Earnings
Presenter: Shabbir Malik
Date: Wednesday 27th April 2016
Operator: Good day and welcome to the NBAD 1Q 2016 Earnings Conference Call. Today’s conference is being
recorded. At this time I would like to turn the conference over to Mr. Shabbir Malik. Please go
ahead, Sir.
Shabbir Malik: Thank you. Good afternoon, ladies and gentlemen. My name is Shabbir Malik and on behalf of EFG
Hermes, I'm pleased to co‐host the National Bank of Abu Dhabi’s First Quarter 2016 Earnings Call. At
this time, I would like to turn the call over to the Head of Investor Relations, Michael Miller. Michael,
please go ahead.
Michael Miller: Thanks Shabbir and good afternoon everyone. Welcome to NBAD’s First Quarter 2016 Results Call.
Today Alex Thursby, our Group Chief Executive, will provide a strategic overview of the quarterly
results. Then, James Burdett, our Group Chief Financial Officer, will walk you through the financials.
We will then open up the lines for Q&A, and for that portion we are joined by Abhijit Choudhury,
Group Chief Risk Officer; Steve Jordan, Group Treasurer; and Rohit Kumar, Managing Director and
Head of Group Integrated Risk Management.
Please note that today’s presentation and NBAD’s full financials are currently available on the IR
portion of our website along with a brief video message from Alex. A replay of this call will be
available following it, and the transcript will be available in the coming days.
Now I turn it over to Alex.
Alex Thursby: Thank you Michael, thank you Shabbir, thank you everyone for joining. We've got some 50 analysts,
I guess, on the phone. We are very, very pleased with this quarter's results, and what you will hear
from me over the next 15‐20 minutes is why. We've given you quite a lot of extra disclosure, and we
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are clearly living in an environment at the moment at home where there is a compressed
environment, and if you could personally look at the banks' results generally, I think the real trend
lines now sit on quarter‐on‐quarter on a sequential basis, rather than first quarter last year versus
first quarter this year. And in those parameters, we're very pleased with our progress.
But we're not just pleased about the numbers. More importantly, it's how we make the numbers,
and what does that mean for the future. And I go back to fundamentally, we created a
transformational strategy, which was geographically different, business model very different, from
many of the other players in the marketplace. And it's been built on a basis of creating sustainable
returns over a long period of time, both through volatile band terms, but also through periods
beyond that.
You can see that our strong core revenue growth is now being driven by our strategic businesses.
And I come to that a little bit later on. The diversification of our revenues are improving
dramatically, particularly when you take out all of the one‐offs. This quarter, we generated surplus
capital as we started to apply better management over our balance sheet, but also seeing the areas
that the bank that we are trying to grow which are better in terms of throwing off capital and long
term return.
We remain very disciplined in our cost management but even in these periods, we are able to invest
and we are seeing more opportunities for cost saving. But we're not booking those, we're investing
in our business because our core revenues are growing. And our liquidity is extremely strong in what
is, I think, a much better liquidity environment than the previous quarter. And our capital structure
remains very strong.
I'll now move you on to page 4. This is a new disclosure. And we felt it was appropriate to release it
to you at this point in time to show you the real underlying trend line of NBAD as it's moved into its
new strategy. The grey line is our reported revenue. And they are quite clearly including our
previous one‐off revenues from the sale of assets in our AFS book and our long‐term holding book
that we've done over the past, frankly for a very, very, very long time, with the gift of government
liquidity.
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We maximised those sales during the back end of 2014 and the front part of 2015 as we felt that
obviously the bond market was probably at the best prices, so we could maximise the return. But at
that point in time, we have from two and a half years ago, been building a stream of revenue that is
very different and reflected our new business model and reflected our new geographical approach
under our Pillar 1, Pillar 2, Pillar 3, and Pillar 4 strategies. The green line reflects that.
And what makes us very optimistic about the future for the medium term is that the continuous
ability to grow between two and a half percent and eleven percent on an annualised basis quarter
after quarter. This despite a market which now looks quite flat, where we grew about 7% on an
annualised basis this quarter, a market that is flat, and certainly the results of the banks as a whole
are showing flattish assets, flattish deposits, generally increasing provisions. A market where the
confidence is beginning to wane a little, but we're still able to do this.
And we put that down to something that we didn't start last week, but we started two and a half
years ago. So we have an undercurrent that we've now reached. The core revenue has now reached
the reported revenue. And you will see from here on end that that will generally be the case. From
here on end.
If I can now move to page 5, and really indicate why the strategy of generating new product
opportunities and new markets and new customers have been so successful in generating those
core revenues. You'll see here the revenue mix on 2013. The red area indicates really those
investment gains that go back as far as 2013. They have basically now stopped. And what you're
now seeing is that, as a contribution, has severely reduced. What you're also seeing is part of our
strategy was to lessen the need for wholesale lending to generate our revenue. We are clear that in
the long term, wholesale lending is not accretive return and is too capital intensive. And our
originate‐to‐distribute model is about meeting our customers' requirements, but at the same time
developing further businesses.
What you see in the light blue box is that we have increased our revenues for the wholesale banking
in our trade, cash, market sales, DCM, advisory areas from 13% of the total revenue contribution to
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23%. And that is a significant change in that '14‐'15 and first quarter '16 zone of time. You also see in
our Pillar 1 strategy that our retail and commercial, which again is a defined growth area, has grown
from some 34% to 43%. So the contributions from two of our three key areas have significantly
grown and significantly increased to our revenue mix. And we believe that this is difference in our
model that we're creating relative to the market generally in the Gulf.
If I now move to page 6, and I just want to sort of highlight a couple of areas here. This just gives you
a quick snapshot of the sort of growth rates that we're getting in our retail and commercial sector.
You can see the revenues and the retail loans are both growing at double digits. What is also
impressive is that we've got 28% more customers since 2013 than we had in two years in one
quarter. You can see our online transactions are growing at 1.7 times. And our volume growth is two
times in markets and retail. Our mobile proposition, and our online transactions now, are hugely
successful as we start to move more to electronic platforms from the traditional branch platforms.
If you then move to page 7, you can also see huge success in the building of our new businesses. In
the middle, our transactional banking revenues are growing at a rapid rate. And we're seeing that
continue in the first quarter. You can see on the left hand side that our Debt Capital Markets are
also growing at a rapid rate, and again, suggests very strong growth for this year. And our market
sales continues to astound us in the way that we're able to attract clients and deal with clients. And
we know that rating in now is becoming a critical issue in that side of the business. Other
counterparties want our rating.
In addition, some of the areas that we have shown enormous growth has been the transactional
volumes. Our cash management has seen some 76% growth through our new electronic channels,
with the final launch of phase 3 of our cash management capacities. You also see the mandates
increasing dramatically, they're roughly around 75‐80 on an annualised basis. We probably will
improve that beyond. And you see our positioning now in the league tables is very good in the global
loans and sukuk and bonds area across not only the GCC, but the whole region as a whole. The
message is very clear. The areas where we are trying to grow, we're growing extensively even in a
marketplace which has got some headwinds to it.
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If I now move to page 8. We invested aggressively two and a half years ago into our new strategy.
That was deliberate and purposeful. But what we have found is that we're continuing to be able to
invest and keep costs flat. So while those core revenues continue to grow, we will continue to invest
in our capacities. But what you should view is that for the next three or four quarters, we expect
costs to remain approximately flat. So quite simply, we continue to find opportunity to take bad
costs out, but rather than just sit on those saves, we're investing them to continue the momentum
that we've built up that I showed you very much on the earlier slide.
If I now move to page 9. I just want to highlight a couple of very important things. The business
model is very successful for a number of reasons. But one of those reasons is our AA‐ rating. We're
seeing particularly in our wholesale sector and how we are perceived in the market and in the retail
customers is very much as a safe bank, a bank that people can trust, a bank that people think is
solid. Our liquidity positions and our capital positions remain very strong. In fact, our liquidity
position has strengthened to really very conservative levels, and we're very pleased with that.
We are now one of the 12 commercial banks globally that carry an AA‐ rating from the three major
rating agencies. And the only one in the emerging markets. And this is an incredible competitive
advantage going forward.
In summary, the market has changed dramatically over the last 9 to 6 months. The story is no longer
first quarter this year, first quarter last year. Right across the industry. To really understand what's
happening in the industry, you should be looking at what is happening quarter on quarter on
quarter. That's how we've been running our business. And you can see that as we've applied our
new strategy, that we have always had confidence in the success of it because we've been able to
show to ourselves that every quarter, we're making further in‐roads and growing our revenue
sources.
We have disclosed that to the market, and what you now see from here on end is the termination of
the one‐offs at the reported line, to now what is the true strategic business that NBAD is driving.
We're very pleased with the progress, and I'm sure James will just give you some guidance going
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forward. But particularly in the context of a very difficult domestic market, we are extremely
pleased of where we're moving forward.
James, over to you.
James Burdett: Thank you, Alex. Look, I think Alex has touched on some of the high points here. So I'll go through
my slide deck quite quickly, and give you more time for questions and answers at the end.
So look, I'm on page 11, just looking at the headline revenue, which you can see is down 1% over
prior comparative period, but is up 4% over last quarter. And I think the two key messages I'd leave
you with here is, very strong underlying core growth, which Alex has already explained, so you know
in our retail business above 20%; and the flow products within wholesale banking significantly
higher than in some of the product lines. But all of that was offset by the AFS books, which you can
see last year was approximately 200 million of one‐off and 0 this quarter. So I think the key message
there is, despite the absence of one‐offs this quarter, we managed to grow our core businesses to
offset that. So we're very pleased with that result.
Looking at page 12, which takes you a snapshot on expenses, expenses down 3% over last quarter.
We said to the market that we're aiming for neutral to positive JAWS, and we've delivered that both
over prior comparative period and sequentially, and we are targeting positive JAWS for full year '16.
Now, what I would say is, within the flat cost growth that we've shown over five or six successive
quarters, we are still making significant savings that we're reinvesting into the business.
The key movement over prior comparative quarter is on the bottom of page 12, where you can see
provisions are significantly higher than the first quarter last year, up 73%, but well down over last
quarter last year. Now on an annualised basis, that represents a cost at risk at 57 basis points. We
put out to the market that we're comfortable at less than 55 basis points for the full year. In other
words, we expect the provisions to tick down over the next successive quarters. So we're
comfortable with our full year guidance.
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Page 13, in terms of net profit after tax, the net impact of all of that is 11% down year on year,
mainly because of the uptick in provisioning that we've just talked about, but obviously 23% up over
quarter on quarter. On the bottom right hand side of page 13, you can see our tier 1 ratio of 15.1%.
What you should know is that we paid out dividend of 2.3 billion, and that impacted our ratio by 85
basis points. So in other words, this quarter we threw off significant capital in our underlying
businesses, and we expect to be above, or close to, 16% by the end of the year.
On page 14, just a couple of things on wholesale banking. You can see the revenues down 3% year
on year. I guess the significant driver there is again the AFS sales and the global markets book. We're
about 70 million lower than this time last year. But as Alex has already said, we're showing good
growth in transaction banking, disorigination, market sales, which are up 21%, 48%, and 6%
respectively. So where we are investing, we are showing very good growth. We've kept costs flat.
They're down 5% quarter on quarter, and we expect to keep them flat for the remainder of the year
in that business.
The big delta movement you can see in the first quarter '16 over last year in terms of their net profit,
it's up 36% to just on a billion dirhams there for the quarter. The big movement there is a reduction
in provisions. So when we come to the balance sheet section of my report, you'll see that we've
deliberately run down our FI trade book, and this movement represents the release of the 1.5%
general provision on those balances as we've reinvested them elsewhere.
Page 15 on retail and commercial. Really good underlying growth, year on year up 19%. That's
mostly on the back of balance sheet growth. We've kept costs flat there too. In fact, they're down
2% year‐on‐year and 3% q‐on‐q. And again, the delta movement in terms of net profit after tax is
really the uptick in provisioning. I said to you provisioning had gone up 70‐odd percent over prior
comparative period to 295 million. That represents growth of 125 million over this time last year,
and most of that growth is in the SME segment within commercial banking, which is part of our
global retail and commercial construct. So that's the reasons for the year‐on‐year fall off of 18%.
Looking at global wealth, down 11% year‐on‐year. Look, the business there continues to be
impacted by market sentiment, but part of that is margin compression in our lending books within
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the private banking business, and also continued muted volumes in our securities and brokerage
business.
Continuing to page 17 on international, still a great story for us in terms of diversification with
revenues up 4%, deposits up 34% over this time last year, and the AD ratio just above 60% for that
business. But what's really pleasing there is that the return on risk assets associated with that
business continues to improve. So we're very pleased with that.
Page 18, Alex has already talked about costs. Page 19, just a little bit on provisions. Couple of key
points here, one is NPLs have reduced over December '15. Our coverage ratio is up to 110%. I talked
about the cost of risk at 57 basis points, but our guidance remains below 55 for the full year.
In terms of page 20, the key message I want to get across here is, when you look at loans over first
quarter last year, they're flat at 200 billion. But the key point here is since the first half of '15, we've
run down our trade FI book by 13 billion, and we've invested that in our investment portfolios,
where we see good relative value and we continue to see good relative value versus the market.
And when you look at the net investment position of the business over the same period, we've
increased it by 20 billion. So in other words, we've optimised our balance sheet to help us throw off
capital, but improve our return on equity.
Deposits are stable, again with good growth in capital, which is up 3% year‐on‐year, and our AD ratio
remains at 86%, so below 90%, and well below the current UAE market.
On page 21, I've already talked about capital adequacy, and the fact that it was impacted by the
dividend and will slowly recover over successive quarters to a strong CAR ratio. In terms of return on
equity, 12%, we've put out guidance for 15. The reason for the reduction over last year's two‐fold.
One, the uptick in provisioning, which as I've said will tail off a little bit throughout the rest of the
year. But really, the big impact was the AT1 that we put on last year, and I think that's to the tune of
about 1.3‐odd percent, and we are looking to recover that if we go forward.
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I'll jump to page 23, where we just want to reiterate our guidance. So we've said neutral to positive
JAWS, we're delivering positive JAWS, we'll continue to do so. We've said tier 1 above 15%, and
notwithstanding the dividend pay‐out, we're still above 15% and we're looking to tick that up.
Loan‐deposit ratio, we said below 95, we continue with our guidance and we're currently at 86%.
Cost of risk will, as we've said before, increase over last year, but we've fixed to be below 55 basis
points for the full year '16. In terms of low single‐digit revenue and earnings growth, we believe that
that statement remains correct and we expect to deliver that by the full year '16.
With that, we're ready to hand over to Q&A.
Michael Miller: Operator, we are ready for Q&A please.
Operator: Thank you Mr Shabbir. If you would like to ask a question at this time, please press *1 on your
telephone. Please ensure also that the mute function on your telephone is switched off to allow
your signal to reach our equipment. We will pause for just a moment to allow everyone to signal.
We will now take our first question from Mr Chiro Ghosh from SICO. Please sir, go ahead, your line is
open.
Chiro Ghosh: Hi, thanks for hosting the call, and more importantly, thanks for the extra disclosure which we are
seeing in the presentation. My two questions are, first one, I see that your FX income has gone up.
So I just want to understand, is this sustainable? And more importantly, why is it going up? In fact,
we have seen even other banks witnessing higher FX income. Is it to do with the currency movement
in other countries? This is my first question.
Second one is on your debt rating is still quite good. Is there the possibility that you might be
tapping more funds from international market? And your international deposits have also gone up,
so just want to understand, in which currency are you taking that primarily? Thank you very much.
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Alex Thursby: OK. I'll leave the third question I think it was, for Steve. Second question for Steve. I'll take the FX
question, and James if there's anything you need to add. Look, I want to go back. You just don't turn
on these things. You've got to build them over a period of time, and I think the reason why we've
disclosed more now is because we're now at a level where our core revenue and our reported
revenue is now at a similar level. But you probably heard me ramble on for these calls previously
that I was confident that we were there. We had obviously this information in our hands. So we
think it's time to disclose. So we're delighted to disclose it, and hope you respect it and treat it for
what it is.
What is happening in the FX side is that we are building a foreign exchange business in the West‐
East corridor currencies. And we're also building a derivative business gradually in those currencies
as well. We have two competitive advantages. First of all, the FX business that we do in the West‐
East corridor currencies is a much higher margin business than G10 currencies. It's also sensibly
where we can strategically compete.
And what Mahmood Amani and his team have done has built currency by currency our trading
capacities. We haven't finished that build, we've probably got at least another 18 months of that
build in terms of the number of currencies we can do. And a selection of those are a slow process to
understand the markets, to understand where the liquidity makers are, and the market makers are,
etc. So that's the one area that I think has been hugely successful, and you get a bigger bang for your
buck.
The second area is that our rating has helped us in our derivative business. Major institutions that
are on our core client list in the wholesale bank want to use us for derivatives, particularly interest
rate derivatives, sometimes across currencies, even in G10 currencies, because of our rating, and
because of the safety factor and the credit risk that they take on the other side of that trade. And
that's been another area that we've also developed.
The theme of all of that though is one thing. We are building a rates and FX product capacity around
clients. And there is this connectivity between trade, cash management, and rates and FX. There
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always has been. It's incredible though, how many banks in the world don't put those three
together. That's one area.
Secondly, we also are developing within our commercial business really good traction on selling our
rates and FX products to them. It literally has grown five‐fold in the last three years, and runs at
around about US$ 5 million a month in revenue from that sector. And we think there's a lot more
upside of that quarter by quarter by quarter by quarter. And we're also, with the development of
our e‐channel mobile platforms, etc. have gone end to end on how we develop foreign exchange to
our retail customers.
So it's a very cohesive one bank approach that requires hard‐nosed professionals who know what
they're doing in each of those respective segments, it requires a dealing room who regards the
franchise, and not just trades on in the bank and proprietary trading, and works off a basis of flow
from its customers for which to trade better. So that is the reasons why you're seeing us grow. And
do I see future? Yes I do. In a market where rates and FX engines are probably a little bit sluggish
globally, we feel that we can continue to grow. So we think it's an important part of our proposition
to our clients, we've set up the infrastructure, we've set up the people, we've set up the end‐to‐end
processes that have allowed us to get where we are. But we're not finished! So that's the key
question.
Steve, if I can pass over, do you need any more liquidity, mate? That's the question I've got. So I'll
pass it over to you.
Steve Jordan: I think you asked the question in terms of the deposits we've raised internationally. Obviously we've
got a good geographical footprint, but I'm guessing that the hubs have been key in this, so certainly
in Asia from Hong Kong, in Europe from our London office, and from the US our Washington office
has been instrumental. So in terms of the currency, I would say that by far the majority has been
dollar liquidity, which is obviously very, very useful for us.
In terms of the other part of the question, I believe was on debt issuance. NBAD hasn't got any debt
maturities this year, and given the underlying strong liquidity and structural liquidity position we
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have, we don't have any immediate plans to issue, but obviously we will look throughout the year
on an opportunistic basis.
Chiro Ghosh: Ok. Thank you from my side, and especially that FX income answer, I was wondering why have you
kept FX income in your core earnings, and I think now it definitely makes sense. Thanks for that.
Steve Jordan: Yeah, and look, I think it's a great question. And I think the whole issue is, you can either expect to
the old standard Gulf model of growing assets, growing deposits, or you can have a little bit more
balance and grow non‐fee income. And we said right up, you know, my very first call to you guys,
was about creating a bank that had a balanced but non‐funded income. It's hard work, it's not easy,
it's not instant noodle, you've got to work really strong to get there, and you need good people. And
that's what we've done. That's just one area where I think we're beginning ‐‐ well, frankly, it's been
happening for the last two years. But I think you see it now as a whole.
Chiro Ghosh: Thank you.
Steve Jordan: Thank you very much.
Operator: Thank you. As a reminder, to ask a question at this time, please press *1. Thank you. We will now
take our next question from Rahun Baja from Citi. Please go ahead Sir, your line is now open.
Rahun Baja: Good afternoon gentlemen. One quick question from me. I'm really concerned about the volume
trends in the quarter. So the net loan number is down 3% quarter on quarter, deposits are flat
quarter on quarter. How should I read these? Is there any trend, anything underlying that you would
like to point us to? Thank you.
Alex Thursby: That's a great question, and let's be very clear. There are two drivers on the loan side. First of all, we
have continued in the quarter frankly third quarter to the fourth quarter, fourth quarter to first
quarter, we have been taking over our FI trade finance to the tune of I think 13 billion. And that was
very strategic. We deliberately put that on when we felt there was a lot of liquidity issues in the
region, and we want to shore tenet beyond the capital markets. So it's a very technical banking
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issue, but you are managing your risk of liquidity not just necessarily on the ability to repo paper,
but also having practical stuff that liquidated 30, 60, 90 days. That was one reason. So if you take
that 13 billion out, I think you'll find that this quarter we're actually up slightly on flux.
Second thing is that our wholesale lending area is not the area we're looking to field out of the park
in terms of loans. And you see that in one of the slides that I showed on revenue. And that's a simple
philosophy that we have in the organisation that long term, wholesale lending in this region does
not make sense. Long term lending, we think if you overplay that mark, it just doesn't work. That
product, it just doesn't make sense for shareholders.
So we're very clear about that, and we are moving more and more of our customers, particularly of
the wholesale side, toward capital market transactions. And we've done a lot of private placements
in the last quarter, a lot of private placements, and that's what's frankly taking us to first place in the
league tables in the first quarter against all comers, including the American banks. So that's
important.
The second thing is that if you look at what's happening in the loans side and in our retail side, which
we do see is an attractive area to grow, we're moving more and more towards mortgages. Not de‐
emphasising, but lessening the growth, I would suggest, in personal loans, and moving much more
towards the mortgage area. And we think we're the number one acquirer of mortgages in the
system at the moment.
And we have a very analytical way of judging where to put that origination par into in terms of
mortgages. We don't necessarily compete in all suburbs or all parts of Dubai or Abu Dhabi in a
similar manner, and we change loan to valuations depending on where location is. But we've seen
very, very good growth there. And I think generally you can say that the retail growth, which I think
we indicated somewhere, nearly 20%.
So where we want to grow, we will grow. Where we don't want to grow, we won't grow. And it's as
simple as that. I think quarter‐on‐quarter is just part of the phenomenon. I do think you'll see some
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growth, and I don't think the FI trade run‐off is going to become repeated anywhere else. I don't see
us withdrawing out of any other sectors going forward.
On the deposits side, our liquidity has remained strong. And we've slowly switching more into
current accounts, and I think you've seen that as part of our ability to keep margins at quarter‐on‐
quarter at around 2%. And as I keep emphasising to you, I think if you look at first quarter versus
first quarter, you'll miss the trick of what's really happening in the industry. You've got to be much
closer to the sequential movements now. Much closer.
So we've managed to do that switch. We will not pay up for deposits when we don't need them. And
we don't pay up for deposits, you know, we still unfortunately for ‐‐ or fortunately, should I say, for
shareholders, we still basically have 0% interest on a current account. And we are seeing very good
growth in our average balances and current accounts with the wholesale side as our cash
management proposition has grown. So we're still receiving on the average monthly balance basis,
that growing is somewhere in the vicinity of around about 6‐7% at least, minimum, on an annualised
basis.
So we are growing where we want to grow, and I think grow everything all the time is not a smart
move at this point in time in the part of the cycle that we're at. Again though, I do think we've
certainly seen this early part of the first and second quarter, we've seen some pretty strong growth
in deposits. What we have done is we have moved a little bit more into carry over our liquidity book.
We're much more comfortable about liquidity in the capital markets space. So we have grown that
area quarter on quarter. And frankly, we're seeing better margin if we've held various assets on that
area, better margin we're seeing in the wholesale loan market. So with some of the private
placements, there's much better margins, although we've distributed a lot of that, but it's sort of
sensible banking, I think, what we're doing at the moment.
So I am not worried about it for us, but I would say the industry as a whole, I think it's getting big
sluggish, and people are slugging it out more. And I don't think that's why you're seeing margins
improve. I think retail is margins are holding up in a very competitive environment. Wholesale
margins, which really should be going up, I think, from a risk perspective, are really not moving on
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the asset side. And I think you'll see banks generally in the industry, in the UAE, will continue to have
margin pressure, maybe a little bit of release on the liquidity.
But we've held our margin very well, and I think we're in a balance sheet strength position, where
we have the ability to hold margin and not think too much that we're bringing on too much risk onto
the balance sheet in terms of our balance sheet structure.
And I believe you're the new analyst. Is that correct? For Citi. Welcome. You've come at a good time
to look at NBAD.
Rahun Baja: Thanks for that one.
Alex Thursby: Thank you. You'll bring me luck!
Operator: Thank you. We will now take our next question from Edward Lam from Somerset Capital. Please go
ahead Sir, your line is now open.
Edward Lam: Hello. Thanks very much for the call. A couple of questions if you don't mind, the first in two parts.
What makes you confident that cost of risk will be trending down towards the year end? And
connected to that, what can throw it off? What sort of things are you looking at in terms of risks to
that?
And then the second question, obviously, I think it's great that you've got the rating that you've got
and that that's an impetus for a lot of business, particularly derivatives business. Question is how do
you ration that appropriately? That it's obviously not an infinite resource, your balance sheet rating,
and your rating in general. So those two questions please. Thank you.
Alex Thursby: Thank you. I think that's a great last question. So if I start with that, and then I'll hand you over to
Abhijit for your first question. We're very clear. We have five sectors. We have a specific list of core
clients. They get it, if you're not a core client, you don't get it. Simple as that when it comes to
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rationalising. It is good to see that there's lots of demand from those core customers in those five
industry segments.
Those who have been on the call before, right at the very beginning, we currently have about 600
targeted names across the West‐East corridor and outside the West‐East corridor dealing in the
West‐East corridor. We've probably got to about 400 of them. 450 of them, I think, would be better.
And we've got to them at various levels of debt. So right now, we have haven't seen a problem.
But if you're not a core customer, our risk, our capital, is given to the customers who give us multi‐
product sales, we get a deeper understanding of their risk levels, and create strong, long‐lasting
relationships with them. And I think there are many success stories that we've developed in the last
two years, particularly at home, but also away from home.
So that's the way we do it. And we're very disciplined, frankly. We don't stray. Stray creates
problems.
Edward Lam: Excellent.
James Burdett: Can I just say that in terms of the return on equity of the balance sheet that we do deploy, we've
obviously invested a lot upfront. We've got very clear parameters in terms of allocation of that
capital to the geographies and the businesses, and we have medium term targets and long term
targets to achieve, that 15% ROE figure that we put out in the market. And we are de‐risking the
wholesale book slowly but surely as we've moved to driving the big strategy. I will pass on to Abhijit,
who's been the driver for a long time of de‐risking our book. Abhijit.
Abhijit Choudhury: So the question on cost of risk, and I think the fact that we've given you this guidance, and the
confidence behind this guidance, there is a certain historical element to it. I mean I think if you
were to look at our cost of risk distribution curve for the last 5‐6 years, you'll see a certain
degree of consistency. No spikes really. And it sort of hovered between the 37 to 60 sort of
level, even at the worst times in 2009, 2010.
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Now the first quarter of 2015, our provisions were at the level of 170, the delta for the first quarter
is now another 125. We were at 295. Now, we were pretty much 170 for the first three quarters of
2015. And in the fourth quarter, I think I gave you an indication in terms of the spike which we had
in terms of 436, which was primarily on account of three factors, really.
And the reason why I'm giving you this transparency so that you understand in terms of why we
have the confidence of being below 55 for 2016. There were three factors. One was we referred to a
certain GRE here in the UAE, in Dubai, where we said it was provisions which we had in turn taken,
and we were very confident in terms of a reversal, if you recall, in the first quarter or the second
quarter. Let me tell you this will be reversed in the second quarter. That's one. That was a one‐off.
Second, we had our restructured balance, if I recall, for those of you who would have seen our
restructured loans, had gone up, and there again, there was a one‐time impairment on a particular
asset, which was a completed asset. Which was a one‐off.
And the third where we had taken provision was in the context of our commercial portfolio, the one
which James referred to. In the first quarter, when you look at our provisions, you will notice that
we have been conservative. That even though our loan book has in turn dropped, but yet we haven't
relieved any general provisions. There has been no change in our general provision number.
All our provisions have been relating to that particular component, namely our commercial portfolio
at the lower end. That portfolio size is an amount which is literally a billion. A billion. 1.2 billion of
programme lending relating to business loans, which the UAE market, which the Dubai market has
been impacted, particularly relating to the trading sector. We have seen a plateauing of that as far
as the trend line. As you know, banks in the UAE, it's been there in the media as well, informally
have got together and tried to manage the further spread of delinquency in that portfolio by coming
around with a 90 day moratorium period, etc.
So we see that portfolio bottoming out, and therefore relative to the rest of our book, when we look
at the rest of our book, between retail, commercial, and wholesale, I think retail was touched upon
by Alex. Yes, system‐wide, you would expect there to be some pain because of layoffs, etc. We have
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been very selective in terms of our growth, particularly in personal loans, sticking to employees
belonging to certain sectors. Mortgages, once again, has been very selective. I've touched upon our
commercial book already.
And as far as our wholesale book is concerned, as I've spoken about it before, between the sectors,
whether it's real estate or energy, and energy within national oil companies or whether it's within
EPC contractors, we've done a full stress analysis of our portfolio in an environment of protracted
energy prices remaining at the 30‐45 level. And we feel confident with having done all of that
analysis, and with a bottoming out, or a plateauing rather, of the commercial portfolio, we expect
that our cost of risk would be within the 55 basis points.
Edmund Lam: Ok.
Alex Thursby: Thank you very much. That's a great question. Keep going, guys.
Edmund Lam: Thank you very much, that was really useful. Thank you.
Alex Thursby: Thank you.
Operator: Thank you. We will now take our next question from Aybek Islamov from HSBC. Please go ahead.
Aybek Islamov: Hi, good afternoon everyone, it's Aybek Islamov from HSBC. I had one question about your NPL
coverage. How do you think about your general specific coverage? I think if I just take specific
provisions and divide by the NPLs, it doesn't look that high, it's just around 34% or so. That's my first
question.
And secondly, I wanted to ask you about this trade FI loans that you were running down within your
books. What they represent is the loans against receivables, trade receivables, what is there exactly?
And you spoke about that you're buying mortgage loans from other banks in the UAE, did I
understand you correctly? And if yes, how much are you buying, and how much more are you
planning to buy going forward? Thank you.
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Alex Thursby: Ok. Can I make myself very clear, so you do not make any mistakes. We are not, can I repeat myself,
not, buying other people's mortgages. We only originate our own mortgages. What I did say was
that we differentiate the way that we originate. So if we have an area of one of the two cities that
we don't like as much, we don't think it holds value as well during turmoil or a downturn, then our
loan‐to‐valuations are changed. Is that clear?
Aybek Islamov: Ok, yeah, that's clear, so it was my misunderstanding.
Abhijit Choudhury: And I'll add to that. In this sort of a market, any requests which we in turn get for equity release
requests from clients, we have strictly stayed away from it all along. Particularly in a softening
market.
Alex Thursby: Right. Why don't you take the first question, two questions, I think.
Abhijit Choudhury: I'm going to take the other question on provision coverage. In fact, I think you must have been
referring to the number which was as at the end of 2015, or specific provision coverage on NPLs
36%, which at that point in time, in February when we had the conference call, I had explained
to you that one of the reasons why that percentage had dropped from the earlier number to
36% was because we had write‐offs, and whenever you have a situation in terms of write off,
automatically because of the disproportionate impact between the numerator and the
denominator, you had an effect of a reduction.
If anything, as at the end of March now, our percentage is 40%, as you would see in the trading
book statement. As also our overall coverage is 110%. But if you look at our performing loans,
our general provisions now are at about 1.72% of credit risk weighted assets. Let me tell you
that we are of course required to meet a coverage of 1.5% of the central bank, but there is a
significant gap of a cushion between our internal expected loss model of required collective
provisions and the provisions which we have to in turn keep in place as per the central bank's
requirement.
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Aybek Islamov: Can I ask an add‐on question to that? Your credit risk weighted assets, obviously there are loans,
there are non‐loan assets. What's the share of loans in credit risk weighted assets? Can you tell us
please?
Abhijit Choudhury: Loans? On credit risk weighted assets? In credit risk weighted assets, you would in turn take
three components. You would take loans. And the loan component would in turn depend on the
risk weighting relative to the counterparty as prescribed at the central bank. And you would
have another component, which would be your investments. And a third component in terms of
your credit converted off balance sheet items. So you know, you have to take your not just
loans, you've got to take the entire…our total credit risk weighted assets, if I'm not mistaken,
number 235 billion. Of that, I don't the offhand number in terms of the distribution between
loans and investments and off balance sheet.
James Burdett: But predominantly loans.
Abhijit Choudhury: Predominantly loans.
James Burdett: And if I take your FI question, pre and post shipment finance. Very simple.
Aybek Islamov: Pre and post ‐‐
James Burdett: Shipment finance.
Aybek Islamov: Shipment finance. Ok. Ok, yeah.
James Burdett: Now the reason why we ran it down was, one I wasn't, as I said to you before, and you as coming
from HSBC would truly understand this. Sometimes when capital markets and all the markets boys
say you know, it's liquid, it's liquid, it's liquid. Well, there's a couple of sort of examples in history
where that hasn't happened. 2008 would be one, '97 would be another, etc. So we took a decision
that we wanted to remain ‐‐ we needed to deploy some of our liquidity in things that rolled over
very, very quickly.
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Now, the second thing around that that is, as it currently stands under central bank regulation, we don't get
a fair return on capital for it. We have to provide 1.5% about with it. You at HSBC will of course be under the
UK capital jurisdictions, and you're able probably to put some form of advance methodology on it, albeit
that you abide by Basel 3. But if you start historically look at trade finance, the expected loss is generally
greater than the actual loss, I think for about the last 25 years globally.
But unfortunately, we live in a different regulatory regime, so that was a second reason. But the first reason
we put it on was that. Now we think liquidity's a lot stronger generally. So we're taking over a slightly
different position. Sensible banking, we would call it.
Aybek Islamov: Ok. Thank you very much. Thank you.
Operator: Thank you. We will now take our next question from Sandeep Dahuia. Please go ahead, your line is
open. Please, Sandeep Dahuia, from ADCB, your line is now open. Thanks.
Sandeep Dahuia: Hi. Just a quick question on the segment. Your retail net interest income grew by 163 million to
839 million, and your asset base has been decreased. Since you're focussing only on the
mortgage loans, which is the low yielding assets compared to bills or credit cards, so can you
please help me understanding how the increase in the net interest income?
Alex Thursby: Yes, that's just on the back of balance sheet growth and retail and commercial business. And whilst
you say the mortgage bias is lower than cars and personal loans and so on, from our perspective,
the proportion of our balance sheet that's in retail business generally, we believe is underweight. So
if we build that up, the mix change improves, and we increase our margins.
James Burdett: I think there's a very important point here. People look at backwards rather than forward. And I
think if what concerns me is that you are seeing some asset classes which generally you think are
good yielding, risk and return, that maybe are not going to be.
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And I am a little bit concerned about unsecured lending generally in the market. And I think one has to be a
little bit careful of just looking at the past and saying that will happen in the future. I think one has to be a
little bit different. We have a low cost of funds, so we should be a natural player in mortgages. We think that
the turnover of the mortgages is nowhere near as great.
And we think for NBAD, it's the right strategic approach. It's less risk, and maybe the return is not as great,
but looking at the market as a whole, I think it allows you to keep momentum with your clients while just
stepping back from PILs and credit cards right now. And you know, this is a leveraged consumer market. And
one has to be careful going forward. So that's the way we think. It's a nice question.
Sandeep Dahuia: There's a follow‐up. This 163 million, with a yield of around 5‐6% will require additional asset
base of around 13 million to generate this kind of income?
Alex Thursby: Well, if you make those assumptions, yes. But there is another side too, that's called the deposit
margin. Retail customers. And the transfer pricing is working ‐‐ we're not paying up for deposits, and
we've seen nice slow growth for that. And the deposit side also gives you return as well. So one
always has to remember that a bank needs deposits as well as loans.
Sandeep Dahuia: Ok. Thanks.
Operator: Thank you. As there no further questions in the queue, that will conclude today's Q&A session. I
would now like to turn the call back to Mr. Shabbir for any additional or closing remarks. Thank you.
Apologies, as we were speaking, we have an additional question from Wasi Hassan, Shuaa Capital.
Please go ahead.
Wasi Hassan: Hi. Thank you for this presentation. I just have a couple of questions. Could you kindly give some
guidance on the blended cost of funding, and elaborate on how it's trended, maybe on a sequential
basis? The second question is, I believe, Alex at the start mentioned more sort of headwinds for this
sector. So what is the biggest headwind you see in the next couple of quarters given that the
liquidity positions, there's been some relief on that side. Those are my two questions. Again,
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blended cost of funding and what sort of headwinds are major headwinds you see ahead. Thank
you.
Alex Thursby: Alright, I'll pass you over to Steve for question one, Steve and James on blended cost of funds. So
guys, you want to answer that?
James Burdett: Yeah, we're noticing obviously an uptick in the cost of funds, and you'll have seen the EIBOR rates
have slowly grown as well as the Fed rates. From our perspective, and looking at the mix of our
portfolio, we're talking about 10 basis points higher since year to date December.
Alex Thursby: Steve, anything to add?
Steve Jordan: No, I think we've been in a very fortunate position, and obviously that's relative to the overall moves
that you've seen in benchmark rates, I would say, that NBAD has not got a proportion of higher cost
of funding, you know, year on year, we've been able to replace some of the government deposits we
lost very economically.
I think the guys have spoken about the strong value of our CASAs and our retail CASAs and our
operational accounts as well. In terms of headwinds, I think as we've mentioned a few times today,
we've got a very, very strong liquidity and structural funding position, and I think we haven't even
scratched the surface of fully leveraging off our credit ratings to bring in additional liquidity. We
brought in liquidity that we felt is appropriate, but I believe there is substantial more liquidity
available to NBAD at very economical terms.
Alex Thursby: And I think as a matter of that, just before I move on to the headwinds of the industry, not
necessarily NBAD, but for the industry, look, where you borrow too around the world is important in
terms of deposits. So we have a big chunk of deposits out of Hong Kong, very much related to our
rating, from various Hong Kong customers, government customers predominantly. And clearly the
United States is also very cheap. Traditionally, there used to be a way of borrowing from major
corporations, say for 3 months, 12 months. Hong Kong's probably a little bit more expensive than
Singapore. Singapore's a little bit more expensive than London. And London's a little bit more
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expensive than Washington. So you have some ability to switch and move if you so wish. So it gives
you a little bit more flexibility than people think.
In terms of the headwinds, and I think the market is a ‐‐ liquidity is not a headwind. I think liquidity
position is solid. One still has to be a little bit cautious, but I think it's pretty solid at the moment. I
think it's just general growth. The marketplace is a little bit slower. I think Dubai is a little bit more
up than Abu Dhabi. But we are getting around that 2, 2.2% growth. And I think certain sectors are
way lower than that, and some sectors are above.
Having an international franchise helps a lot, to be perfectly frank. Many of our good customers are
looking to do things offshore, and we want to assist them with that. So that sort of negates a little
bit of that. The retail proposition I think definitively has to change in the industry. Much more now
with the Credit Bureau. I think this will be a headwind for many, many retail banking models in the
industry. We are now using the Credit Bureau 100% in all our credit decisions. And I think you'll find
that that is reducing. We said about 20%, it's actually probably reducing the acceptance rate by
closer to 25%. So that gives you some indication.
You don't use it as it gets better and better and better. I think you do it at your peril. Because I think margin
compression will start to occur in the really good side of retail banking. So you've got to be quite selective. I
think reliance on balance sheet growth as your only revenue remit models need to change. Particularly
Dubai is a flow centre in so many regards. So does the market bear that the foreign banks have traditionally
had that cream, to be perfectly frank. So the transformation that we're going through, which is not over yet,
we're nowhere near where we want to be, has helped us remarkably. And you saw that on page 4 and 5 of
the deck. I think they're very powerful slides about what we've occurred.
Credit quality, unemployment, if it really starts to move, obviously a threat. But in saying all of that, the
economy is quite resilient. And people need to learn how to grow in 2% as they grow in 5%, you know?
You've just got to be smarter and work. It's no good changing your mind and doing things differently when
it's 2%. You've got to build it when it's 5%. And that's what we've done. So that's the stress. I hope that helps
you, sir. Good question.
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Wasi Hassan: Thank you, that's very clear, and I appreciate it.
Operator: Thank you. There is no further questions in the queue.
Shabbir Malik: Hi, this is Shabbir. One question from me, if I may. What do you think about credit quality in the
wholesale banking sector, the corporate banking sector. There has been one name coming up in Abu
Dhabi. Is there something that you feel there is a risk going forward in the second half or in the next
6‐9 months?
Alex Thursby: I'll just talk generally. We don't talk about specifics at all. Look, we have a broader based book. And
we have generally banked at the very top end of the market. So the last two or three years has been
very much focussed on that. I think there are sectors that are struggling. And they are very obvious
to people. But there are sectors that are doing very well. So the aviation businesses, particularly in
Dubai, and their related parties, are doing very well.
So you have to offer a proposition. If you want to bank those top clients, you've got to be able to do
capital markets, you've got to be able to do foreign exchange, you've got to be able to do hedging,
fuel hedging, you've got to be able to do a sophisticated cash management facility. And if you want
to play at that league, you've got to be able to have the product capabilities to do it.
So if you don't build those products, then you're going to go into the next avenues of risk. And some
of those avenues are the next layers of risk in the wholesale market, but I think we'll struggle. But I
would say generally, the conservative business people of Abu Dhabi are extremely strong, so you
shouldn't worry too much about them, and I think Dubai there is a number of very good businesses.
But it is an entrepreneurial part of the world. So you see the issues with the skips and the
commercial sector. But I don't think there's anything hugely damaging on the front at the moment. I
think generally, cautiously optimistic about where you place your capital is the approach, for us,
anyway.
Ok, thank you very much guys, and as I said, we're very pleased with these results. We know that
the market now is in a very different position from the first quarter of last year. My advice to you is
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to start probably configuring yourself much more around sequentially from here, and try to
understand what's happening in the industry. For us, we're very proud of what we've done so far,
but we've got more to come.
We hope the disclosure shows why we were so bullish and you didn't see it at the front line. Helps
you understand where we're at in the transforming of the bank and our success with clients. And
you know, you can be assured that we will take on measured growth strategy and transformation of
NBAD forward in a very rigorous manner, and James is giving you the indication of where we expect
to be at the end of the year.
So thank you very much, and I look forward to hearing from you individually at certain times, but
more towards the beginnings of the first quarter. So for those who celebrate ‐‐ maybe not an
appropriate word, but for those who have Ramadan, I wish you all the very, very best in your
endeavours through the fasting month. Thank you very much.
Operator: Thank you. That will conclude today’s conference call. Thank you for your participation ladies and
gentleman, you may now disconnect.