Alinma Bank (1150) Earnings Call Transcript & Summary

Hello, and welcome to the Alinma Bank Q3 2022 Earnings Conference Webcast. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I'll now hand you over to host, Ribal Hachem from Arqaam Capital to begin. Ribal, please go ahead.

Hello, everyone. Thank you for joining us today. This is Ribal Hachem. And on behalf of Arqaam Capital, I'm pleased to welcome you to Alinma Bank Q3 '22 Earnings Call. With us today from Alinma Bank, Mr. Abdullah Ali Al Khalifa, CEO; Mr. Saleh Abdullah Alzumaie, Senior VP and Head of Retail and Digital Banking; Mr. Adel Saleh Abalkhail, CFO; and Mr. Ahmed Sager, IR Manager. Now without any further delay, I will turn over the call to the CEO, Mr. Abdullah.

Thank you. Hi, everyone. Welcome again for our earnings call for Q3 2022. As usual, I will give a high-level review of the financial performance, then a quick reminder of our strategy, current strategy, and the progress of our implementing the strategy. So on the presentation sent to you, on Page 4, just a snapshot of the financial position, the market share, stock highlight and the digital transactions statistics. If you flip to Page 4 -- Page 6, sorry, we had -- on the financing side, we had very strong growth in Q3, almost 7% growth. As you recall, in the first half of the year, we did not have much growth in corporates. To the contrary, we had some small decline. But utilization was very strong in Q3. And obviously, retail continued the strong performance in sales. As a result, we have 11% year-to-date compared to, I think, 3.9% in the first half. In assets, we had also growth of 11% for total assets. For deposits, it's 9% year-to-date. For operating income, we've increased by 17%, while our net income increased by 31%. Our credit quality ratios in terms of NPL coverage or NPL ratio, all improved. NPL ratio stands at 1.67%, and our coverage ratio is almost 156%. As I mentioned, customer deposit is 9% growth, but what's more important is the CASA growth. We have 9% year-to-date growth despite the difficult time in terms of high interest rates, which typically see a migration towards more time deposits. The first 9 months cost-to-income stands at SAR 34.7 million. Our NIM stands at 358 -- 359 basis points. As I mentioned in a recent meeting with investors and analysts, when we see strong growth in loans, naturally, the percentage of CASA will dilute. So despite the fact that we continue to focus on growing our CASA balances, the percentage of customer deposits will dilute. And now we stand at 65.5%. Our CAR is 20%. I would remind that our strategy started from Page 8. As you recall, some of you recall, the bank is aiming to be [Technical Difficulty] Apologies for this technical problem. I was going through the presentation apparently not realizing that we are disconnected. So I don't know where I disconnected, but let me start by quickly reviewing or remind us of the strategy that we have. As I said, we are focusing on being recognized as the fastest and most convenient bank in the country. And if you flip on Page 9, it gives you more details on [indiscernible] on every businesses. So for example, retail, want to focus on building and expanding our affluent and high net worth franchise, attract more and more of the used customers and offer the best customer experience within retail. For corporate, want to be the main bank, not only for large and project finance, but also for mid-corporates. We want to develop and enlarge our SME offering. And we want to obviously focus on cross-selling through the development and cross-sell of cash and trade. For treasury, we want to be the main partner for our corporate needs in terms of hedging and investing as well as growing our FI business and maintain an ALM function, a stronger ALM function. To do this, obviously, we needed to build a digital factory -- on the left side of the presentation. We want to develop our advanced analytics to take advantage of the wealth of information that's available to us. And obviously, the transformation -- cultural transformation required to not only to attract, but also to retain the good talent. On Page 10 of the presentation, it shows you what we have achieved so far. Out of the original 63 initiatives under the strategy, we added 12 more. So there are 75 total initiatives, of which we already delivered 36 initiatives. Some of the functions, some of the developments that took place in Q3, for example, we launched digital credit card and personal finance journey. More than 45% of our IT project are delivered through an agile model. Our female participation work reached 19%, up from 13% at the beginning of '21. In retail we have also introduced point-of-sale financing to leverage the large the network that we have in order to reach more customers in that product. We will also enhanced and automated refinancing. And we deployed 21 more of self-service machine over digital zones. Now every single branch that we have in the country have a self-service machines. And we also launched our auto lease financing. In corporate, we have very strong growth in Mid-Corporate. As you know, Mid-Corporate is something we just literally focused on over the last -- or build the capability over the last 12 months. We have year-to-date 194% growth on the booked asset, 310% growth in unfunded. We have also strong growth in point-of-sale financing 78%, and 37% increase in KAFALAH. In Treasury, we finally launched -- successfully launched our treasury system. And I think that's one of the record time in terms of implementation. So it's already in production and live and being used. We've now managed to increase our forward FX deals into more than SAR 2.5 billion. I know it doesn't sound much, but when you consider we had nothing at the beginning of the year, it's a very good achievement. We're focusing also in selling more products and profit rate swaps. We're expanding more of our customer base and derivatives. This year, we continue to focus on 34 initiatives, delivering of 34 initiatives, some of which is obviously progressing in the automation and utilization of RPA. Obviously, we want to focus on driving employee engagement. We've done this OHI, Organizational Health Index in February '21, and we've done it again literally 10 months later, and we managed to have an increase of 7 points. Typically, organization take 2 years to reach an improvement of 4 to 5 points. So we've done 7 points improvement in 10 months. And that's obviously a result of all the transformation that took place as far as the townhalls, the training, the career developments, the clear communications, that all helped. Obviously, we're trying to improve our focus on improving our new app, our current application. We're launching hopefully within a month or 2 months, our new app that will have a much better functionality and look and feel. In retail, we're enhancing the -- working to enhance the family account ecosystem. We're trying to continue improving our turnaround time on digitizing the whole process, strengthen marketing effectiveness and efficiencies. In corporate, we're looking at adding more products in order to attract more liability. We're also working with the new model to originators distribute, working with some international names as well as our investment companies to develop this new product. That will allow us, obviously, to underwrite more and offload later on and enhance the return on the existing or remaining portfolio through the scaling of the offloaded portion. And obviously, we will also trying to implement a new loan origination system in corporate. In Treasury, obviously, we continue to offer more products and have more structured deposit products. We're obviously focusing on cross-selling, are continuing to sell more profits rate swaps, profit rate caps and forward FX deals. And we're also working with some of the international players to offer some of those products through back-to-back deals to our customers. So that's the efforts that we're focused on this year. And with that, I give the floor to our CFO to take you through a detailed presentation on the financial performance.

Thank you. Good afternoon, all, and welcome again to our earning call for Q3 2022. I'm happy to walk you through the financial performance for the third quarter, and that will be followed by our recent guidance for the remaining of the year. I'll be trying to run this a bit fast to allow more time for the Q&A session at the end. On Slide #13, on the balance sheet trend, we have seen total asset growth YTD 11%, and this was mainly driven by 11% growth in financing and also was driven by also 15% growth in our investment portfolio. The total liabilities, we have seen a growth 13% YTD. And this -- during the 9 months, and this was mainly a 52% increase in SAMA and also Interbank deposits and another 9% also growth in the customer deposits. In the second slide, Slide #14 and the P&L trend, as mentioned by CEO, net profit year-on-year has grown 13%, which is 7% on a sequential basis from Q2. The growth in total operating is coming from 17% growth in total operating income and also less impairment charges to the P&L, 23%, but that was offset by 20% higher operating expenses year-on-year. So if you can see it on the separate chart, funded income has grown 15%. We have seen the non-funded income also year-on-year, we have seen a growth of 23%. And as mentioned earlier, 23% lower impairment charges year-on-year, and this was, as mentioned, offset by 20% more OpEx. And the next slide, Slide #15, a little bit diving deeply in financing, more details on the financing. I've seen on a net basis, growth YTD, 11% on a gross basis, 10% growth in finance in a sequential basis from Q2. Financing has grown 7% on a net. So as you can see from the top right chart, as of September, the corporate portfolio represented 5% from the gross financing and the remaining 25% for retail. Corporate financing include project financing large corporate and also mid-corporate and SMEs as well. As you can see from the top left chart, the breakdown in the growth by segment. So we continue to see strong growth in mortgage, 25% YTD, and that's an 8% from last quarter. Personal financing, which has included the credit card as well, 10% growth on a sequential basis, 31% YTD growth. As mentioned by the CEO is start to see during Q3 a pickup in the corporate financing, bringing the corporate growth YTD to 5% and the SMEs also financing continue to be -- to have a strong growth by September YTD 21%. In the next slide, on the deposits. As mentioned earlier, CASA continues to grow. We have a 9% growth of YTD in CASA given all the challenges. But despite all the challenges, time deposits, obviously, with the financing growth increased by 10%. As you can see from the chart in the center, CASA as a percentage of total deposits as of September represents 65.5%. This is down from what we have seen in the first half, where this percentage was around 71% as more time deposits is being added to the deposit base. On the next slide, Slide #17, on the NIMs and the income from financing and investments. We have seen a strong pickup in the yield income. The YTD financing growth -- financing net income growth of 21%, 33% from investment. But as you can see from the graph in the center of this slide, the improvement in a sequential basis on the NIMs for the bank, very strong growth, 40 basis points, reaching the quarter-to-date for Q3 NIMs standing at 3.89. As you might remember, our exit NIM last year, December 2021 was 3.42%, looking at the YTD NIMs as end of September standing at 3.59%, that's a 17 basis points NIMs expansion YTD. In the next slide, that relates to the fees and other income. We have seen lower on a sequential basis, 23% in the non-yield income, but that was mainly a drop in the other income. But looking into the top right chart, fees from banking services has improved -- has increased year-on-year 7%, and that's basically a 17% growth in income related to fees from banking services, but that was offset by an increase in fees related expenses. 30%, as mentioned, for volume and other cross-sell that was mentioned by CEO, 30% FX income growth year-on-year. The composition of the fees from banking services and you can see from the bottom left chart, fund management represented 32%, 33% from the fees from banking services from card services, state finance represents 10% and the brokerage fees of 9%, and the remaining is for others. In the next slide, Slide #19. In the operating expenses, as you all know, the bank is running through an investment cycle, and we have seen 20% year-on-year growth in OpEx. The increase came from 17% relating to salaries and employee-related expenses. We have seen a pickup in depreciation, 11% year-on-year, as we capitalize most of the projects and other G&As increased to 27% year-on-year. So as you can see from the graph in the center cost-to-income ratio, it's 1% on a sequential basis dropped from Q2. However, it's higher than where we were in the same period last year. So as of September, cost-to-income ratio stands at 34.7%. On the next slide, Slide #20. On the impairment for financing. So the impairment charges during Q3, an increase of 10%. And year-on-year, the impairment charge increased 21%. The composition of the total impairment allowance, 15%, relates to retail, but obviously the majority of 85% is relating to corporate. Cost of risk stands at 74 basis points. Cost of risk for the 9 months improved by 33 basis points if you look at the cost of risk as of September last year. On the next slide, Slide #21, on the NPL and NPL coverage ratio. We have seen NPL ratio decreased by 8 basis points during the 9 months to reach 1.6% and also an improvement of 60 basis points year-on-year. Also in the NPL coverage ratio, NPL coverage ratio increased by 9.1 basis points per thousand year-on-year. And also if we see Stage 1 coverage remains stable at 50 basis points. Stage 2 coverage is at 18.9% Stage 3 coverage as of September stands at 56.1%. In the next slide relating to the capitalization and liquidity. Obviously, with the growth that we have seen in the portfolio, including the pickup in the corporate financing growth during Q3, with the increase of credit risk-weighted assets, the CAR stands at 20.1% as of September. If you can see also in the LCR, LCR declined by 2 points per thousand year-on-year, and that's due to the increase of just in the shorter time deposits and also the increase, as we mentioned before, 52% YTD growth in the interbank basements. LDR stand at -- regulatory LDR stands at 87% by end of Q3. And also NSFR, NSFR has decreased 6.2 points per thousand year-on-year to reach 103.2%. That's due to the increase in corporate financing, as mentioned, with slightly longer maturity. And also, that's also followed with an increase in short-term time deposits and also interbank placements. The next slide is to give the guidance for the remaining of the year. On the financing, we have seen, as mentioned, 15% growth year-on-year. And as you may recall, we had a mid-teen guidance following our Q4 results last year. We have revised this in Q2 for low teens. And with the pickup we're seeing in corporate, we are revising the financing growth now for high teens. All other guidance has remained unchanged. Net profit margin stands at 3.59%, as mentioned, 14 basis points year-on-year, which is YTD 17 basis points. So the guidance remains 20 to 25 basis points expansion. Cost to income ratio stand 54.7% and the guidance unchanged to be below 55%. Return on equity, 14% and the guidance remains unchanged above 13%. Cost of risk, 74 basis points and the guidance unchanged for the range to be 65 to 75 basis points. Common Equity Tier 1 16% and no change to the guidance, 16% to 17%. Just to remind you, there is in appendix to the presentation, a couple of the slides there is an update to the ESG that we are working on now and -- it's already part of the appendix. With that, I will leave it for the Q&A.

[Operator Instructions] Our first question comes from Waleed Mohsin from Goldman Sachs.

Three questions from my side. First, on loan growth, you had a very good quarter. And when we look at the breakup, not only did you grow your corporate book, but there was good growth in the retail side, SAR 3 billion. I was wondering how do you think about the profitability of retail growth in this environment? So what I'm thinking is, let's say, at the end of September or maybe like, let's say, August, September, a bank originated a personal loan, SAIBOR plus 50 or SAIBOR plus 100. And it's a fixed rate loan. But given the move in SAIBOR, it seems that that loan is now not profitable if this was funded through a time deposit. So your thinking on retail origination would be very helpful. I know not all of the loans are funded, obviously, a large part is funded through CASA. But still, given where SAIBOR is, it just seems that retail origination is becoming less and less profitable. So your thoughts on that would be very helpful. Another question on liquidity. I mean your regulatory LDR is now 87%, closing in on the 90% cap. I was wondering how you're thinking about liquidity and if you expect any action from the Central Bank to ease the current liquidity situation with 6 months SAIBOR at 591 today and 12 months beyond [ 600 ]? And then last and final question, if you could comment on the decline in Stage 3 coverage. Is it mainly due to a change in loan -- mainly due to change in the loan book mix, which is driving the Stage 3 coverage lower because certain NPLs are asset-backed and you don't need that?

Thank you, Waleed. I will leave the first question to Mr. Saleh, but I'll take the second and third. In terms of liquidity and the LDR being at 87%, I did communicate multiple times in earnings calls and meeting with investors that we try to be efficient in liquidity without having to take obviously risk on the level of liquidity. And I said that we intentionally we manage our liquidity to be within 85% to 86%. Obviously, why 85% to 86% because that producers that need to take expensive time deposits, especially nowadays, you've seen how expensive they are as well as leave enough margin for any last minute unexpected withdrawal of deposits or utilization, expected utilization on loan. And that's what happened. There was some last minute reduction in deposit 87%. I think 87% is beyond our normal range, but we feel comfortable that that is under control. We're going to continue to target 85% to 86%. Obviously, if they're getting cheap deposits like CASA and so on, if the ratio drops declined significantly, I don't mind, but we don't want to take expensive term deposits just to show lower LDR. And I think you also had a part of whether some may inject liquidity or not. They've done this before. Are they doing it again? I don't know. We've seen some statistics like reversal volume amounts declining to SAR 7 billion. That may be an indication. But we have to be fair with the Central Bank. Central Bank should not be seen as demand funding or the main source of funding. It should be for stability in the system and so on. So it may or may not, we'll have to wait. I think we also talked about decline in Stage 3 coverage. We had write-offs. And that's the main reason. That's the write-off. Obviously, when you have a loan there sitting at Stage 3, before write-off it's 100% already provided for. All of a sudden the amount as well as the provision disappears. So naturally what remains dilutes the percentage. But that's -- I think it's all under control. You've seen our overall coverage ratio improved. Our NPL ratio declined. I'll leave the first question to Saleh. You can take that question, about the long growth and stability.

I think from the beginning, we talked about this many times in the previous earnings calls. As a bank, we did not go on this price war from the beginning. So the origination and the new sale profit rate is very well within our budget and within our strategy to 2025. So it is a very healthy pipeline and the new sales rate is well above the [ mix we have today ]. This is one. We are focusing in the new high-yielding products, for example, the credit card. So we have very good sales and the portfolio has grown significantly. This is two. Three, also, we bought almost 10% of our portfolio in retail is repricing – repriceable. So we can reprice every 3 months. This is going to go to the private banking customers. We could reprice the construct every 3 months. And this is 3. Number four, in retail, the top up could happen after 6 months. So even if we book till at the beginning of the year, now we can top up with a very high -- with a higher rate. And we put in mind that the lifetime of the retail, especially in the personal loan is only 18 months maximum. So the customer either do refinancing for full amount or he keeps top up. Also, we're having a new product for more top up. So we could reprice much faster than before with the different sort of products that we have today.

Just maybe I can just have 1 follow-up on liquidity, on the deposit side. What trends are you seeing currently given the liquidity tightness? Are you seeing banks -- competitors offer rates above SAIBOR? Is that the trend on the time deposit rate? Or are banks being a little bit more mindful in terms of what they're offering on the time deposit side?

No. We -- obviously, I think that was a continuation of what we saw before. We still show -- we still see banks offering and we are also included. I'm not saying we're totality exit, but we have to take deposit, we have compete. So we've seen banks north of 30 basis points, 40 basis points sometimes to get deposits. And if you look at the market loan growth, with the exception of one bank, every bank had a double-digit growth in loans, whole industry increased 15%. That's a strong growth in loans. That typically, obviously, will not see the similar growth in CASA, especially with this high interest rate now. So naturally, there's a clear competition on deposits, and that's driving the cost. And that's why one of the reasons why we did not actually upgrade our NIM outlook. We're doing very well in terms of the asset side, but obviously cost of funding is eating up on this NIMs, as well as in certain cases you have to obviously -- with high interest rates, some customers are no longer accepting like the normal spreads that banks charge. So there everybody is shopping around and getting good rates in terms of spreads, and we have to compete in some of those loans.

And then the margin guidance, as you said, you did not revise, but on a sequential basis because your exit rate for the quarter is significantly higher than your 9-month rate. Do you expect sequential expansion? Or do you expect now NIMs to start plateauing?

Well, as we guided for the remaining of the year the 20% to 25%, as you likely said, we have seen the quarter on a sequential basis, 40 basis points that's significant expansion and the NIMs in a quarter-to-date. But most of the -- and that's again what we have also maybe mentioned earlier that Q2 and Q3 included most of the repricing that we were expecting in our corporate portfolio. So there will still be some repricing. It's might not be as significant as we have seen maybe in Q3. And that's maybe along with the reason mentioned by the CEO on the deposit mix and the customers' behavior. That's why we are keeping the guidance as is. So we have 17, as mentioned, 15 basis points YTD. So the guidance is at 20% to 25%.

Our next question comes from Nida Iqbal Siddiqi from Morgan Stanley.

I have 2 questions. My first question is on the funding side. A bit of a follow-up to what we've been discussing so far. Given your LDR ratios are now at 87% and the strong loan growth aspirations that Alinma has. How are you thinking about funding sources for Alinma until 2023, '24? So that's my first question. And then secondly, on a follow-up on the MIN side of things. Given the increase that we're seeing in funding costs, do you see your NIM sensitivity that you provided earlier this year to be lower going forward? And if so, any quantitative color on that would be much appreciated?

I think, if you can just repeat the last part. I'm not sure I follow up, the last part of the question.

So has the NIM sensitivity for Alinma Bank decreased now versus the start of the year to rate hikes, given the increase in funding costs that we're seeing? And if that has increased, would you be able to decrease, sorry, would you be able to quantify what the latest NIM sensitivity is to rate hikes?

Okay. Thanks for your questions. On the first part about the funding side, I was talking about the number of initiatives we're working on. Some of them is also focused on the funding side through diversification of sources fund through also with a longer duration fund deposits and funding. We're talking to multiple international partners or clients or -- not clients -- finance institutions to see if we can sort of work out uncertainties that will provide long-term funding. We've also -- we all have on the table also the ability to issue sukuk support most likely not capital instruments. So this is obviously something that we look forward to continue our growth story. We're also, as you know, focusing, as you've seen already, despite the competition, despite the price increase in SAIBOR, we still managed to increase our CASA balances. Certainly, I am not ignoring the issue of liquidity. Liquidity is, as I mentioned in so many meetings, to me the biggest challenge is that is faced by banks is about liquidity. And I think the demand is a huge coming on loans. So liquidity will be more important. The issue is obviously very well known by the regulator. We recently -- as banks met with the Minister of Finance and see there could be a way to improve liquidity in the markets and attract maybe more international funding coming to the market. In terms of sensitivity, I agree. I think at the beginning of the year, there was competition in deposit, but not as intensified as now. The rate itself did not have -- at that time did not have -- was not high enough to impact the composition. If you recall, we were growing our CASA as a percentage of deposits. But on the rate, CASA is like in the 5 months, 3 months now, it's 560 something. Clearly, that is encouraging customers to migrate into deposits, time deposits. You've seen some news about some institution issuing sukuk at a very attractive rate, but also attracted more of the migration. The competition on not only the composition of deposits, but also the competition of deposits, meaning banks are paying more than the benchmark, have an impact obviously in the NIMs as well as the -- as I mentioned also, there is also competition on the pricing of the assets and that's for some banks, especially with certain customers, they are looking with 560, 565 SAIBOR. I can no longer accept 150 basis points or 140 basis points that used to be when the rate was very low. So that is something that is obviously some banks are offering lower pricing of corporates, which in certain case we have to compete. So yes, the dynamics have changed compared to the beginning of the year, and I agree the sensitivity will be less.

Can I just follow-up with one more question on the loan growth side of things. It's quite interesting that you lowered your guidance for loan growth in the second quarter and have now increased it again. I just wanted to understand better kind of what was the driver of the positive surprise during the quarter? Did competition decrease? Because that was cited as one of the reasons for the weaker loan growth in the second quarter. Or did demand surprise positively?

Sure. The reason we reduced our guidance is that we expect -- at the beginning of the year we were expecting good corporate loan growth. What happened is not only we had no growth, we had I think almost SAR 500 million lower in corporate. We're still positive about the longer term, but what we saw and experienced during Q3 was a very strong utilization. Almost half of that came through project finance, for example. And as you know, project finance is one of the inheritance strength that the bank has. And the level of competition is much less when it comes to project finance. Normal corporate loans, you are competing maybe with 10 or 11 banks, 10 listed and 1 not listed. And when it comes to project finance, you'll find we're only competing with maybe 2 to 3 max. So the level of competition is less. And that has contributed to this. And then if you look at the outlook for Q4, we talk to our team. We looked at the potential utilization, the likelihood of the utilization as well as obviously from the corporate side from mid-corporates, from project finance, from SME and of course from retail, and that's why we upgraded our guidance to be high teens.

Our next question comes from Naresh Bilandani from JPMorgan Chase.

It's Naresh from JPMorgan. 3 questions, please. One is, first of all, congrats on your treasury system enhancement. I mean, clearly, I know you put in a lot of effort in this direction this year. Could you please just elucidate on how should we think of the liquidity and the product cross-sell benefits that could potentially come from this upgrade. We've seen similar developments in some of your peers, banks, peers a few years back, and that's clearly helped them a lot. Clearly, I think some guidance on this side would be very helpful. That's one. Second is, also, I think on the project finance question that was asked previously, is this project finance growth related to Giga projects? Or is that not yet the case? How should we think of the Giga project-related growth going into 2023? And my final question is just a follow-up to the reply that Adel offered in Waleed's question on the Q4 NIM. Do I understand that right that you mentioned that the majority of the repricing is done for now and in Q4, the NIM could come under somewhat of a pressure on higher funding costs first. But is that just a timing impact and the higher SAIBOR could be better reflected in, say, Q1 next year? Or have I not understood this completely. If you can offer some clarification on that, that would be super up.

Obviously, on the treasury system, the success of going live will allow us -- and I think I was alluding to or mentioned specifically some maybe offering some creative structured deposits that offer potential high upside for our customers, reviews of options and obviously do it may be back to back with other banks or you take. So it's something that we will be able to offer. Without a proper system, it is very difficult to do. We can offer multiple structured deposits. Hopefully, that will improve the diversification of the funding and maybe attract new funds to the bank. Project finance, no, actually, we have not yet seen strong demand or, let's say -- let's rephrase that. We did not see strong utilization coming from Giga projects. We have some potential strong -- big projects for employees in Neon. There was so many sites. It's a sizable project. Some of our customers are bidding forward and they got awarded. But that's more mainly that utilization maybe -- it's a 2023 story rather than Q4. And I leave the NIMs questions to our CFO.

Yes. So Naresh, back to the NIMs question. If you recall, Q1 this year, our NIM for the first quarter, it was a 0 movement from our exit NIMs in 2021. We have seen an 18 basis point improvement in the second quarter from the year-end and also Q1. And this is, again, what we have been talking about on the repricing for corporate and where the majority of the reprising is going to take place during Q2 and Q3. And of course, even if there are some repricing take place in Q2, even it happens, some of that will take place towards the end of the second quarter. So we will have a full quarter impact for the Q3. So it's not surprising to see the 40 basis points is -- and also the fact that we are now looking at the YTD NIMs. As I mentioned, you are standing at 17 basis points as of September, and the guidance, as we mentioned, 20% to 25%. Taking into account, again, not only the improvements that will continue NIM pricing, but also the customer behavior changes and also the increase in rates and to what level the cost of funding will be hurting the NIMS towards the yearend. So that's why the guidance remained unchanged from last quarter.

Our next question comes from Rahul Bajaj from Citi.

This is Rahul Bajaj from Citi. 3 questions from my side, if I may, please. The first one is on the OpEx. And I've seen very decent 20% Y-o-Y growth in 9-month OpEx, which I understand, as you said earlier in the call, is driven by investments in the staff cost and other kind of system enhancements. Just want to understand, as I look forward into the next couple of years, at what rate should I think OpEx would normalize and when? It's like a high single-digit or kind of 9%, 10% kind of growth rate in 2023 and had a reasonable kind of normalized OpEx growth? Or you think this high pace of investment would continue at least for the foreseen future? So that's my first question. The second question is on non-REDF mortgages actually. So earlier this week, one of your peers actually made a comment that we see easing opportunity in the non-REDF, nonsubsidized mortgage market. Just wanted to hear your thoughts around this topic and then what are you seeing in terms of subsidized versus nonsubsidized mortgages, probably with no rate caps, non-REDF mortgages become more attractive to banks in the current environment? So that's my second question. And my final question is on the overall strategy. I see that you talked about your retail, corporate and treasury business enhancement. And kind of following up on the question previously asked by Naresh, how should I think about the business mix evolve over the next 2 to 3 years given all the enhancement programs? So if I look at your current asset mix, that has roughly give and take 15% retail, 55% corporate and 30% treasury. I mean if I kind of pass forward to 2024 or when '25, do you think the business mix will be very different, asset mix will be very different? Or in your view, it will be similar to what we are at today? So those are my 3 questions.

So I'll be taking the question on the OpEx. So as mentioned before, as you know Alinma is currently running an investment cycle relating to the strategy execution and also the need for investments across the bank operation. So when you say it just to correct, the 20% growth was year-on-year, not really YTD's. It's not only during the 9 months. That's just to correct the percentage. Definitely, last year and including this year, OpEx has increased. We're talking about the salaries and the employee -- related to the G&As. There, a part of these expense, as I mentioned, it's an investment toward the future. But also some of the investments as we are mentioning, there will be some expenses that is coming related to telecommunications and some message that needs to be done and other business as usual expenses. So expenses for 2021, 2022, and obviously, an investment done in 2022, midyear or towards the year end will definitely have a full in impact on these assets. In the longer term, we wouldn't be thinking to see the same percentages of the growth for sure, that you have seen made in a couple of years back. But definitely, there will be some full impact of what I mentioned some of the investments that we have done this year. Most importantly is what we are looking for is the cost-to-income ratio. And this is the ratio that we're monitoring closely, and that is at -- as we mentioned in the guidance, we will be giving also 2023 cost to income ratio guidance following Q4 results. So that is also something that's also continued -- expected to continue to improve. So back to the question, the longer term, medium to longer-term OpEx growth shouldn't be there compared to what the bank had to invest given the current investment cycle in this year and what happened last year. Second questions, Saleh, about the non-REDF?

Yes. I think from the beginning, we did not really go on the price for the REDF. I know some of the banks, REDF portfolio is almost 90%, 97% of our their mortgage portfolio. The case in Alinma is totally different. We have a very good size portfolio for non-REDF where we can -- the price is not capped. And also we introduced commercial mortgage loans. This is -- will add to the non-REDF portfolio. So one of the products that we have also called non-REDF is equity release. So this is what customers who have already owned house, so we can mortgage -- give them mortgage against the ability of their property. Today, almost 25% of our portfolio is non-REDF. And I think we are one of the lowest banks in REDF mortgage portfolio.

Rahul, on your last point about how do we look at the business mix going forward, and I mentioned this in a couple of meetings at least. When you look at the -- what's coming because of the 2030 vision and which call for private sector participation, private sector doing a lot of the projects that the government used to finance, plus the new sector coming to the country again through private sector participation. Clearly, that's a huge amount. I've always mentioned that the combined lending capacity of all the banks will not be enough and that's why we should say we should expect to see more capital market activity and more, obviously, international money coming to the country. So in a nutshell, the retail growth continue to be very healthy both on mortgage and in consumer loans, supported obviously by continuous reduction of unemployment, meaning more bankable customers coming to the market as well as demographics is very supportive to retail growth. But the size of expected credit for corporate is going to be big. So I expect in 2, 3 years, even purer retail banks, you see the weight of corporate loans is growing and growing fast. So I don't think with this focus in retail that banks will be close to like more balanced 50-50. In fact, the 75% I expect, even with good growth in retail that this percentage of corporate loans will be increased even further.

Our next question comes from Aybek Islamov from HSBC.

So yes, I wanted to ask you about the asset quality, the loan policy. Quite decent write-offs you have in the third quarter and in the second quarter. I think they're north of 1%. So I guess that kind of says that if you were not to write-off these loans, your NPL ratios will be higher in the last quarter. Could you elaborate on where the write-offs are happening? That's the first thing. Secondly, it looks like your loan loss reserve to loan ratio has fallen. I think there was a comment earlier that your NPL coverage by Stage 3 reserves also declined a bit. I mean how do you think about your loan loss reserve ratio? Like what kind of level is comfortable for you? And how do you think about the asset quality outlook overall?

Obviously, write-off is a normal process that banks do. We did not go aggressive in write-off. These are loans that's been there for a long time. So write-off, obviously continue our legal efforts to recover. We had also during the quarter, we had some settlements not just in write-off. We have good settlements that happened. We're expecting very likely more settlements to come in Q4. That's why we're -- towards the top end of the range, a 74 basis points in terms of cost of risk. And we have to maintain that our guidance for cost of risk to between 65% to 74% -- 75%, knowing there's also going to be potentially more settlements coming in Q4 and most likely more settlement coming in the first half next year. The reason for the decline in coverage and coverage Stage 3 is basically because of write-off. We continue to be conservative. If you notice, we don't like huge volatility in terms of cost of risk. So we're always being conservative even if things are rosy, and they are rosy now. We still want to build enough capacity in terms of provision and be prudent in terms of being -- of provisioning for credit losses. Hope that answers your questions, Aybek.

Yes, it does.

Our next question comes from [ Chirag Gohil from FICO ].

This is Chirag Gohil from FICO. My first question is, again, a continuation of the previous question which people asked. What is your loan growth pipeline over the next few quarters? Because even at this rate if you can grow at this kind of pace and have such no asset -- NPL ratio, I just want to get a sense. And the second part is also a continuation of this. It's a hypothetical question. So if the interest has actually gone up by say 3% over the last 6, 7 months, if the customer can actually still service the loan at this rate very effectively, under charging them, say, 6 months back or competition would have come in and would have capped your interest rate. I'm just trying to understand whether the corporate borrowers could have paid much higher rate than this? These are my 2 questions.

Sorry, the second question is not clear to me. Can you explain it, please?

Yes. The second question, yes, it's just a hypothetical question. I'm wondering that even at current rate, if customers are willing to pay these kind of rate and not default. So hypothetically, had the interest rate not gone up, would you have still increased your interest rate or competition would have come in? Just to get a sense about the affordability of the customers, that's what I'm trying to understand.

Will cover the first part, the loan growth. It's a bit clear when we give guidance in the Q3 and we only have 1 quarter to go. And we updated the -- upgraded the guidance to the high-teens. Clearly that in a way you can almost calculate the expected growth in Q4. I mean if we have 2 quarters to go, then may be a bit difficult about next quarter growth, but we only have 1 quarter to go. We give guidance only for the full year. We don't give guidance for the first quarter next year. Until we finish obviously, our business plan, our earnings call for Q4, that's a time we give guidance for 2023 loan growth as well as others. The second question, I'll try to answer it as I maybe understood it, maybe I misunderstood it. But typically, a customer have -- when you look at the debt as a multiplier of a number of -- compared to the interest expense, typically, customers who have like your coverage ratio is like 3%, 4%, whatever is obviously much less impacted. I mean, obviously, their margin declined, but nonetheless they're not going to go on red or be able -- not able to serve the loan. So I think that -- and that's why we're looking at our current portfolio of customers and see the ones that operate in a very thin margin, and then we can have to -- our strategy maybe how do we reduce pricing, do we exit if possible? Some of that we'll have to assess. But I'm not sure I fully understand your second part.

No, it is clear. It's quite clear. So you're saying the customers are still -- are not very far from a very comfortable levels. They are slightly getting uncomfortable. That's what I would…

Of course. When interest goes from 70 -- SAIBOR 70 last year to now 560, of course, that's a big jump. Don't forget also some customers -- some of our customers or some other corporate customers do also have hedging, not necessarily because of the outlook or the view of interest rates. Just some CFOs prefer to see stable cash flow, outflow. So they do hedging. And whoever did it, obviously benefiting a lot from that hedging.

That's clear. And just one quick one on the non-REDF. Roughly how much additional interest you can charge in REDF, approximately?

Well, we don't have limits. You just basically have free hands. We have to look at competition, other offers in the market. But you're not -- you don't have a [indiscernible] as far as price.

Our next question comes from [ Ahmed Iqbal from VCP ].

Congratulations on a very good set of results. I just have -- like a very simple question, so. What is the marginal cost of funding now in the system? So is it sub-SAIBOR, is it above SAIBOR, if you could please explain that? And secondly, Mr. Abdullah, you've been in the industry for -- you are veteran in the industry which cannot be said about a lot of the other bankers. So I'm just wondering in this tightening interest rate cycle, is it different than compared to 2004, 2005? And how is it different, I mean, ask this question, I mean in terms of cost of risk, asset quality evolution and also the kind of stable level of NIMs in case interest rates globally stay where they are at the moment?

2004, I don't think I was in banking sector. No, sorry. Look, we've seen the cycle multiple times, if you compare it to for example something even more recent. 2016, SAIBOR also increased significantly compared to the year before. At that time, what banks did is they turned around and increased the spreads on the asset side. So they went back to their customer and say, look, "We have -- our cost of funding is increasing. We have to pay a lot more now on deposits, and we have to pass some of this." And that was the whole industry acted, not in a cooperation, but it makes sense that's a normal process that we do. And that's what happened at that time. 2004 -- again, 2016, by the way, both cycles, we did not see the major demand on credit that we see nowadays. After really the introduction of Vision 2030, especially over the last, I would say, 18, 24 months, you can see a lot of the demand coming. I already commented about the capacity of banks. As far as cost of funding, as I mentioned, there is competition because of loan growth and banks are paying more than SAIBOR in all cases. Obviously, sensitivity about the customers towards a basis point or a few basis points, it depends on the sophistication and the -- of some of the institutional depositors. These are very rate sensitive. They shop around all the banks in the market and they get the best rate possible. Some are less sophisticated, so they deal with maybe with 2, 3 bank, and they'll be able to compete better there. But truly as cost of funding, I mean they increase, getting deposit is more than the current SAIBOR for sure. Hope that answered your question, Ahmed.

It does. Just a follow-up question very quickly. And do you expect the margin cost -- like let's say interest rates remain where they are. Do you expect the marginal cost of funding to increase over time simply because at the moment, it seems like all the subordinated debt and Tier 1 issuances are coming at tight spreads. So it's the more Saudi bank borrow in the kind of the capital markets, the incremental cost of that will be even more?

True. I mean, because the outlook for loan to continue to grow and grow strongly and that means need to be funded because of the LDR, for example. At the same time, the loan to credit deposits, but there are other factors that is liquid to the market. Seems like, for example, taxes is collected on a monthly basis. You have also companies, including banks, issuing instruments. Also the normal migration, the natural migration to see from customers, whether corporates or individuals move -- organization moving their money from being sitting either in current accounts now into time deposits. All this will make more pressure on liquidity for sure. And as I said at the beginning of this -- and I said it multiple times, the biggest challenge then, possibly the real challenge that the Saudi Banks face is liquidity. I don't think it's quality. I don't think it's a lack of demand. I don't think it's technology and so. It's really the liquidity side.

That is now the end of the Q&A session, and this concludes the Alinma Bank Q3 '22 Earnings Conference Webcast. Thank you for joining us today. You may now disconnect your lines.