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Edited Transcript of DIB.DU earnings conference call or presentation 13-Feb-20 9:30am GMT

Q4 2019 Dubai Islamic Bank PJSC Earnings Call

Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Dubai Islamic Bank PJSC earnings conference call or presentation Thursday, February 13, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Adnan Abdus Shakoor Chilwan

Dubai Islamic Bank P.J.S.C. - Group CEO

* Kashif Moosa

Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications

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Conference Call Participants

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* Janany Vamadeva

Arqaam Capital Research Offshore S.A.L. - Analyst

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Presentation

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Operator [1]

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Welcome to the Dubai Islamic Bank Full Year 2019 Financial Results Conference Call and Audio Webcast. (Operator Instructions) I will now hand over to your host, Ms. Janany Vamadeva from Arqaam Capital. Please madam, go ahead.

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Janany Vamadeva, Arqaam Capital Research Offshore S.A.L. - Analyst [2]

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Thank you, Lydia. Good afternoon, everyone, and thank you for joining us today. This is Janany Vamadeva and on behalf of Arqaam Capital, I'm pleased to welcome you to Dubai Islamic Bank's Full Year 2019 Earnings Conference Call. I have with me here today from DIB management, Dr. Adnan Chilwan, the Group's Chief Executive Officer; Mr. Salman Liaqat, the Chief Strategy and Investor Relations; and Mr. Kashif Moosa, the Head of Investor Relations and Strategic Communications. Without any further delay, I'll now turn the call over to the Head of Investor Relations, Mr. Kashif Moosa. Kashif, over to you.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [3]

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Thank you, Janany, and good afternoon, everyone, and welcome to the 2019 full year results webcast by the Dubai Islamic Bank, led by the Group Chief Executive, Dr. Adnan Chilwan, who is accompanied by Salman Liaqat, Chief of Strategy and IR; and myself. As always, all your questions received during the session will be taken up post the presentation, and we will endeavor to answer as many as possible during the allotted time.

With that, let's begin. Moving on to Slide 4. As you can see, the UAE economy continues to advance as one of the most competitive and diversified economies in the region. National efforts are being exerted at both public and private levels to ensure a more sustainable growth and development of the economy, with a series of structural reforms, along with fiscal stimulus packages implemented in 2018 and '19 to boost nonoil sector growth. The weakness of the global market and trade tensions in 2019 has had a relatively limited impact on the UAE.

Outlook, in general, points towards rapid economic diversification, underpinned by a string of bold reforms and a series of government stimuli, measures, which are being set to drive UAE growth at a steady pace over the coming years.

The next slide shows that Dubai continues on its journey of a strong economic and investment reforms, which have led to the Emirate attracting larger FDIs in 2019. Dubai continues to progress on global rankings as well of the most attractive cities for FDIs, and effectively ranks third in the world, attracting FDIs in terms of both cash flows and the number of greenfield projects.

In addition, the expansionary 2020 Dubai budget demonstrates the leadership's keenness to provide the highest levels of economic stability and stimulus to the Emirates business sectors with a renewed focus on key areas, such as social services, health, education and housing as well as working on developing the social benefits fund as part of the objective of making Dubai one of the most livable cities in the world.

Now we move on to Slide 7. In December 2019 and talking more about the Dubai Islamic Bank, we -- the bank received a reaffirmation on rating from Moody's, highlighting the bank's strong profitability, stable asset quality and solid liquidity.

Further, the franchise continues to enjoy robustness and sustainability through various economic cycles, which proves the loyalty of the bank's customer base and its strong competitive positioning.

In addition, we also continue to focus on efficiencies and digitization within the UAE market, particularly around the branch rationalization, which currently stands at 66, down from over 90 when we embarked on our growth plan a few years ago.

Moving on to Slide 8. 2019 has seen DIB remain at the forefront of Islamic financing capital markets space as well, having completed transactions valued at around USD 30 billion. And the bank executed high-profile deals for a range of clients from sovereign supernationals, quasi-sovereigns, large corporates and financial institutions. And this strong performance has led to the DIB capturing the top spot in both 2019 EMEA Islamic Financing (Mandated Lead Arranger) and Bookrunner league tables by Bloomberg. So with that preamble, I will now request the CEO, Dr. Adnan to take you through the financial results and plans for the year. Dr. Adnan, please?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [4]

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Thank you, Kashif. Good afternoon, ladies and gentlemen. I would like your attention on Page 10 and this is probably for the last time we would be showing you the stand-alone balance sheet of Dubai Islamic Bank, given that we have now completed the acquisition of Noor Bank in the beginning of this year. And going forward, all our webcasts are going to be on a consolidated basis. So for one last time, the stand-alone balance sheet of Dubai Islamic Bank and its financial performance is in front of you on Page 10.

You can see that 2019 has been yet another year of solid growth performance in terms of the income statement. But before I go to that, the way we have seen our balance sheet grow in the last few years, I think 2019 was a decent year for us. I would call it a year of recalibration, it's a year where we decided to make sure that we conserve capital and at the stage in 2019, when we started to conserve capital, we made sure that we were on the lower end of our guidance for growth. You can now see that is demonstrated in front of you. Hindsight is always a luxury. So I think today, everything seems like it has panned out well.

In terms of the overall balance sheet, it has grown by 4%. We've closed the year at around AED 232 billion. Financing growth and the Sukuk investment growth, we've seen an uptick by 5% to end at AED 184 billion versus the AED 175 billion. Now clearly, when you look at the nominal amount, it looks like we have probably had a very modest year. This was very deliberate, keeping in mind that we have to conserve capital and make sure that the full impact of Basel III does not catch us off guard. We also were working towards an impending acquisition, which we've done now. And hence, we wanted to make sure that we do not grow significantly, thereby consuming our capital. And then when we have to acquire the institution, we would be very thin on capital. And by that, I mean, common equity Tier 1. So from that perspective, we've managed our growth ambitions in 2019 and towards the end of the presentation, I will tell you, where 2020 guidances would be. But how we've funded that financing and Sukuk growth is by accommodating them in the form of growth in deposits. And you can see a 6% growth in deposits from AED 155 billion, we've gone to AED 164 billion.

In terms of income statement, whilst we have recalibrated ourselves in terms of balance sheet and wanted to make sure that we've got a decent year in terms of growth and do not excessively make a risk-weighted asset formation, we've made sure that our income statement continues to be profitable for us. And that is witnessed in the form of group's net profit increased b 2% to the end at AED 5.1 billion versus the AED 5 billion in 2018. But what is important to see is that this net profit has been contributed by the top line of the bank, which has always been the strength of the bank and its profitability. Our top line continues to grow. In this case, for the full year, we've seen a 17% increase in our top line.

When you look at operating expenses, that's another area that we've continuously focused on in the last few years, and we've managed to keep them pretty much flat.

Our impairment losses, and there is a slide on credit quality, we will definitely touch upon that. But optically, it looks like when we compare 2019 with 2018, we have made double the provisions in nominal values, that is right. But it's important to understand that in 2018, the number that you see in front of you of AED 833 million is net of recoveries. And given the landscape that we had in 2019, we felt that it was appropriate not to take into account those recoveries for 2019, and hence, the grossed up impairment losses or provisions stand at AED 1.76 billion.

In terms of our key metrics and performance ratios, again, once again, a very, very good quarter and a very good full year for the bank. You can see that it's demonstrated in the form of all the ratios in front of you, whether you take the advance to deposit ratio, which stands at 92% or the total capital adequacy ratio, which stands at 16.5% or CET1, which is 200 basis points than where we should be, stands at 12%, you can see that in terms of ROEs and ROAs, we are at 17.1% and 2.25%, respectively. And towards the end of the presentation, you will also see where we are vis-a-vis the guidance we had given to you at the beginning of 2019.

Asset quality, nonperforming loans stands at 3.9%. Now again, this is a function of, one, the numerator, which has moved up a little from where it was at the end of 2018, but more importantly, it takes into account the modest denominator growth which was, again, very deliberate and conscious on part of the bank. And I've already mentioned that to you. That made sure that this ratio stands at around 3.9%. There is a slide on asset quality, and we can go into that in greater detail to see what sort of asset quality, we -- deterioration we have seen in 2019. So overall, before I move on to the next slide, most importantly, a very good year in terms of key growth. All our businesses have continued to grow in the right direction. Our profitability is robust, and we've maintained profitability on an overall basis. And the key components of that profitability are coming from the top line or the operating revenues of the bank.

On Page 11, again, we will start looking at these key metrics in a greater detail. Most importantly, you can see that the net operating revenue on a year-on-year basis. And this net operating revenue is gross revenues minus cost of funds, you can see that, that has also grown. This is a very good sign because it just shows you that it's not just the top line, but also the cost of funding has been managed in a good manner. And hence, you see year-on-year growth in that line.

There would be institutions where top line would grow, but then again, cost of funds would also grow substantially and probably the net operating revenues do not grow as they have grown in our case, but you can witness from this chart that our net operating revenues continue to grow year-on-year, which shows you it's a sign of our core banking engine growing in the right direction.

Already touched upon net profit, AED 5.1 billion versus the AED 5 billion that we've reported in 2018. As our earning assets increase, we have managed to sustain strong margins. And it is important to understand that in a declining interest rate scenario, you would always be under margin pressures. We've seen that. And over so many calls in the past, I have maintained my stance that whether the interest rates are going up or down, there would always be a lag upwards or downwards. We just need to make sure that we manage our net interest margins, that is exactly what we've done to end up at 3.15%.

In terms of ROEs and ROAs, you have seen on the preceding slide, we have ended up with an ROA of 2.25% and an ROE of 17.1%. The way these are versus the guidance given at the beginning of the year, and what is going to be the guidance for 2020 would be touched upon in a few slides from now.

Most important aspect of our transformation over the years has been our cost-to-income ratio. So it's just not growth that should take center stage. It's just not the ROEs or ROAs that should take center stage, or it's just not the asset quality that should take center stage.

We sometimes do not give enough attention to the cost-to-income ratio, and I'm very happy to tell you that the cost-to-income ratio of 26.9% is probably the lowest that the bank has ever been. And over the last few years, you can see that we've seen a gradual decline in that cost-to-income ratio. And the components of that are the income growing in the right direction. We've given it enough attention, but most importantly, we've managed to grow the bank but keep cost stagnated. So that actually shows you the kind of efficiencies we've brought about in our business, and the kind of productivity levels that we are operating at to end up with a cost-to-income ratio of 26.9%. And I'm sure when analysts will do all their work and analysis, they will realize that this is the lowest cost-to-income ratio of the banks within the UAE as well as within the region.

In terms of -- on Page 12, you can see how our businesses have grown. I have one slide each on each of this business. But you can see that all our businesses continue to grow over 2019, whether it was the corporate business, whether it was the consumer business or selective real estate financing or the fixed income book of the bank.

In terms of the way that pie is divided, real estate financing has stayed pretty much where we want to be, slightly higher at 21% versus the 20% guidance, and we would talk about it in greater detail, but predominantly, the corporate and the consumer books have contributed equally.

In terms of further detail on the consumer business, Slide 13 shows you that whilst our business has grown by roughly AED 2 billion in terms of portfolio size in order to keep that business in the growth mode, we've underwritten AED 14.1 billion in terms of financing -- consumer financing in 2019. This clearly has been distributed well within our range of products that we have from personal finance to home finance, followed by auto finance and cards. What is important to see in this business and probably, that does not come out in this slide is the kind of quality that we've maintained in our consumer bank, where we made sure that the asset quality is robust, the nonperforming loans -- or the noncredit -- net credit losses within the consumer bank are very, very low. And I think that shows you not just the strength of our underwriting, but also in the strength of our collections where -- and recoveries where we have robust processes in place to make sure that the flows are maintained and managed at acceptable levels. That is also reflected in the ECL modeling when you look at the consumer business on its own.

In terms of revenues, we've made sure that the consumer bank contributes adequately. Clearly, majority of the consumer banking portfolio is a fixed portfolio, given the nature of the product. So when the interest rates go down, clearly, you will see that its contribution in terms of net funded income would be lower and that is the reason why you see AED 3,192 million versus AED 3,230 million. But if you look at the components of that, you will see that the fees and commissions have grown, and we've maintained the yield on financing at 7.1%.

Clearly, premium pricing, which allows us to offset the pressure on the corporate bank or the wholesale bank as such.

The consumer bank is clearly a net lender to the overall bank with the gross financing, this includes the home finance business, stands at around AED 41 billion versus the deposits that stand around AED 73 billion. And they also adequately contribute in terms of the CASA book of the bank.

Now Page 14 is a look on our corporate business. Corporate business over the last 5, 6 years has clearly been the key driver of the bank's growth, given that the retail business in the years gone by, did not grow significantly. In 2019, we've seen the retail business rejuvenate itself and start go up in the right direction. We've made sure that not just acquisitions, but the support functions of the retail business were adequate to kind of support the growth that we anticipated for the retail business.

But for the corporate business, 2019 has been a year where as a bank-wise we have recalibrated, we made sure that the corporate banking business is also done in a modest growth pattern. You can see that the business today, corporate banking business or corporate financing business stands at around AED 114 billion versus the AED 109 billion that you see in the year gone by. Clearly, they are a net borrower, contribute significantly to the overall income of the bank, that has gone up by AED 3.4 billion versus AED 3.2 billion. Now the first part of 2019, we saw some interest rate increase. So clearly, there was an impact on the yields. 4.78% to 5.08% was where we ended the year. Now going forward, we see that the corporate banking business and the yields on the corporate banking business might come down a little, and that's just a reflection of where the pricing would be. However, we will try and offset that with the retail premium pricing that I've already spoken about. Once again, on the deposit side, the corporate bank definitely contributes. But clearly, it's a net borrower from overall funding perspective. The pie chart in the middle shows you the kind of diversification we've brought about in our corporate banking business, and that is broken down by portfolio. You can see that not much difference when you see compared to quarter-on-quarter over the last year or so.

Our next business line is treasury on Page 15. Once again, an important part of our business, we have ended the year at AED 35 billion versus AED 33 billion. And this is net of all the sales that have happened in terms of diversification of our concentrations. So we've made sure that we ended the year on a high at AED 35 billion. It's clearly a book that gives us 4.29% in return higher than what it gave us in 2018 at 4.14%. You can see substantial contributions from the treasury in terms of AED 1.38 billion in terms of the total income coming from that book versus the 848 billion - AED 848 million in 2018.

So in terms of the diversification or the breakdown of that portfolio. Again, it's a reflection of the issuers and the issuing market. It's a reflection of where which sovereign, which quasi-sovereign, which corporate would issue its Sukuk, and given the excess liquidity position that we have, we make sure that we invest it according to the investment and risk appetite that the bank has.

You can see clearly that the treasury yield has substantially increased. And I think it's a reflection of where the market coupons are. We ourselves have priced a very successful $750 million senior unsecured at a price of 2.95%, which is probably the lowest a financial institution would have priced itself in the capital markets.

Page 16, I've talked about asset quality. In terms of nonperforming financing, you can see there's an uptick from 3.4% to 3.9%. Clearly, we wanted to be below this range. But given where the economic headwinds are and the landscape around us, it was only prudent for us to make sure that we classify some of those accounts. And those accounts are 100% provided for in terms of cash provision. And in terms of total collateral coverage, we are at 135%.

The cost of risk, I've already alluded to this, but in percentage terms, it's about 87 basis points, slightly higher than where we would want it to be. But when you compare that with the base of 51 basis points in 2018, I think we are doing an apple-to-an-orang comparison over years because the 51 basis points are net of recoveries and the 87 basis points have absolutely no recoveries. So on a normalized basis, our cost of risk, I've always mentioned, the guidance was at 70 to 80 basis points. We have slightly higher than that at 7 bps above. But again, let's not forget that the effect of the denominator is also making this look a little deteriorating than what it actually is, because clearly, had we grown the way we had anticipated we should grow at the beginning of 2018, but then we recalibrated ourselves and made sure that our denominator does not grow to that level, clearly because of the impending acquisition that we had. We wanted to make sure that we conserve capital and meet all the regulatory requirements in terms of Basel ratios.

Page 17, it shows you the funding sources of the banks, predominantly funded by deposits. You can see that majority of our liabilities are in the form of deposits, followed by our equity position and also the senior unsecured Sukuks that I've already mentioned.

In terms of ADR ratios, we have supported our growth by adequate mobilization of liabilities and that can be seen in the ADR ratio of 92%. We are in line with all the coverage ratios. Our LCR ratios and NFSR ratios are above the minimum requirements.

You can see that in terms of the diversification of our liability book, 33% of that comes from CASA, 67% of that comes from investment deposits. And I see that picture changing in a declining interest rate scenario. And in terms of businesses, 45% (sic) [44%] contribution by consumer and a 56% contribution by our wholesale bank.

In terms of capitalization ratios, you can see that in terms of CET1, our minimum requirement is 10%, and we are at 12% CET1. Our minimum requirement in terms of capital adequacy ratio should be at 13.5%, and we are at 16.5%. So you can see that we are adequately capitalized. We've consumed this capital. I must say repeatedly, we've consumed this capital because the capital position would have been different had we met our growth aspirations and had we not recalibrated ourselves.

So I think an ounce of logic is more than a pound of flesh. We took a step back way early in 2019 and started to make sure that we underwrite credit, which gives us adequate yields and just do not grow our book because that would consume our capital.

We started underwriting cap -- facilities that were not consuming capital to that extent. And as a result, I think it is very, very heartening to see that we've managed to keep our CET1 ratio at 12%, which gives us adequate room now to start and look at growth in 2020. What that is would be seen in a couple of slides from now.

In terms of dividend, as always, the end of the year, we have recommended and shown you a dividend of 35%, which is in line with the 2018 levels. And -- but this is clearly subject to the general assembly approval.

Page 19, it's a very quick look and one slide tells you what we've done in the entire 2019. You can see that our ideology for the year or the theme for the year at the beginning of the year was care, customer experience, acquisition, retention and engagement and everything that we have done throughout the year has followed these principles. And tactical strategies were built around this in order to become what we call ourselves as a digitally intelligent bank, where we have focus on enhancing customer experience, following the care ideology, making sure we align capacity to growth. And that is exactly what we have done by making sure we have adequate liquidity and adequate capital to meet our ambition and to meet our growth ambition, which is exactly by making sure we conserve capital and can support acquisition that we have just done. All of that by maintaining a good quality credit portfolio and maintain cost discipline. Result is the key metrics in front of you. While our growth guidance at the beginning of the year, if you remember, this growth guidance was given in January in the first call when we said we will grow by 10% to 15%, but clearly, at that stage, as you know, acquisition was not on the radar. Acquisition came on the radar in October. We started to give markets some feelers way back in April, also formalized that sometime in June. So you can imagine that between April to September or April to October when we announced, we had a fair idea of where this was going. And hence, we started to kind of recalibrate ourselves and start conserving capital and not consuming capital.

The result of that is still decent growth that allowed us to maintain our net operating profitability at -- and the growth of 5% is where we ended the year.

Our nonperforming financing. I've already mentioned that. It probably looks a little higher than where it was, but I've already given you reasons for that. It's reasons around prudence, both on the asset quality side and making sure that we do not grow the denominator significantly.

On a cost of risk basis, we are at 87 basis points, slightly higher than what our guidance was. But clearly, it's a reflection of where the economic landscape is.

In terms of real estate concentration, circa 20% is where we wanted to be. It shows you that we are at 21%. But then again, this would include loans that have been given to corporates that probably are within the real estate sector. Now that necessarily does not mean that we've done real estate financing. But clearly, from a concentration perspective, that's where the real estate concentration is.

ROE at 17.1% is within the guidance that we had given. ROA at 2.25% is on the higher end of the guidance we had given. Our net profit margins at 3.15% is at the higher end of our guidance. And last but not least, our cost-to-income ratio is another significant milestone. This was probably one metric that we were aspiring to reach, and we have done that in 2019.

Our strategic focus going forward is on Page 21. Once again, no change in strategy. We aspire to be a digitally intelligent bank. 2020, in my opinion, is going to be a game-changing year for the bank's positioning as a digitally intelligent bank. You would see us making a lot of announcements around what that actually entails. Throughout 2019, I've been alluding to the fact that we are making the right investments, changing our processes, making the right modular developments that are required, and I had also mentioned that in 2020, you would see us make these announcements. And I think it's a matter of time that we would be, in phases, gradually making these announcements as to what do we mean by when we call ourselves a digitally intelligent bank.

Our ideology remains the same. We would continue to focus on customer experience, continue to focus on acquisition, retain the customers that we have and continue to engage with them.

I think, so, overall, there is no shift in the strategy of the bank. We would be continuing to grow. It's a part of our Growth 2.0 strategy. So 2020 is yet another year. We had mentioned to you that the first 10-year plan from 2008 to 2018, and then a 2-year plan, which was Growth 2.0 between 2019 and 2020. We have not deviated from that at all. All our numbers stack out, and that can now be demonstrated in the form of the guidance that we are giving to you for 2020.

The preamble to this guidance is that, remember, this is on a consolidated basis, it's on a combined balance sheet. So this is the last time that you have seen a 2019 balance sheet. All the numbers that I have given you this far were for the year 2019 for DIB on a stand-alone basis, but the target metrics that I'm now putting in front of you for 2020 is on a combined balance sheet basis. So when I say that we would be growing between 8% to 10%, that is not on the year-end balance sheet of 2019, but on a combined balance sheet between Dubai Islamic Bank and Noor bank. So that can tell you that we are now recalibrating ourselves once again and having achieved everything that we wanted to achieve in 2019 consciously, deliberately showing you modest growth because that was important for us to kind of take a step back and recalibrate ourselves. And now that we've done everything that we wanted to do in 2019, we once again are putting a step in the right direction. 8% to 10% balance sheet growth, 8% to 10% loan growth, actually signifies, you can do the math, you can look at where the combined balance sheet is because from next quarter, we are going to show you where the balance sheet is going to be combined basis. But you can do the math, and you can see that Dubai Islamic Bank is once again embarking on a very cautious and a very well-crafted growth strategy.

Nonperforming loans from 3.9%, which we have ended the year, 4%, please don't let this deviate the attention and think that risk quality and asset quality is going to deteriorate with the integration that we are going to do. Clearly, all the analysts know that the asset quality at Noor Bank is different than the asset quality at Dubai Islamic Bank, slightly higher NPLs. So when we put them together, we are going to grow at -- we are going to work with an NPF ratio of 4%.

Real estate concentration. We want the combined balance sheet to have a concentration of close to 20%.

Return on assets. Clearly, with the declining interest rate scenarios, the return on asset would come down slightly. We want to be closer to that high end, which is at 2.20%, but the range that I want to put in front of you is 2.1% to 2.2%.

Return on equity. To maintain a return of equity between 17% to 18%, given that the capital has slightly increased with the share increase that we have done to accommodate the Noor Bank shareholders, I think this kind of return on equity is still very challenging.

Cost-to-income ratio. Having achieved 26.9%, integrating these 2 banks, there would be integration costs. But despite that, we are very confident that we will be able to operate at a cost-to-income ratio of between 26% to 27%; cash coverage ratio, not changing much from where we are; and net profit margins, not changing much from where we are.

So I think, overall, the strategic focus for 2020, you can see that this is, again, going to be a very important year for us, not deviating from the overall strategy of the bank that you've been witnessing over the last so many years, at least from 2013 that we've completely changed, rejuvenated ourselves under the leadership of the Board. I think we will continue to put our best foot forward, and 2020 is a positive year for us, given that now we have completed the acquisition, and we are in the mode of integration.

Talking about integration brings me to Page 22. That's a very quick time line of what we wanted to do and what we've done so far. I've already alluded to this. So 2019, we worked about with the regulators. We made sure that we had all the approvals. We got the general assembly approvals in December. This is the first call that I'm doing after that. You have probably picked it up in the public domain, but it's important for me to now show you that we have completed the acquisition of Noor Bank on the 22nd of January, and you can see that broad time line in front of you.

Swap ratio is already known to you, but it's clearly in front of you. And now, given that we've completed the acquisition, here's -- ever since now, going forward, you will see that the balance sheet -- combined balance sheet is circa $75 billion, making it one of the largest Islamic franchises in the world. And in terms of dirhams, that is at AED 275 billion.

Our objective for Noor Bank is full integration of the bank into Dubai Islamic Bank. And we have a very, very aggressive time line. We want to do that before the end of this year. However, balance sheet will be consolidated immediately. We've already started doing that. And the next financial statements you will see would be on a consolidated basis, both balance sheet as well as P&L.

Adequate synergies, and I'm sure you will have questions on what those synergies would be and what would be the nominal amount of that synergy and absolute amount or percentage. I'm not going to give too much away, obviously, because that's a journey that -- and it's not a destination. We would make sure that we bring about adequate synergies to enhance shareholder value. That's the whole point why we've done this acquisition.

And throughout 2020, you would see those synergies coming in, thereby, obviously, benefiting the shareholders and the key franchise of the bank.

My last slide is a very important slide. Some of you analysts have alluded to this fact in the past, and most of my investor colleagues have nudged me to kind of go in this direction. I'm very happy to say that I've got now the required approvals from the Board in the Board meeting yesterday to increase the foreign ownership limit of the bank from 25% to 40%. Obviously, this is subject to regulatory approvals and corporate approvals that also would be tabled in the general assembly that we intend to do to approve the financial statements as well as the other corporate action plans that we have.

So I think subject to this approvals, Dubai Islamic Bank would increase its foreign ownership limit from 25% to 40%, something that everybody has requested us to do and everybody has pressurized us to do. Clearly, it shows the confidence that the investors have in the script and the available room warrant san increase in the foreign ownership limit, clearly, to bring about international demand into this -- into the script as well as to maintain our leading position within the MSCI basket of indices.

So from that, I come to the end of my presentation. I'm happy to take questions, but I would leave the last 5 minutes of my hour in order to make sure that I sum it up and throw a very quick light on 2019, but equally importantly, what should you expect from us for 2020. I've already said that in many slides, it's important that I give you context and a summary, which I will do towards the last few minutes of the hour given to me.

With that, I now open the floor for more questions, please feel free and ask us. We will -- I can promise you, we'll not be able to answer all of them. We will take as many questions as we can, but then you can reach out to our investment -- Investor Relations guys on a one-on-one basis, and we will also be doing nondeal roadshows going forward once probably travel is a little relaxed and the virus is behind us. We would start traveling and we would meet investors and we would be happy to see all of you and take questions from you and give you light on where 2020 and how it looks like. But open the floor for more questions now.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [5]

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Thank you, Dr. Adnan. The floor is now open for questions. We have about, I think, just under 20 minutes for questions and then 5 minutes for Dr. Chilwan to wrap up. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [2]

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Okay. So we have the first question, it's around the dividend.

Is the proposed even also for Noor Bank shareholders? Does the reduction in retained earnings in CAR calculation suggests so.

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [3]

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Thank you. I think it's a good question. And I see a flurry of questions, and I'm going to take common questions and try to answer as many as I can. The question is from -- I don't see a name, Chiro, from Chiro. Yes, given that I've already told you the time line of the acquisition. We have acquired the institution on the 22nd of January, that means that before the AGM on the record date, all the shareholders who are on the books of the bank would get dividend. That definitely means that Noor Bank shareholders who have now, in essence, become DIB shareholders and from hereon, I think we should stop referring to them as Noor Bank shareholders, they are now DIB shareholders. And I would say that all DIB shareholders would get dividend that we are suggesting to the shareholders in the general assembly for approval.

The second part of that question was whether the reduction in retained earnings in the CAR calculation suggest so? The CAR that you see is net of dividends. So when we say that we are at 16.5% or a CET1 of 12%, it is net of dividends. It is already adjusted.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [4]

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So the next question -- set of questions actually is from Janany. And she has a question on the cost of risk levels, Noor Bank and FOL increase.

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [5]

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Janany, thank you for your question. But I always presume that questions are drafted before my presentation because I've already alluded to all of this in my presentation. Cost of risk is higher on -- than normalized level. I've already mentioned that cost of risk at 87 basis points is, obviously, normalized. It's a little higher than 70 to 80 basis points guidance. And clearly, I've already mentioned, it does not take into account recoveries because we've been very prudent, and we've not taken recoveries for 2019 versus recoveries that were taken in 2018. But like you say, normalized cost of risk, 87 is definitely a slightly higher than 80, but for us, that is just to follow a prudent strategy.

In terms of process integration of Noor Bank. Once again, I have mentioned that we want to integrate this fully within Dubai Islamic Bank before the end of the year. And I think that is a very challenging time line that we have set ourselves for, but we are up for it.

Growth guidance is lower, even including Noor Bank. I slightly disagree, Janany. I don't think the growth guidance is lower. Because growth guidance is on a combined book. So I think if you would have waited for my presentation to end, this question would probably have been different. You would have said growth guidance is higher including Noor Bank. This is on a combined balance sheet, so a combined balance sheet of AED 275 billion, a growth guidance of 10%, you can see that it is not low, it is high. But I would never call it even high because it is always cautious and very balanced.

In terms of time line for affecting FOL. There are some moving parts in this. We require regulatory approvals. So we are already, effective today, started to talk to the regulators. And then it also requires general assembly approvals. Once we have these approvals, it will then, depending on the right time to kind of make sure that it is active within the Dubai financial market. So we'll keep you posted. And we'll keep the analysts posted with when do we intend to activate the FOLs. But clearly, I can see that there is a lot of demand and a lot of pressure on us to activate it sooner than we should. But we will make sure that we have all the approvals in place before we go in that direction.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [6]

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Okay. So this -- and a question from Edmond from Bloomberg. Where do you see cost of risk heading into 2020 as well as the coverage ratios? And what sort of coverage you have with the collateral, a 50% (inaudible)

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [7]

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Thank you, Edmond. I've already read Edmond's analysis today on Bloomberg. I rather he waits a little, listens to this call and then analyzes and then gives his feedback. But nevertheless, Edmond, my friend, the cost of risk heading into 2020, we have given a guidance of 80 basis points. So we want to stick to that guidance as of now. That would mean that the 87 basis points that you have seen in 2019 and for all the reasons that I've already mentioned, we want to bring that down. So we are going with the cost of risk headline of 80 basis points. Remind you on the overall coverage of 135%, yes, includes 50% of the collateral at the current prices today.

So -- and that is frequently evaluated every 6 months. So that is the latest evaluation and valuation that we have done of the collaterals, and it stands at 135% today.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [8]

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Okay. There's another question from Edmond from Bloomberg. Your CASA levels increased in fourth quarter, do you expect further improvement with low -- in the lower interest rate scenario?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [9]

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Yes, Edmond, absolutely, the CASA levels in the quarter 4 have slightly dropped. The overall CASA of the bank on a full year basis because we are discussing full year results, so I think we should not be focusing on any one quarter, which is something that I keep mentioning. Nevertheless, our CASA levels for the full year have been at 33% and do we expect this to improve further with the mix with Noor integration, I would not call it merger, with Noor integration, yes, we are expecting that our CASA levels given the composition of the liability book at Noor Bank and then the focus that we have with our payroll accounts and our operating accounts on DIB on a combined basis, I feel that the CASA ratio would improve, thereby adding positively to the cost of funds of the bank.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [10]

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All right. So just to let you know that we're going through the questions as quickly as possible. There are similar questions, so we're just trying not to repeat the same to get -- to maximize the time. Thanks.

Okay. Another question from Chiro, on the ROE, how are we going to maintain it on a larger equity base?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [11]

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We are going to maintain it exactly how we've been maintaining it over the last couple of years. This is not the first time the equity base has increased, Chiro. In the last 6, 7 years of our growth strategy, the equity base has increased twice, and we've maintained an ROE of 17% to 18%. And ROE is a function of the earnings of the bank, the profitability of the bank, which is, again, a function of where your yields are, if you then dissect that on the corporate side, where there are pricing pressures, offset by retail yields, where there is premium pricing, our cost of fund has always been our strong point. Our cost-to-income ratio is now lower than it ever is. So even if the declining interest rate forecast, our net interest margins have been maintained.

And let's not forget the synergies that we have been talking about with the Noor Bank integration. All of this put together, we are very confident that we'll be able to maintain our return on equity at 17% to 18%, despite a slight increase in base, I would say.

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Operator [12]

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(Operator Instructions)

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [13]

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There's another one from Edmond in Bloomberg. Does the lower end of your guidance reflect another rate cut and what could help your margins this year, lower cost of funding, more CASA, et cetera?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [14]

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Well, obviously, we've already -- historically, we've given a guidance. We try to be at the upper end of guidance. I think it's a reflection of not just anticipated rate cuts, but also a reflection of the composition of which book grows and what premiums it grows at, what would be the pricing. Clearly, we would want to be at the higher end of the guidance, and which is where we are today, but we can definitely improve that guidance or stay at the higher end of that guidance by lowering our cost of funding. And clearly, I've answered throughout my presentation and also in a preceding question that with the integration and a better CASA mix, we are confident that we will be able to be at a very good range -- a very good end of that range that we've given ourselves.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [15]

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A question from Edmond, again, on the synergies from Noor Bank -- on synergies from Noor Bank, yes?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [16]

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Yes. How much revenue synergies do you expect? I think in the past, I have mentioned that synergies are coming from revenues, synergies are going to come from cost of funds, and synergies are going to come from the operating expenses. So 3 synergies put together, I think we are anticipating adequate synergies, but I do not want to pin down myself with a number on either of these 3 synergies.

Quarter-on-quarter, I think now that the fact that it's a combined balance sheet, we are giving you combined growth numbers. Clearly, by showing you synergies out of revenues or synergies out of cost of funding or synergies out of operating expenses is going to defeat the purpose of this entire synergy exercise.

So my suggestion would be to hold on to our horses and look at quarter-on-quarter and see how the bank is unlocking value from the Noor Bank integration. And as long as this is value-accretive for the shareholders and as long as the P&L of the combined entity is being enhanced, I think everybody should be happy.

But I understand from where Edmond sits, he wants information that would probably create some waves. But I think you'll have to do some analysis yourself.

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Operator [17]

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(Operator Instructions)

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [18]

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All right. So from -- a question from Divya, CET1 calculation, Noor Bank shareholders have also been given dividend, will DIB shareholders also be getting their dividend?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [19]

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I'm not sure how to answer this question because Noor Bank shareholders appear to be getting a dividend and will DIB shareholder also be getting a dividend?

Yes, all DIB shareholders on the record date will be getting a dividend. And like I've mentioned, I've already explained this, now we are not going to call them Noor Bank shareholders anymore because the swap has already been executed. They have now become DIB shareholders. So as of the dividend record date, everybody who is on the book is going to get a dividend. I also have seen some questions which are repeated, cost of risk, which are repeated; CET1 related, I've already answered these questions. I understand why these questions keep coming up because these questions have been framed when you've looked at financial statements before the webcast. But I think the webcast has thrown light on all that I had to say and maybe most of these questions have been either repeated or answered.

So hence, I will give you another couple of minutes to take fresh questions, if any. Or I will then sum up and kind of put context around everything and give you a very brief closing statement.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [20]

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We'll take this as the last question before Dr. Adnan wraps up. The question is from [Angie, from MSNPD.] She's basically asking, will you be beefing up capital given the CET1 ratio at 12%?

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Adnan Abdus Shakoor Chilwan, Dubai Islamic Bank P.J.S.C. - Group CEO [21]

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No, [Angie] I think the CET1 ratio at 12% is where we are comfortable ending up the year. But with the forecast that we have in mind in terms of growth and the anticipated P&L that we have in mind, we feel that we will be having adequate capital by the end of 2020 to meet our growth aspirations for the 2020 that we've given on a combined level as well as retain adequate capital at the end of 2020.

So no, we do not see a requirement to beef up CET1. Usually, requirements come up if you are consuming capital faster than your organic capital generation or you're consuming capital more than the P&L forecast that you have or there is an asset quality problem. In our case, none of the above that I have mentioned would necessitate a beefing up of capital. So from that perspective, I think we are comfortable at 12%. And we are comfortable at a total CAR of around 16.5%, which, in our opinion, is more than the minimum requirements, given the kind of growth that we have in terms of balance sheet as well as in terms of P&L.

Now that brings me to the end of this presentation, but it is important to kind of very quickly summarize this last 1 hour. I've also seen the questions that you've been asking, the questions are around foreign ownership limit, around integration, questions around asset quality. I think let's not take away the credit from the bank and the management team that 2019 has been a very, very important year for Dubai Islamic Bank to continue its growth ambitions. While they are looking modest in terms of the loan book growth, that is deliberate. We've made sure that we've grown judiciously and cautiously. We've underwritten good quality credit. That new NPL formation is hardly anything to talk about. Whatever you are seeing is the formation, the NPLs that we already had on our book. And we had to classify them into stage 3, thereby ending up with a cost of risk of 87 basis points versus the 80 basis points that we were guiding at the beginning of the year.

But more importantly, I think we've maintained our operational profitability, we've maintained our net profit. We've still grown, given that the economic landscape saw some headwinds to grow in terms of balance sheet, to grow in terms of P&L the way we have grown year-on-year, 17% growth in top line is, I think, a commendable achievement.

We maintained the ROEs and ROAs in line with the guidance that we've given. The net interest margin is in line with the guidance that we've given. No undue concentration on the real estate side. And last, but not least, the cost-to-income ratio at 26.9% shows you how operationally the bank has brought about efficiencies and effectiveness in its business.

All our businesses continue to grow in the right direction, whether it is our important consumer banking business or our important corporate banking business or our important treasury business. Each of these businesses has not seen any asset quality deterioration or any undue contraction.

2020 is a very important year for us. It's an important year in terms of rationalizations, it's an important year in terms of making sure that our ambition to become a digitally intelligent bank is made public.

You will see us making the right announcements at the right time. More importantly, the digitally intelligent bank strategy revolves around our core principles of customer experience, acquisition, retention and engagement, which is what we call our care ideology.

In terms of geographical footprint, we will continue to focus on the 3 key areas other than the UAE, which is Pakistan, Indonesia and Kenya. Each of these operations are at various stages of their gestation period. Pakistan is a very profitable business for us. So is Indonesia, modest profitability. Kenya would be a turnaround year for the franchise.

In terms of guidance, I've already mentioned to you that 2020 is an important year for us. It's a year when we become the second largest Islamic bank in the world. It's a year when -- with the combined balance sheet of AED 275 billion, we become a very strong player, not only in the domestic markets, but also in the capital markets. It's a year where you would see us grow, and we have aspirations to grow by 8% to 10%. Our asset quality remains at current levels, very close to the 3.9%. Real estate concentration, we want to maintain our real estate concentration at that levels.

Return on equity and return on asset, once again, would be the guidance that we've given. Having achieved this guidance in 2020, we will be probably the highest in the market in terms of ROEs and ROAs.

Our cost-to-income ratio, despite the integrations that we are talking about, we would endeavor to bring about synergies and make sure that we are operating within the same ranges that you've seen in 2019. And our net interest margins, even though the decline in the interest rate forecast, we are making sure that we are at the top end of that net profit margin.

So overall, 2020 and the key strategic focus for Dubai Islamic Bank in 2020 is a year of growth. We have recalibrated ourselves in 2019. And I think now with the right foundation and the platform, you would see us going and growing positively, cautiously without compromising asset quality and without compromising our profitability.

With that, I come to the end of the webcast. Happy to take offline questions, if any, but looking forward to see some of you when we embark on nondeal roadshows. Thank you, and goodbye.

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Kashif Moosa, Dubai Islamic Bank P.J.S.C. - Head of IR & Strategic Communications [22]

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Again, thank you, Dr. Adnan. Thank you, everybody, for joining us on this webcast. The -- any -- some of the questions may have remained unanswered, please get in touch directly for those. So thanks again, and see you next time.

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Operator [23]

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Ladies and gentlemen, this concludes today's conference call and webcast. Thank you all for your participation. You may now disconnect.