Rahul Bajaj: On the line here, this is Rahul Bajaj from Citi Research in Dubai. We are delighted to host Abu Dhabi Commercial Bank's Q3 2026 Earnings Call today. Representing ADCB, we have Deepak Khullar, the Group Chief Financial Officer. We have Robbert Muller, Group Treasurer, Monica Malik, Group Chief Economist, and Harsh Vardhan, Senior Head of Investor Relations. At this time, without further delay, I will pass on the call to Harsh. Harsh?
Harsh Vardhan: Thank you, Rahul, and good day, ladies and gentlemen. Welcome to ADCB's call on our Q3 2026 Financial Results, which were announced yesterday. We will be referring to our earnings presentation available on our investor relations website. I am joined today by Deepak Khullar, Group Chief Financial Officer, Robbert Muller, Group Treasurer, and Dr. Monica Malik, our Chief Economist. We will discuss the key financial highlights, followed by the operating environment and guidance, before opening the floor for questions. With that, I will now hand over to Deepak to begin on slide five.
Deepak Khullar: Thank you, Harsh, and good morning, everyone. ADCB's record results for the first nine months of 2026 demonstrate the earnings power of ADCB's franchise, supported by positive momentum in the UAE economy and disciplined delivery against our five-year strategy. We continue to generate broad-based growth across our businesses while maintaining strong risk management with significant lending activity and increasingly diversified income streams. Q3 profit before tax increased 28% year-on-year to a record AED 4.06 billion, marking our 21st consecutive quarter of profit growth and more than tripling since Q3 2021. Net profit after tax reached AED 3.56 billion in Q3, up 15% from a year earlier, and at AED 10.3 billion in the first nine months, up 27%, demonstrating the consistency of our earnings trajectory. Return on average equity for the nine-month period was 16.2% compared to 14.7% a year earlier.
Deepak Khullar: Non-interest income continues to be a key driver of performance in the first nine months, increasing 21% from a year earlier and contributing 38% of operating income. Over the same period, the cost-to-income ratio improved by 40 basis points year-on-year to 27.3% as revenue growth outpaced operating expenses. We continue to expand the balance sheet at pace. Net loans grew by AED 66 billion, or 16% over the first nine months, and customer deposits by AED 58 billion, or 12%. We have also gained market share in both loans and deposits, reinforcing our position as one of the leading banks in the UAE. We achieved this growth while continuing to strengthen asset quality.
Deepak Khullar: Cost of risk improved to 36 basis points for the first nine months, compared with 73 basis points a year earlier, and the non-performing loans, NPL ratio, reached a record low of 1.6% at September end. Reflecting the strong underlying credit quality of our portfolio, we have lowered our cost of risk guidance to below 50 basis points from below 60 basis points for both the full year 2026 and our five-year strategy. Our capital and liquidity position remains robust with a CET1 ratio of 13.79% and a liquidity coverage ratio of 116.8% at September end. We are now one year into our AI transformation program and making significant progress in embedding it across the bank with a disciplined governance framework. AI is increasingly becoming a core enabler of our operating model, raising productivity, improving the customer experience, and giving us greater operational scale.
Deepak Khullar: Together with our broader digital capabilities, these investments are delivering tangible business value and strengthening our competitive position. Turning to slides 6 and 7, which present the key income statement details for the first nine months and the Q3. Operating income rose 10% year-on-year to AED 18.31 billion in the first nine months, led by another strong contribution from non-interest income. Beyond the headline growth, this reflects an earnings base that is becoming steadily broader and less reliant on any single source of revenue. Operating profit before impairment charge increased 11% year-on-year to AED 13.3 billion for the nine-month period, and 7% to AED 4.53 billion in the Q3, up 4% on the previous quarter. What stands out is the repeatability of this performance. Each quarter this year has built on the last.
Deepak Khullar: Sustained business growth, rising profitability, strong returns, and a rigorous approach to risk give us confidence in the resilience of our earnings trajectory and our ability to continue creating value for shareholders. Moving to slide 8. Net interest income rose 4% year-on-year to AED 11.34 billion in the first nine months. Strong loan growth more than offset the impact of lower interest rates following three benchmark rate cuts between September and December 2025. In the Q3, net interest income grew 4% quarter on quarter and 2% year-on-year to AED 3.87 billion. Net interest margin was 2.22% for the nine-month period and 2.16% in the Q3, four basis points lower than the previous quarter. Asset yields improved during the quarter, but funding costs rose slightly faster as we increased term deposits and wholesale funding to maintain strong liquidity buffers.
Deepak Khullar: Importantly, as we have highlighted on previous calls, we managed the bank to a risk-adjusted NIM, which increased 11 basis points from a year earlier to 1.89% in the first nine months, and held steady at 1.87% in the Q3, supported by a lower cost of risk and our strategic emphasis on lending to government-related entities. On slide 9, non-interest income increased 21% year-on-year to AED 6.96 billion in the first nine months, continuing to play a central role in our growth. Fee income was a major contributor, with net fee and commission income rising 24% to AED 3.37 billion in the first nine months. Loan processing fees increased 39% on the back of strong lending origination, and card-related fees grew 22%. With growth spread across products and closely tied to client activity, our fee income rests on a broad and sustainable base.
Deepak Khullar: Net trading income for the nine months rose 39% to AED 2.89 billion, driven mainly by gains on financial assets at fair value through P&L, as well as higher foreign exchange income. Non-interest income now represents 38% of operating income, up from 35% a year earlier. This rising share reduces our sensitivity to interest rate movements and adds stability to our earnings. The Q3 extended this trend, with non-interest income up 19% year-on-year to AED 2.45 billion and fee income up 28%. Turning to slide 10, income growth again outpaced costs in the first nine months, delivering positive jaws and a 40 basis point year-on-year improvement in the cost to income ratio to 27.3%. Operating expenses rose 9% year-on-year to AED 5.01 billion as we continue to invest in our people, technology and AI, and in building new business capabilities.
Deepak Khullar: We remain focused on delivering efficient growth, continuing to optimize our cost base while maintaining a significant level of investment in the franchise over the coming quarters to support future profitability. I will skip slide 11, which summarizes the key balance sheet metrics, and move to slide 12. Strong credit demand across the UAE economy supported loan growth in corporate, retail, and private banking. Net loans rose by 16% in the first nine months, including AED 24 billion, or 5% in the Q3. The Q3 was driven by domestic lending, with the UAE accounting for over 90% of the quarter's loan growth, with personal lending increasing by AED 14 billion during the quarter, alongside further growth in lending to government-related entities. New lending reached AED 128 billion, more than double the AED 62 billion of repayments over the same period.
Deepak Khullar: Geographically, the UAE accounts for 71% of gross loans and international exposure for 29%, consistent with our strategy of a balanced domestic and international portfolio. As the loan book grows, it continues to become more diversified and increasingly resilient. Turning to slide 14, the credit quality of our portfolio strengthened further, supported by sound underwriting standards and close portfolio oversight. The NPL ratio fell to a record low of 1.6% at September end, from 1.7% in June. Provision coverage stood at 156% and total coverage, including collateral, at 263%. Net impairment charges were AED 1.65 billion in the first nine months, 44% lower year-on-year. In the Q3, the charge declined 57% year-on-year and 12% quarter on quarter to AED 472 million.
Deepak Khullar: The year-on-year reduction largely reflects elevated provisions on a small number of legacy corporate accounts in the Q2 and Q3 of 2025. Asset quality has strengthened alongside the strong loan growth, confirming that the quality of our lending has kept pace with this scale. Cost of risk was 31 basis points in the Q3 and 36 basis points for the 9-month period, around half the 73 basis points recorded a year earlier. With that, I will hand over to Robbert, who will take you through the investment portfolio, customer deposits, and the capital position.
Robbert Muller: Thank you, Deepak, and good morning to everybody on the call. Our investment securities portfolio remains an important source of liquidity and diversification for the bank. At September end, the portfolio stood at AED 169 billion, an increase of 6% from a year earlier and 2% year to date. Approximately 99% of the portfolio was invested in bonds, maintaining a high quality and well-diversified investment profile. In terms of accounting treatment, 41% of the investment securities were carried at amortized costs, with the remaining 59% at fair value through other comprehensive income and mark-to-market on a daily basis. Turning to slide 17, we continue to see strong momentum in customer deposit inflows reflecting the strength of the ADCB franchise and customer relationships. Deposits increased by 12% during the first nine months to reach AED 558 billion at September end.
Robbert Muller: The Q3 was especially strong, with inflows of AED 32 billion and growth across every business segment. Over the past 12 months, deposits increased by AED 76 billion, ahead of the AED 71 billion growth in net loans. Our lending expansion remains well-funded by our customer base. Deposits account for 70% of our total liabilities. Current and savings accounts balances grew 16% year-on-year to AED 251 billion and represent 45% of total deposits, and that is broadly unchanged from a year earlier. Term deposits accounted for AED 21 billion of the quarterly inflows, which, together with our wholesale funding activities and balance sheet optimization, supported the robust liquidity position at quarter end. Reflecting this funding strength, our liquidity coverage ratio increased to 106.8%, up from 109.5% in June. The loan-to-deposit ratio remained comfortably at 84%.
Robbert Muller: Turning to slide 18, our capital position strengthened further during the quarter. The CET1 ratio rose to 13.79% at September end from 13.66% in June, and the capital adequacy ratio stood at 16.54%. Both ratios are comfortably above regulatory minimums, and the CET1 remains ahead of our 12% guidance. Our growth is also generating its own capital. Earnings added 192 basis points of CET1 in the first nine months, which supported 16% loan growth while holding the ratio steady compared with December. This gives us room to keep on investing in our strategic priorities while maintaining adequate buffers above requirements. With that, I will hand back to Deepak to discuss the operating environment and guidance.
Deepak Khullar: Thank you, Robert. Turning to slides 20 and 21. The UAE economy continues to demonstrate resilience, supported by strong fundamentals and sustained domestic investment. The PMI has remained in expansionary territory throughout the year, strengthening in September as output and new orders picked up, pointing to renewed momentum in non-oil economic activity. There has been some tightening in banking sector liquidity, though still comfortable, as loan growth has outpaced deposit growth. The investment outlook also remains constructive. Project awards have held up well during the first nine months, with Abu Dhabi accounting for almost half of the total across the UAE. Looking to 2027, we expect a rebound in economic growth led by both the oil and non-oil sectors. Strong government spending, the ongoing investment cycle, and the recovery in externally facing sectors should support this rebound.
Deepak Khullar: Finally, turning to slide 22, I would like to bring together the key messages from the first nine months. Our performance this year has been strong on every front. Record profitability, supported by growth in both net interest income and non-interest income. Positive jaws, substantial expansion in loans and deposits, and a further improvement in asset quality. The sustained performance of the portfolio has allowed us to lower our cost of risk guidance to below 50 basis points, and we remain on track to deliver against our full-year 2026 guidance and the targets of our 5-year strategy. With a solid capital and liquidity position, we are well-placed to keep supporting our clients and the UAE's economic ambitions, and we approach the final quarter of the year with confidence. We will now open the floor to questions.
Rahul Bajaj: Hi, Deepak. This is Rahul from Citi. Maybe I will kick off and then we have others come in as well. So 2 questions from my side to begin with, Deepak. The first one is on deposit competition. You mentioned earlier that, clearly there has been some elevated cost of funding and deposit competition in the market. Are you seeing any signs of easing in Q4 so far of this competition easing? And how do you see this competition evolve on the deposit side over the next couple of quarters? So that is my first question. My second question is on the lending growth that ADCB has seen during Q3.
Rahul Bajaj: Just wanted to understand, were you involved in the leveraged part of the FCNR deposits, which Indian banks were doing, and if so, what part of the growth or what percentage of the growth that you saw in Q3 QoQ came on back of those leveraged FCNR products, which I would assume as one-off in nature and that should normalize in Q4. So those are my 2 questions, Deepak. Thank you.
Deepak Khullar: Thank you, Rahul. Let me take the second part of the question on lending growth, and then Robbert will respond to the deposit competition, et cetera. As you can see, we have had a strong Q3 in terms of lending growth as well, both from the corporate side and on the retail side as well. Retail has grown significantly. And yes, the FCNR product, which is well-known, has been part of that. So FCNR is a seasonal product, and we have leveraged on that. It has delivered an uplift to both the assets and the revenues in Q3. And we expect to offset any normalization through other opportunities in the pipeline for the following quarter. So yes, we did participate on that, and it has been a significant contributor to the uplift in both the assets and revenues in Q3. Robbert?
Robbert Muller: Sure. On the deposit, we have been talking about the deposit competition in the past as well. Even prior to the conflict, this market has been competitive. That, of course, has not changed since the start of the conflict. We have seen the excess liquidity in the system go down significantly over the last six months or so. Then, of course, the last quarter, it was also unclear as to what was going to happen with the resilience package that the central bank extended on 30 September. I think, going forward, I do expect this competition to be there. It may be slightly less. It is still early days there. We are only three weeks into Q4. We do see some easing on pricing, but that may also be anecdotal.
Robbert Muller: I think from our perspective, we will continue to see competition for deposits and, as a result, elevated prices. Also to put it a little bit into context, this is only a certain segment where there is this competition. As we have said before, there is also a large part of our funding base that we continue to roll on pre-war levels that is not price sensitive. But there is clearly a segment, which is the more professional part of the funding market, that is asking for higher returns, and that is what we continue to see so far.
Rahul Bajaj: Understood. That is very clear. Thank you. Operator, can you please open the floor for questions?
Operator: Thank you. If you have a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. Once your name has been announced, you can ask a question. If you want to withdraw your question, please lower your hand using the raise hand function. We ask that you please limit yourself to two questions. Our first question comes from Naresh Bilandani with Jefferies. Please unmute to ask your question.
Naresh Bilandani: Yes. Thank you. Hi, it is Naresh Pilandoni with Jefferies. Congrats on the results. Two questions, please. One is, Deepak, thank you for confirming on the FCNR product. Would you please be able to enhance on the level of participation? I think I am trying to just gauge how would the normalized run rate in the loan processing fees and the non-mortgage retail product look like had the FCNR product not been around? Generally, would it be fair to assume that you have garnered a new customer base there? Would you see any cross-sell potential into this new customer base that you have garnered from the scheme? Just trying to understand the extent of participation so we can look at the normalized run rate, excluding the FCNR. That is the first question. My second question is on asset quality.
Naresh Bilandani: Would you please be able to share any thoughts on the FIRP 3.0? Just trying to understand what that looks like. How does that compare to the FIRP that was originally announced at the start of the conflict, and what benefits, if any, have you accrued as a bank from these measures that we may not see repeating into the next year? Just one side question on asset quality. There was a reversal in the general impairment reserve and equity that we are seeing in Note 19, and if I compare that to the Q2, would you please be able to confirm what drove that? I am assuming this reversal, as I understand, was done directly in retained earnings and did not pass via the P&L. I am sorry, there is a bunch of questions in here, so I am happy to repeat any if you would have missed that.
Naresh Bilandani: Thank you.
Deepak Khullar: Thank you, Naresh. Let me take the first question. In terms of the FCNR, as I mentioned earlier, we do have a very strong customer base existing and some new as well who have been participating in this product. As I mentioned, this is a seasonal product. Obviously, it will not be repeated every quarter. It has delivered significant uplift to both the assets and the revenues in this quarter. Any such normalization, we obviously will not be repeating in Q4, but through other opportunities that we see in the pipeline. So we expect to see that normalization come through other opportunities that we have in the pipeline. I do not want to give you excluding FCNR numbers, et cetera, because that is not what we split out in our public disclosures. But suffice to say that we expect to compensate that.
Deepak Khullar: In terms of asset quality, I think you are seeing strong asset quality, both in terms of NPLs and the coverage ratio. Some of the deferrals that we have done earlier obviously have now moved by the stages, so we have not seen any significant movement there except in probably credit cards a bit. But other than that, the asset quality of the bank remains quite robust. In terms of the last one on reversal in general, the reserve through the equity. The way this works is that the impairment reserve under equity is a function of the IFRS provisions and the CBUAE's requirement of 1.5% of credit risk-weighted assets. And the provisions for this purpose include both IFRS provisions and certain other adjustment on assets.
Deepak Khullar: Anything that we take through this gets run past equity, and if there is any release, it also gets released to the reserves and equity and not through the P&L. Obviously, we reassess this at every quarter, and we will continue to do that.
Naresh Bilandani: Thank you, Deepak.
Deepak Khullar: Thank you.
Naresh Bilandani: Thank you. This would have gone effectively back into retained earnings, right?
Deepak Khullar: Yeah.
Naresh Bilandani: Then, Deepak, what was the need for doing this? Shifting from one line. Ultimately, would you be able to clarify whether this reserve forms a part of the CET1, or is that not the case?
Deepak Khullar: It does form part of that, yeah.
Naresh Bilandani: Okay. Okay, Deepak. Thank you very much. I may have some follow-up questions.
Deepak Khullar: Yeah, absolutely. But this we reassess at every quarter. It is not that we look at it only at the year-end or at the beginning of the year. This is reassessed at every quarter.
Naresh Bilandani: Okay, Deepak, thank you very much for the clarification.
Deepak Khullar: Thank you.
Operator: Thank you. Our next question comes from Jitendra Singh with Al Ramz Capital. Please unmute to ask your question. Jitendra, I can see you are unmuted. Please go ahead with your question. Looks like we are having some issues with Jitendra's audio. We will now move to Rahul Rajan of Bank of America. Do go ahead with your question.
Rahul Rajan: Hi. Yes, this is Rahul Rajan from Bank of America. Congrats on a good set of results. A few questions from my side, please. Firstly is on the NIM trajectory and loan growth into the next year into 2027. I understand you do not give a guidance yet, but broadly, how would you see in terms of loan growth next year versus this year? Also on NIMs in terms of potential rate hikes and the cost of funds pressure, therefore, how would you see NIMs trending through next year? That is one. Secondly is from a tax rate perspective, how should we see tax rates in 2027 and beyond? Should we see ADCB continue to avail the benefits from the lower tax rate? Thirdly is a smaller one. Any one-offs in terms of gains that you might have recorded in your non-funded income in Q3?
Rahul Rajan: These are my three questions. Thank you.
Deepak Khullar: Thank you, Rahul. Loan growth next year, we expect the same momentum of 2026 continue. We have a good line of sight of deals in the pipeline. What we see in the macroeconomic environment also supports that. So we expect to see similar double-digit growth coming in 2027 as well. On the NIM side, for the rest of the year, we expect them to be broadly stable to slight compression on NIMs, but risk-adjusted NIMs, we expect those to hold up. Next year, similarly, I think a small compression in NIMs, but not significant. In terms of tax rates, 2027 and beyond, again, this depends on the exemption that a bank can claim. The maximum period that is allowed for is five years, and you have to qualify for that each year. Clearly, the bank's intention is to continue to work towards that.
Deepak Khullar: But if there are any changes to that, we will signal that to the market with the year-end results. Lastly, in terms of any one-offs, there are not any significant one-offs that have contributed to the uplift in the income. Similarly, on the cost side as well, we have not seen.
Robbert Muller: Maybe, Rahul, on your question on rate sensitivity, as you are aware, ADCB has limited its exposure to rate sensitivity over the last couple of years. If rates were to go down, which is unlikely at this point in time, that would have an impact of -100 million dirham on an annualized basis. If rates were to go up, which I think is more likely, that will have an uplift of 126 million dirhams on an annualized basis. That would equate to approximately 2 basis points of NIM uplift. The difference between rates going up and going down, that is because the assumptions about pass-through or pass-on are different for the various scenarios.
Rahul Rajan: Got it. Thank you. Just to follow up on the NIMs aspect. You mentioned risk-adjusted NIMs to hold up through the rest of the year and maybe small compression next year. What is your, the central bank rate assumptions in these numbers?
Monica Malik: We see one more rate hike by the Fed, which we see the UAE Central Bank continuing, and that would be in December. Then we see rates on hold for 2027, though we do highlight risks of one further rate hike in the Q1 of next year. Our core scenario is one more rate hike and then hold.
Rahul Rajan: Thank you so much.
Operator: Thank you. Our next question comes from Jitendra Singh with Al Ramz Capital. Please unmute to ask your question.
Jitendra Singh: Hi, thank you. Can you hear me now?
Deepak Khullar: Yes, we can.
Jitendra Singh: Yeah. Hi. Thank you for taking my question. Just a quick question, maybe I want to come back on the loan growth, particularly on the retail side. We noticed that in other retail loans, there is increase quite sharply from around AED 46 billion to AED 59 billion this quarter. Could you give us some color on what is driving this growth? Is it mostly unsecured personal loans or secured auto? Is this mainly organic, or is there any change in the portfolio mix? That is one. Second, I just wanted to check on your trading income side. On the previous calls, you have mentioned that around 60% to 65% of trading income was repeatable. Now, trading income has remained strong at nearly AED 1 billion this quarter. In the last few quarters, it has been around that level. Does that 60% to 65% estimate still hold?
Jitendra Singh: How much of trading income is coming from realized client activity versus unrealized fair value gains? Those are my two questions. Thank you.
Deepak Khullar: I will let Robbert respond to the trading income, but let me take your question on the lending side again. On the retail lending side, I think I have mentioned this earlier in the call. Clearly, with the increase in the asset balances and the strong lending that we have seen, loan-related fees has also moved up in concert, and a lot of that is both secured lending, which is the FCNR piece. That is on the loan side and the fees, and on trading income, I will let Robbert.
Robbert Muller: Yeah. Again, like we have discussed before, we have continued to invest heavily in our franchise and our capabilities, and I think the 60% to 65% still holds up. We have seen, I think, a very consistent performance in this area over the last few quarters, and we expect that to continue going forward as well.
Operator: Thank you. Our next question comes from John Peace with UBS. Please unmute to ask your question.
Jon Peace: Hi. Thank you. First question, please, is on the new cost of risk guidance. I remember when you originally gave less than 60, it felt like a cautious number. I think the reasoning was that it is a five-year outlook, and there will be cycles, and you want to allow for those cycles. If you are now reducing it to under 50, does that mean you do not expect the cost of risk to go materially above 50 basis points over the next three years? The second question, please, is on absolute costs and the growth rate. It has crept up a bit over the last period. Would you expect that to trend back towards mid-single digit growth next year? Or is it going to be a revenue-dependent decision, so as long as you are seeing very good jaws, you are happy to let it grow a little faster?
Jon Peace: Thank you.
Deepak Khullar: Thank you, John. The cost of risk guidance, we have lowered it based on what we are seeing in the book. The book has moved to a much higher quality credit, not just on the GRE and government lending side, but even the quality of the corporates that we have been booking over the last several years. So it is a much higher rated book and therefore we see a much lower ECL coming through. Based on what we have seen over the last three quarters in terms of cost of risk and the line of sight that we have, we have reduced that number. So we have been trending in that 30 basis points range, and we feel that probably the opportune time to bring down that cost of risk guidance.
Deepak Khullar: Clearly, you are right, there will be cycles, but from where we stand and the quality of the book that we have now, we feel that should be a reasonable number in terms of our guidance. In terms of absolute cost and growth rates, the bank continues to invest and will continue to invest in people, technology, digital, AI, and we will see an increase in absolute costs. But what you have seen thus far is positive jaws in the current environment as well. I think it is the right thing to do in terms of investment. Our cost to income ratio is at a very low level in the sort of mid 20s or 27% odd. So, absolute costs will go up as the bank continues to make investments in these areas.
Jon Peace: Okay. Thank you.
Operator: Thank you. Your next question comes from Shabbir Malik with Morgan Stanley. Please unmute to ask your question.
Shabbir Malik: Hi. Good day. Can you hear me?
Deepak Khullar: Yes, we can, Shabbir.
Shabbir Malik: Perfect. Just one question from my side. If I look at your capital position, CET1 is about 13.8% right now. I think by the end of the year, assuming dividend, it comes down to about 13% or so. What is your sense on your capital position? Do you think you have sufficient dry powder for the growth, or the loan pipeline that you are seeing in 2027 and potentially even going forward?
Deepak Khullar: Thanks, Shabbir. You are right that the CET1 will likely come down in Q4 with the declared dividends or the proposed dividends that comes off as a deduction in the fourth quarter. We expect to see the effect of that. But so far, the organic capital generation has funded the growth and the impressive growth that we have seen of 16 odd percent for the first nine months. We expect to see that organic capital generation funding the growth going forward. You would have also noticed that our RWA density of the book has come down significantly as well. We are moving into, as you can see in terms of GRE lending, government lending, secured lending as well. The RWA density is coming down as well.
Deepak Khullar: I think at these levels, we will continue to be able to fund our growth through organic capital generation.
Shabbir Malik: Perfect. Thank you.
Operator: Your next question comes from Murad Ansari, GTN Middle East. Please unmute your line.
Murad Ansari: Yes. Good afternoon. Thanks for the call and congratulations on a strong set of results. A few questions. Firstly on the loan book growth that we have seen in Q3, obviously a large proportion of that was driven by retail and based on your number, about AED 7 billion on non-mortgage retail and about AED 8 billion on private banking. Would it be fair to assume that majority of the FCNR kind of loans would be booked under private banking? Then related to that, we have seen a AED 311 million, I think, charge within the private banking segment on the provisioning line. Just wanted to see if these are more precautionary driven by the growth in the book, or you are being a little bit more cautious because even in H1 there was about a AED 300 million cumulative charge. That is one. Then on the cost of risk.
Murad Ansari: You have averaged around sub 40 basis points. Your guidance is under 50, that leaves a quite wide range. Is there anything that you see that would require you to raise or build up coverage or provision into Q4 or the Q3 number is, or the nine-month average is more or less where we would expect Q4 to be? Just if there is any thought that you can share on that. Then on asset yields, we have seen decent pickup quarter-on-quarter. How much of that was the retail book adding to yields or has the rate hike also played a part in that, and would you expect that to move up further over Q4?
Murad Ansari: Lastly, if you could just confirm on the management overlays that were booked in Q1, has any part of that been reversed, or you would be looking to reverse that in Q4? Thank you.
Deepak Khullar: Thank you, Murad. Your question on loan book growth on retail, AED 7 billion and AED 8 billion private banking. Yes, a large portion of that FCNR loans are booked both under retail and under private banking. So it goes under both segments. The AED 311 million charge that you are talking about on the private banking. So private banking in our segment also has the private banking businesses, LLCs, et cetera, of the private banking individuals. So some of that provisioning is taken on some of those business loans, and some of that is overlays and general impairment provisioning. The asset yields on the retail book, yes, has contributed to the slight uplift in the asset yield. The rate impact has not yet fully flown through. This was a late September hike, so hopefully some of that will flow through in the following quarters.
Deepak Khullar: I think the cost of risk, I think your question was around the sub 40 basis points is where we are tracking. We have guided towards less than 50. I think that is a fair corridor for us to operate in.
Murad Ansari: You would not see any reason for, because it is quite a wide range from 36 where you are to about 50. I appreciate that under 40 basis points would still be under 50, but you do not see any risk of a major increase in cost of risk versus where the nine-month average would have been? Lastly, if you could confirm on the overlays booked in Q1.
Deepak Khullar: Let me talk about the overlays. Yes, we took some overlays in Q1, and we have written back some of that. But I think more than half of, or roughly half of that still remains as an overlay. We assess them at every quarter. In terms of what we see, I do not think we see anything significant in the pipeline in terms of elevated cost of risk. That is the reason why we brought down our guidance from 60 to 50 basis points.
Murad Ansari: Great. Thank you so much.
Operator: Thank you. Your next question comes from Aybek Islamov with HSBC. Please unmute to ask your question.
Aybek Islamov: Yes. Thank you for the conference call. Thank you for the answers so far. I want to clarify a few bits on the asset quality. The question is on, could you guide us what was your credit general impairment allowance to credit risk-weighted assets in Q3? It looks to me that this reversal of general impairments within your equity led to this ratio drop below 1.5% in Q3. So it would be great to have clarification here. That is number one. Number two, your slide deck, slide number 14, shows the NPL coverage, 156% as of 26 September. Can you remind us what goes into this NPL coverage calculation? In fact, you have footnotes here. I can take this question offline, but I cannot reconcile this 156% number.
Aybek Islamov: It is your IFRS 9 reserves, it is your fair value adjustment that you show on the same slide, and it is also the general impairment allowance within your equity, which goes into this coverage, and it is the NPL number or stage 3 loan number which you report. So, these are the two kind of accounting questions. Thank you.
Deepak Khullar: Sure. Aybek, perhaps on the coverage ratio on the adjustments that we have taken, not the adjustment, the calculation, perhaps we can take that offline, and I can give you the detailed calculations behind that. I think your first question was on the asset quality and the general impairment provisions. Is that correct?
Aybek Islamov: Yeah. General impairment provision to credit RWA. That is the ratio that regulatory central bank monitors, right? It has to be 1.5% of credit RWA if I am correct.
Deepak Khullar: Yeah. There are two elements here. One is the IFRS provisions, which work on an ECL model. That goes into the calculation of the ECL model, and whatever the output is what we take as a general provision. The second element is the central bank requirement to create a minimum of 1.5% of credit RWA as a general provision. The difference between these two, what IFRS output is and what the central bank requirement minimum is, can be taken through equity, or it can be taken through P&L. It is an option. We do take it as a reserve through equity, and we reevaluate that at every quarter, and whatever the number is, we would adjust that. Again, happy to take you through that separately after the call if you wish.
Aybek Islamov: Okay. Yeah. Sounds good. I will get in touch with you. Thank you.
Deepak Khullar: Sure.
Operator: Our last question comes from Edmond Christo with Bloomberg Intelligence. Please unmute to ask your question.
Edmond Christou: Hello. Thanks for the call. Am I audible?
Deepak Khullar: Yes, you are, Edmond. Go ahead.
Edmond Christou: Excellent. I just want to understand the asset yield, the increase in the asset yield. Is it related to FCNR and our credit additions to the book? Related to the same question, my understanding is the UAE is a very competitive market in terms of the spread on the credits. We have seen it with the mortgage origination in the last few years where it has been around 3.8% to 4%. So it is pretty competitive. Now the cost of funding is increasing and margin is under pressure. The question that I am struggling with is how do you see this going into next year? Cost of funding continues to increase, which is most likely given the significant pipeline, the credit growth outlook. Do banks have the ability to increase the spread and offset most or all the pressure on the cost of funding and keep their margin relatively stable?
Edmond Christou: Or it will be a drag on margin because the market is competitive and affordability will be an issue and you need to promote mortgages and other things? Just want to understand this. The second question is, you said you generated 5% credit growth sequentially in the quarters, if I am right. Are you able to replicate something similar in Q4 to offset the normalization? If that is true, this will be coming from the GREs or the pipeline we talk about it in Abu Dhabi. And the last question is on the fair value OCI for the investment portfolio. I can see you have booked around $760 million. We have seen credit spread widening, and the market very volatile so far, sort of continue as it is. What is your expectation in term of revaluation of OCI for Q4?
Edmond Christou: Because I think the impact on that, see if you wanted around 30 basis points. Is it possible to see it double for Q4? Thank you.
Deepak Khullar: Okay. Hi, Edmond. So series of questions there. You are right, the market in the UAE is very competitive and in terms of cost of funds increasing, yes, we have seen that in the first nine months, and as Robbert mentioned, we have seen some slight easing of that in this first month of the fourth quarter. So margin pressures are there, and the competition is also strong. The way we sort of operate is not just to the net interest margin, but we evaluate client relationships based on RoI and we look at the overall contribution of the client, not just from interest income, but from non-interest income as well, which is everything else from cash management, the deposits that they place with us, trade finance, commission income, FX, derivatives, et cetera. So we look at the overall contribution of a client to the relationship.
Deepak Khullar: And that is why when we said earlier on, when we announced our strategy last year, we said we wanted to take up our non-interest income from 32% it was then, to around the 40% mark, and we are close to that now at 38%. So as we deepen our relationship with our clients, we expect that the non-interest income will, I wouldn't say compensate for the margin pressures, but will contribute far more in terms of profit growth in the coming quarters as well. In terms of the 5% sequential growth, yes, we saw that GREs are a major contributor to that growth, and we expect similar momentum coming from the similar sectors as what we have seen in the first nine months. Government spending, infrastructure spending, where we expect to participate in these loans. We are gaining market share as well.
Deepak Khullar: And I think lastly, on the trading income and fair value, that is a factor of the market, so I cannot give you a definitive number or a trend. This is something we look at each quarter, but rather to-
Robbert Muller: No, maybe just to add some numbers to it. So if I look at the mark to market of the OCI book as per 30 September, that was -0.9 billion AED negative mark to market. And on the amortized cost, it was roughly -2 billion AED. Again, this portfolio is heavily diversified in terms of regions, so I think that in itself gives us protection of any spread widening going forward. While I also have to note that the impact on spreads has been fairly limited so far. Also please take into account that the duration of this portfolio is very short. So most of these exposures in this portfolio has been hedged against interest rate risk within the use of interest rate derivatives. The ratio for the entire book is less than a year.
Edmond Christou: Thank you.
Operator: Thank you. We have had another question come in from Xingyu Wang with China Securities. Please go ahead with your question.
Kunpeng Ma: Okay, thank you. Thank you very much. Congratulations on the results. I have one simple question about asset quality. I noticed that there has been a rise in the credit card delinquency rate in Q3. What was the main reason, and is there a higher risk of the conflict carry pressure on the household debt service ratios in UAE? Thank you.
Deepak Khullar: Sorry, was the question on credit card delinquencies?
Kunpeng Ma: Yeah.
Deepak Khullar: The credit card delinquency increase was primarily a timing effect associated with the phased removal of FIRP. This accelerated the recognition of delinquencies that would otherwise have been spread over a longer period. Early stage delinquency formation improved towards the end of the quarter, which suggests that the increase is largely transitory and concentrated in existing delinquency vintages. Again, our credit card delinquencies are still way below the rest of the market. Not just in credit card, but across every product that we track. I do not think this is an indication of a broader trend of increasing delinquencies.
Kunpeng Ma: Okay, thank you.
Kunpeng Ma: Thank you.
Operator: Thank you. We have a follow-up from Aybek Islamov with HSBC. Please go ahead with your question.
Aybek Islamov: Yeah. Thank you very much. Just one brief follow-up. How do you think about the local funding premium that you now have to pay for the deposits since the conflict started? Do you see it as a transitory or more of a here to stay kind of structural funding premium that you have to deal with?
Robbert Muller: Yeah, I think it is a good question, and of course, difficult. I do not have a crystal ball to see how this develops from here. What you do see, of course, is that the loan growth momentum continues. You can even argue that the UAE is doubling down in certain aspects. Of course, ADCB wants to play a role in lending into this development as well. I think we will see some pressure on funding going forward. You can also see it in the dollar SOFR spread that has widened. Again, we are funding some of our dollar positions with dirham funding. That also adds some pressure.
Robbert Muller: I don't think that will go completely away going forward, but I do expect once the regional situation settles, we will see some sort of a normalization, and that will also lead to lower funding costs over a period of time. But again, it is difficult. I don't have a crystal ball to see where this is going to go, but that will be the base case for me.
Aybek Islamov: Thank you. Yeah. Okay.
Harsh Vardhan: Yeah. Deepak, any final remarks?
Deepak Khullar: Thank you, Harsh. I would just like to leave the audience with a couple of thoughts here. The bank has had a very strong performance in terms of record profitability. We are seeing strong growth in both net interest income and non-interest income, positive jaws on the cost to income side, substantial expansion in loans and deposits, and an improvement in asset quality as well. So the strong liquidity and capital positions. We are well-positioned for the coming quarter and 2027 as well. Thank you, and thank you for your time on the call.
