Alinma Bank (1150) Earnings Call Transcript & Summary

Good day, and welcome to today's conference. I'll now turn the call over to Waleed Mohsin. Please go ahead.

Thank you much. Good day, everyone, and thank you for joining us today for Alinma Bank's FY 2022 Earnings Call hosted by Goldman Sachs. It's my pleasure to welcome the Alinma management team represented by the CEO, Mr. Abdullah Khalifa; the Deputy CEO and Head of Retail and Digital Banking, Mr. Saleh Abdullah Alzumaie; the Chief Financial Officer, Mr. Adel Saleh Abalkhail; and the Head of Investor Relations, Mr. Ahmed Sager. Please note that today's call is being recorded. The call is intended for investors and analysts only, and any media personnel should hang up at this moment. So without any further delays, I will pass on the call to Alinma Bank's CEO, Mr. Abdullah Khalifa.

Thank you, Waleed. Welcome, everyone. We will, as usual, will take you through a quick presentation and then later on will open the floor for your questions. The presentation starts with Page 4, which gives you an overview of the market share, financial position, stock highlights, and digital snapshot. Page 6 talks about the overall view of the financial performance. Adel following my presentation, will give you detailed presentation on the financial performance of Q4. But our loan growth reached -- increased by 16% to reach SAR 146.5 billion, slightly lower than our guidance of high-teens. The reason for this is we had a few loans that totaling about SAR 1.4 billion. That was highly expected to take place and booked before the year-end. Unfortunately, due to maybe documentation issues and so on, it was actually booked after the New Year, after the end of the year, as well as an unexpected repayment of SAR 100 million received in the last few days before the year-end. That's a swing of SAR 1.5 billion. If we add this SAR 1.5 billion to the portfolio, we would have increased our loan by 17.2%, which was the -- in line with our guidance. We had a strong growth in total assets, 16%, a 20% increase in our operating income to reach SAR 7.963 billion, while our net income increased by 33% to reach SAR 3.6 billion. Our NPL ratio increased to 1.94% and our coverage ratio declined to 136%. And maybe that's an opportunity to talk also about the cost of risk, which is not in this slide, it will be coming later. But we were -- our guidance for cost of risk was 65 basis points to 75 basis points. We closed the year at 85 basis points. And the reason behind this miss is that we were fairly confident about full recovery of Stage 3 exposure -- sizable Stage 3 exposure through the sale of collaterals. Auction was set up towards 27th of December, with the most conservative valuation enough to fully cover our exposure. So naturally, we put a reserve price. Unfortunately, due to the short time in terms of marketing campaigns on this auction, we didn't get the right price. So, it seems like now '23 story rather than '22 recovery. At the same time, there was an exposure in Stage 2 that was under discussion for restructuring. And due to the slow progress on the discussion it was decided to be prudent and move that exposure to Stage 3. As a result, we ended up with higher cost of risk and higher NPL ratio. Our customer deposits increased by 20% to reach SAR 145 billion, but more importantly, the growth on CASA, we managed, despite the high interest rates, which, as you know, always means a migration from current into time. We already -- we managed to increase this to -- by 4%. I think today, I saw the 2 largest banks published financials and both of them show a decline in current accounts. So, we don't see the industry yet, but I would imagine that industry, you see a similar trend. Our cost to income came in line with our guidance. Our guidance was to be below 35%. We closed the year at 34.7%. Our NIMs expanded by 20 basis points to reach 3.62%. 20 basis points was the lower end of our guidance. Our guidance was 20 basis points to 25 basis points. Later on you'll see in Page 17, how SAIBOR moved since August. And the big growth in SAIBOR, it was around 3%. But towards the end of September, start picking up end of October, it reaches close to 5%. And as you appreciate, when interest rate goes up, the first thing that can happen to you is your cost of funding goes up faster than the benefit of repricing your assets, as it takes longer to reprice. Our CASA, obviously, is at 50% diluted when I mentioned in Q2 that because of the expected growth in loans, we will have to take more time deposits and a result that's been diluted to 56.8%. But with this current interest rate, I think it's a good rate in a way. Our CAR reached 19.8%. So, I guess we have better efficient capital now. Now in terms of the strategy, which starts at Page 8. Just a quick reminder of our current 2025 strategy. One of the headlines, obviously, we want to be the fastest and most convenient bank in the country. We want to be the best service provider by being #1 Net Promoter Score and as well as being #1 Employer of Choice. On Page 9, give you more details by business. But Bank-wide, we wanted to build a digital factory, we wanted to enhance our analytics capabilities and also achieve a culture transformation that will allow us not only to attract but also retain the talent, the top talent in the country. In Retail, we are focused on building our affluent and high-net-worth franchise. We want to focus on the youth segment and be the best customer service provider through best NPS, Net Promoter Score. In Corporate, we want to be the main bank not only for large corporates but also for mid-corporates. We want to develop a high-quality SME franchise and as well as growing our cash and trade businesses. In Treasury, the top priority was obviously in addition obviously to margin liquidity and ensure sufficient funding in terms of assets. But we wanted to be also the main provider for all our customer needs, whether it's hedging their interest risk or FX risk. On Page 10 talk about some of the progress. We already achieved 54 initiatives out of total initiative of 76, so it's a very good progress. Some of the activity that took place in Q4, as an example, I'm not going to go one by one, but we launched auto loans, auto lease, which we didn't have before. We're leveraging now our branch network through offering Point of Sale at a smaller scale, smaller merchants, the main Point of Sale business within SME. But as you know, around the country, there's smaller merchants that they're in need for such products and we're progressing very well. We're also, bundled products and start selling bundled product for SME other than derivative products. We achieved 270% growth in assets, mid-corporates and even higher growth, 467% growth in non-funded, 108% growth in Point of Sale and 46% growth on Kafalah. And we installed and we went live with a new treasury system and we started selling more derivatives. And the story I think will give you bigger in terms of the size of properties, well, for example, in Q1, as we did a sizeable deal this month. Some of the things that we are working on during 2023 will be 22 initiatives will be starting in '23. And some of them will obviously finish in '23, some will extend to the year after later. So, in terms of Bank-wide, we want to continue to expand utilization and usage of robotics. So, on both the efficiency and the turnaround time for all our products. We want to improve the retail app, we're finalizing now, we are going to go live for the new retail app, as well as by the end of this quarter, we're going to launch our well-anticipated Youth app that I talked before. On Retail, we want to enhance the family ecosystem. We want to launch and will implement a new loan origination system for corporate, we want to digitize mortgage journey for our customers. We already digitized personal finance, auto lease and credit card, but we will continue to digitize also the mortgage business, while develop -- continue to develop our Originate-to-Distribute model and we want build an integrated portal for all corporate segments, which include SME and mid and large. In Treasury, we are developing more structured deposits. We want to increase the duration of some of the liabilities. So, we diversify the funding options through inter-banks and through our customers. That's a quick presentation on the overall financial performance as well as strategy. And now I give the floor to Adel to take the detailed presentation of the financials.

Thank you. Very good afternoon for you all, and thank you for again joining us on our earnings call for the FY 2022. I'll be glad to run you through the financial performance in a bit more detail. I'll try to do this as usual in a bit -- in a quickly -- in a quick way so that we will allow more time for the Q&A session. On Slide #13, on the overall balance sheet trends, we have seen a year-on-year 16% growth on the balance sheet and this was mainly driven by 16% growth in the financing and also a 16% growth on the investment portfolio year-on-year. On the total liability movement, we have seen an 18% growth, which is mainly driven by 20% growth on the customer deposits and 8% growth due to SAMA and banks and other financial institutions. On slide -- next slide, Slide #14, on the P&L trend. Net profit after Zakat, for the full year, we closed at SAR 3.6 billion. That's a 53% growth year-on-year, was mainly driven by growth in the total operating income of 20%, which, as you can see in the top right-hand graph, this 33% was basically an 18% growth from funded income and 25% growth in the non-funded income despite the increase by 17% in the total operating expenses, there was slightly lower impairment charges year-on-year by 6%. In the graph on the same slide on the bottom right graph, the overall operating income composition, 76% is from the funded income and the remaining 24% is the non-yield income between other income and exchange income and also the fees from banking services. On the next slide, Slide #15, on the financing. As mentioned earlier, we have a 16% growth on the financing that as you can see in the bottom left graph, the growth basically was a 32% growth in the home financing and also 34% growth in the personal and other retail products. Other retail products would be the revolving credit card that was launched last year and also the auto lease financing that was launched in Q4 in 2022. A 10% growth in corporate, that includes the mid-corporate and also large corporate and project finance and 27% year-on-year growth on SME business. The overall financing composition is corporate plus SMEs represent 75% and the remaining 25% is the retail financing outstanding as of December. In the next slide, Slide #16, on the deposits as mentioned by the CEO earlier, despite the challenges of increasing interest rates, we managed to grow CASA by 4% year-on-year. And obviously, with the growth in the financing, time deposit has grown 51% year-on-year. If you can see on the center of the page, the CASA as a percentage of total deposits, as we have been expecting this percentage and the CASA as a percentage of total deposits to dilute, we've reached the peak in Q2 last year, where we reached around 37%, but an increase of time deposits as of the December CASA stands at 56.8% of the total deposits. On the next page, on the yield income or income from financing and investments, year-on-year, the total funded income has increased 34% and that's a representation of 33% growth in funded income for financing and also 40% growth in income from investment. If you see the graph in the center where the YTD NIMs has moved, we start to see the pickup on the NIM as an expansion. We have seen 11% up to the first -- end of the first half 2022, then another 17%, 17 basis point growth expansion in the 9 months YTD and we closed the NIMs at 3.62%, which is 20 basis point expansion, as mentioned earlier by the CEO, which is at the lower end of the guidance, yet within the guidance that we gave, which is 20% to 25%. This is just remind ourselves of what happened in Q4. If we look at the graph at the bottom left, which is the movement of 3 months SAIBOR, movement. From July to December, we start to see the big shift from the 3% level of 3-month SAIBOR up to more -- slightly more than 5%, late September and early October. And as mentioned by this earlier, this has impacted the cost of funding in a way that the repricing on the shorter-term deposits take place and this will be part of expansion on NIM -- over NIM's expansion during Q4. The next slide, Slide #18, on the fee and other income. We have managed to grow the non-funded income by 25%. Fees from banking services has grown 13%. We have a very good growth also on FX income year-on-year, which is 36% and also the investment gains and also the valuations and investments and also dividends and other income has grown as well. Fees from banking services composition, as usual, 34% on the card services, 33% is from the fund management, 10% will be the trade-related services and 7% will be the brokerage and other income, 16%. On the next slide, Slide #19, on the operating expenses. We have had a growth on the expenses 17% year-on-year. As you can see on the top right-hand graph, the 19% growth in salaries and employees-related expenses, D&A, depreciation and amortization increased 11% and other G&A has grown up by 17% year-on-year. The positive Jaws that we have achieved, around 230 basis points positive Jaws in the year-end has resulted in -- on 7 basis -- 7 points per 1,000 improvement on the cost to income. So, the cost to income ratio has decreased from 35.4% in December 2021 to reach 34.7% by end of 2022. On the next slide, Slide #20, as mentioned by the CEO earlier on the environment, we have seen a 60% jump on environment, also the year-on-year, 60% on a sequential basis, but year-on-year was lower by 4%. And that's why if you can see in the center -- the graph in the center of the page, cost of risk it's reduced year-on-year by 17 basis points, yet the 85 basis point cost of risk was 10% more than the high end of the guidance. And this was explained earlier on what happened during Q4. The next slide, Slide #21 on the NPL and NPL coverage. So, the non-performing loans, as mentioned again, is also are some accounts moved -- the accountants mentioned by the CEO that's been under discussion for restructuring, we have been prudently moving that, and that has increased NPL in Q4 on a sequential basis by 22%. NPL ratio we're closing at 1.94%. That's almost 19 basis points above December 2021. Coverage ratio, as we always mentioned that we kept that during the first quarter, second quarter, third quarter, within the 150% range. However, as was explained earlier on those expected settlement that has kept or reduced the coverage ratio by year-end to reach 136.3%. On the next slide, the capitalization and also liquidity, the bank remains healthy in all ratios. We can see from the capital adequacy by the year-end. Capital adequacy ratio stands at 19.8%. We have also a very good improvement on the ROE, moving from 10.8% to 13.7% by December 2022. And also, that's also an improvement of - in the ROA from reaching 1.9% from 1.6% level. All the liquidity ratios, looking to LCR, well above the regulatory minimum and also LDR, SAMA LDR standing at 82.8% by end of the year, which is also well below the regulatory maximum. And NSFR as well, 106.1% by December, which is again above, well above the regulatory minimum. In the next section, we will be talking about the outlook and the guidance for 2023 financial year. Just to remind ourself, the guidance given for some of the financials, the financing growth, as mentioned earlier by the CEO, the guidance was high-teen and some expectations of last minute booking that looks like slipped into Q1, this would have been within the guidance. For next year with the expectation of the continuation of the growth and the execution of the strategy and a focus on mid-corporates and SMEs and also the continuous pickup of retail business, the guidance for 2023 is mid-teens. Net profit margin, 20 basis points year-on-year, that's within the 20 basis points to 25 basis points guidance. We are guiding for the NIM expansion of 3.62%, year-end NIM is 35 basis points to 45 basis points. On cost to- income ratio, we managed to close 34.7%. That is within the guidance, which given before, which is below 35%. The guidance for cost to income ratio for the year 2023 is below 32%. Return on equity, the guidance was above 15%. The actual return on equity on December 2022 was 15.7%. The guidance for 2023 on ROE is above 17%. Cost of risk, as mentioned earlier, 10 bps above the high-end guidance, but this would be back as a reason to what was discussed on some settlements that were expected to be happening and did not take place during the last days of the year. The guidance for cost of risk in 2023 is 60 basis points to 70 basis points. And also on the CAR Pillar 1, we closed at 19.8% and obviously, with the expected increase in risk-weighted assets from the mid-teen growth expected in the asset side -- on the financing side, the guidance is between 17% to 18%. And we have been asked by investors for long to guide on the long-term ROE. And as part of the ongoing activities, we are guiding for the 2025 return on equity to be above 18%. Thank you all for listening. And just before I hand this to the Q&A session, there are a couple of slides in the back of the presentation on the latest update and progress on that we're doing on the ESG side. So, it's for information. So with that, I'll hand pass to the Q&A session.

Perfect. Thank you much. I think we can open up for Q&A. But before we do that, maybe a couple of questions quickly from my side. Firstly, on NIM, your guidance for '23 implies 3.75% to 3.85%, which is above your exit NIM for fourth quarter, which we calculate to be around 3.7%. So, I was wondering what do you expect to be the key driver of net interest margin expansion into 2023? And when do you expect NIMs to peak on a sequential basis? So, that would be the first question. And secondly, on liquidity, I mean, how do you see the liquidity situation so far in the first quarter? And how concerning is a combination of tight liquidity and high rates from an asset quality perspective? And given your read of the market, what do you think resolves this liquidity tightness in the market.

Now on the NIMs, the way we look at it and forecast it is basically, if you look at the expected changes in rates in SAIBOR, we have witnessed, remember, we started the year, roughly SAIBOR was 3 months ago was like 70 basis points, 80 basis points, and we closed the year at [ 5 50 ]. So, there's a big swing in terms of cost of funding because of this big movement. The outlook for SAIBOR is potentially maybe some growth, some increase in SAIBOR but not anywhere close to what we see in terms of magnitude of the change. So, in terms of cost of funding, we're not expecting significant -- I mean, significant impact coming from rates changes on the cost of funding. Yes, there could be volume because obviously, we're increasing our loan and we have to take more time deposit. But as far as rates, there is not a significant impact. On the other hand, though, all our assets, even the 3-month assets that was booked or repriced, sorry, maybe early October, late September, now we'll come to price from next year at a higher rate. As towards the 6 months related assets that we're booking, again, when we cover the pricing. We also have 1 year SAIBOR-related corporate loans that now will come through pricing, and that will would be a significant shift. In terms of repricing of liabilities, yes, there'll be some repricing. But as you may appreciate, liability tends to be short term. So, majority has already reflective of the current rate. In addition to that, you have also the business growth, the loans come in booked, the new loans booked, whether it's project finance, mid-corporates, SME, large corporates or retail that also will come at prices close to the market, or similar to the market rates that we see. So, in all these combinations, we believe the NIM expansion is the guidance that we gave. On liquidity, it is a challenge, I have to say. We've seen already some action taken by Central Bank, replacing government deposits with the banks. There's so much obviously, money outside the country that the Central Bank can manage. And we believe that could be easily if the market needs, they can provide this. I think we collectively, as all the banks may be now more encouraged to go internationally to issue whether it's senior, Tier 1 or Tier 2 that can also help. The investment and the increase in FDI coming to the country that will help support liquidity. Loans themselves also create liquidity. So, and all-in-all, I mean, yes, it's a bit concerning, but we don't lose sleep our liquidity, in a nutshell.

Operator, we can open up for Q&A, please.

[Operator Instructions] And we'll go first to Naresh Bilandani with JPMorgan.

It's Naresh Bilandani from JPMorgan. Three questions from me, please. Just to be sure, are you -- actually, you know what, thanks also for a good guidance. It's very much needed respite to the sell-off that we've seen across in the sector. So, congrats on that. So, now my first question is just to be sure, are you expecting any rate cuts that are implied in your guidance? I'm just trying to also get a better view on what is the sensitivity for any rate change that you have for this year? And also, I think just on that line, if you do get a rate cut as is implied in the consensus expectations, would that first impact be actually positive just in -- consistently with the impact that we saw last year that liquidity repriced up first before assets did. So, we initially saw a NIM pressure, and now you seem to be a lot more confident than margin coming through this year. So, how should we think of the NIM, assuming those changes from this point on? That's the first question. Second is some of the banks that have already reported the guidance, your larger peers are guiding somewhat of a lower loan growth than your guidance at this stage. Is that because their retail mix is higher and that is expected to slow more than the corporate? Or is this a base impact? Or what is the other reason that you think you'll be growing much faster than the peers at this stage? And my final question is, thanks for publishing the medium-term ROE, actually 18%. That's quite helpful. Could you kindly guide on how should we think of the medium-term cost of risk and broad-based like the medium-term fair dividend payout because both of these will have had a voting on how you are thinking about the ROE at this stage?

Thank you, Naresh. In terms of rates, Adel?

So thank you, Naresh, for the question. Net commission sensitivity, again, if you recall, what we have communicated in the year-end 2021, we have been talking about the 10 basis points expansion for every 25 bps increase the rates. That's now above the 20 bps that we had for the full year as an expansion really proved that the static NIM sensitivity remains theoretical. So, it's subject to many things. And also, again, sometimes really hard to forecast the behavior or the impact of the transitions that have been on CASA. And also the repayment behavior that happens when it comes to the increasing rate. So, are we forecasting any rate cuts during 2023 within this guidance, no cut is expected and the average SAIBOR that is being incorporated in this guidance is around 5.5%. So, expecting a couple of more hikes to happen during 2023, including the one we have seen in February. So again, you'll also see from the financials that our net commission sensitivity gap in the balance sheet for the 1 year, it used to be at SAR 60 billion during end of 2021. Now, it's reaching SAR 45 billion. So, this explains the impact on the NIMs this year and how we are optimistic for the next year because some of the deposits now on the time deposits that is becoming within the 12 months maturity more into the 1 to 3 months. So this also, as we said, quickly, when SAIBOR increases, as we mentioned for Q4, that starts immediately to eat into the NIMs. So, the guidance is also, as mentioned by CEO earlier, is also what you expect to have repricing for the remaining back book in the corporate and this would have a major positive impact.

Okay. On the loan growth, Naresh, obviously, we -- when you look at our main strength, one of the important main strength that we have is a strong project finance. If you look at 2030 and the amount of projects in the pipeline and the amount of financing and expected to finance is significant. And that plays in our hand because that's the natural strength that we have. There could be there some estimates that maybe in 2023 as much as at least SAR 80 billion worth of projects that will -- certain that will be launched in the country, not saying all of them will be financed by us, but it tells you the size of project finance demand coming to the market in '23. And that is not expected also to that demand or that and credit for project finance expected to reduce even '24 and '25. I think the levels will be higher in the next 3 years. Also, as you know, in our strategy, really focused on building and developing our mid-corporates we are achieving a very strong growth and we continue to attract more customers and continue to grow in that segment. SME, we introduced so far already have 6 program-based lending. So, that will help us to accelerate the growth on SME. And in Retail, we started with this new strategy that we built. We built the -- we brought in the team. We've introduced incentives, we have the KPIs and the mantra. So, I think we achieved growth faster than the market growth. And Saleh maybe you can comment on the potential growth in retail also there for next year.

Thank you for the question, again. Yes, last year, we had a very good growth, almost 34% growth in our retail financing and we are expecting this growth to continue. About next year, we are expecting high-teen digits for next year, especially in the mortgage and as mentioned by CEO, we just introduced the auto lease and the credit card, we are building the [ E&R ] portfolio quicker than we expected because there is good demand. The market share of the mortgage we managed to increase it last year from 2% to 5%, and we expect this year to continue focusing on the mortgage and the asset back product. So, we still believe that there is a huge potential, especially that we onboard so many customers last year, around 700,000 customers in 2022, those customers are potential customers for taking loans this year, inshallah.

And I think the third question on the -- the cost of risk throughout in midterm cost of risk, I mentioned a couple of times, I think, in some of the either earning calls or conferences that I believe throughout the cycle cost of risk should be in the range of 50% to 60%, to be prudent to be to be more cautious than going very aggressively low. If you look at economic activities, what's happened in the country and even on the retail side, the unemployment is declining, more bankable customers, booming businesses for SMEs and mid-corporates and suppliers and vendors. It's not really expected to see a significant decline in the quality -- credit quality to the country. I think this is supportive of a much better outlook for cost of risk. But for us, I mean, the guidance for next year is 60% to 70%. Who knows in 2024 and '25, probably we put in our assumptions for the outlook an ROE, maybe close to that range in terms of cost of risk as well as I think you said what kind of dividends payout built into our assumptions, as we always been trying to be obviously higher in payout. However, I think it's safe to say that it's close to the range that we have already and maybe higher to 60%. I would say that in our model.

We'll go to next to Rahul Bajaj with Citi.

This is Rahul Bajaj from Citi. Two questions from my side, actually. The first one is on cost. Very good outlook statement actually and a very solid CIR reduction I see in 2023 or 2022. So, just wanted to understand, I understand a large part of that CIR reduction would be coming from revenue improving and margins going up. But from a cost perspective, how much of your investment is now done? And how much of that kind of large, big investment that you were planning to do is now still ahead of us? So, what I'm trying to basically come to is, should I expect cost growth to decline also meaningfully going forward or costs will continue to grow and it's just at the revenue line, which is helping the CIR? So, that's my first question. The second question is on the Youth app. I recall Abdullah mention the Youth app and he's mentioned Youth app before as well on some calls and conferences. Just wanted to understand now that you're close to launching the app, what kind of tangible maybe benefits in terms of numbers should we expect from the app over the next 6, 12, 18 months? Or do you think that this is still early phase and maybe it's kind of better to bake in any upside from the app only in '24-'25. So, those 2 will be my questions.

Thank you, Rahul. In terms of cost, we mentioned multiple times that when we embarked on our journey on the new strategy, we fully realize we need to invest a lot really in terms of people, training. Remember also, one of the strategic goal is to be Employer of Choice. And in order to do all these and be the best customer service provider and be the fastest and most convenient, it also requires building new franchise, whether it's an affluent or private, whether it's a mid-corporate, whether cash and trade, sales specialists, product specialist. As a result, you've seen double-digit growth around 17%, I think, year-on-year between '21 and '20 and also '22, we had also 17% growth in operating costs. That is not expected to continue. We've done the bulk of our investments. We're going to continue to invest, but the level of investments compared to the base year, let's say, 2020 is going to be much less. So, when you look at our outlook for cost to income to be below 32%, that's a combination, obviously, stronger growth in the top line whether it's the repricing, the impact of repricing of the assets that were coming at higher rates as well as the growth of the loans that coming at close to the market rate and not much significant impact as far as rate impact on the cost of funding. Yes, it would be volume but not rate impact. So, a combination of this plus obviously slower growth of OpEx going forward. On the Youth app, obviously, we will focus on the Youth app. Our intention is more long-term strategic. We already have a very good market share in terms of achieve or gaining customers in the Youth segment. However, we knew that we need to be much more proactive, it's very young population, those clients who are college students now may not very profitable day 1. But when they get a good job, they have any sort of income, then you start building more and more still more and more products, and that will secure a strong future for the bank. So in 2023, would not have high expectations as financial impact, except obviously the volume is large, you're going to have some NIMs coming in, but not much of asset sales.

We'll go next to Shabbir Malik with EFG Hermes.

I have a question around your cost of risk guidance. 2 points, actually. One, if I look at your NPL coverage, that has come off in the fourth quarter to 136%, which if I look at recent history is a bit on the lower side. And secondly, if I look at your loan growth outlook for 2023, it's being driven by some more higher-risk segments such as SME and retail compared to corporate. So, I just wanted to check with you the 60 basis points to 70 basis points cost of risk guidance compared to 65 basis points to 75 basis points. Just it looks a bit light to me. Maybe I'm missing something considering that you NPL coverage has slipped a little bit and you're looking at high-risk segments. So, any comments on that would be very useful. And secondly, in terms of your spending, do you expect your cost -- the investment spending that you're doing, do you expect that to dissipate or normalize in the second half of 2023? And maybe in terms of loan growth, do you expect this mid-teen growth to be second half biased? Or do you think this to be evenly split between the first half and second half, the loan growth, the mid-teen growth outlook for 2023?

Thank you. As far as the cost of risk, I just mentioned in my introductory presentation is that we're expecting a sizable Stage 3, i.e. NPLs to be fully recovered, fully settled -- fully settled without any losses. And I mentioned the story about the auction. And I said this is going to be next year or just 2023. We also are expecting another good settlement coming from another Stage 3. That was linked to the ability to do rights issue, which I believe is approved. So, most likely, it's going to happen within the first half. So, all these combination will help. Plus, if you recall, we were saying mid-teen growth in loans. And if everything being equal, the growth in loans will dilute the cost of risk even if you take the same amount, it dilutes the cost of risk. So, I think 60 basis points to 70 basis points is a good conservative number. We're fairly confident about our coverage ratio will pick up again, maybe beyond -- well beyond [ 150 ] in '23. I think the other question is about the...

The spending. As well as the earlier answer around the OpEx growth and yes, we have seen the high-teens growth in the OpEx overall. As mentioned by the CEO, let's remind ourselves that 2021 and also throughout 2022, the bank was running through an investment cycle. And we are going into 2023. And as you can see from our guidance on the cost to income, part of the guidance to be below 32% is around the efficiency and also the progress that we have seen and will continue doing in the digitalization. But also, there will be some, of course, impact not to the same extent, but for those investments that has been done midyear or maybe toward the year-end of 2022, that will have a full impact during 2023. But there's an overall -- I think it's in line with the previous answer, which is we're not expecting to see those growth levels in OpEx in general.

And maybe if you can give some color on the phasing of the loan growth. Is it going to be done equally throughout the year? Or do you think there is going to be some biases towards maybe the second half or maybe in the first half of this year?

We give guidance for the full year. We don't give guidance about the -- by half. But project finance is something that come whenever the deal is finalized, not necessarily a smooth flow throughout the 12 months of the year. However, retail is possibly closer to the like smooth sales going throughout the year, there is not going to be big spikes. But project finance itself the nature of it, if a major deal comes in, and utilization, maybe high utilization, it spiked alone at that month. But it's very -- we have obviously our own business plan, which we see it month by month, but typically, we don't give -- we give guidance for the year. We don't give guidance for the halves.

We'll go next to Edmond Christou with Bloomberg.

It's Edmond from Bloomberg division. I just want to ask on the credit growth guidance of mid-teens. So, we hear from banks as they are a bit cautious on the DBR impact from rising interest rate and appetite for the corporate to borrow and even the retail. So, within the mid-teens, clearly are taking market share from the market share. I just want to understand what's your view on the overall market growth when it comes to lending this year? Do you expect it to be in the mid-single digit, high single-digit, and you are taking market on the back of it? And taking market share usually come with competitive pricing. So, the margin growing 35 basis points to 45 basis points, just found it hard to understand how this will happen. Do you have any information you can give me in terms of how percentage of your loan is yet to be subject to repricing on the 5-plus SAIBOR compared to a year ago?

Thank you, Edmond. Now what I can see and we can scale in the market and know what's coming in terms of projects, whether it's in the green projects, whether it's a new project, we see have also water treatment projects. Not to mention, obviously, the mid-corporate and SME. To me, the market is expected to grow in double-digit in the next 2, 3 years is in my view. That's my own personal view. I was surprised by some of the guidance that I've seen. I don't know of the focus. Obviously, there's some kind of slowdown in terms of mortgage growth, for sure, the base is getting much bigger. But for us, it's -- as I said, it's the strength -- the inherent strength that we have, which is the project finance, which seem to be very sizable deals, as well as much less competition. I think you mentioned the point about the taking market share on the expense of margin. We never played the price game. It was we demonstrated that clearly in the first half of 2022 when we had literally no growth in corporates because we didn't want to go very aggressive on pricing. Some did it. But in our case, we never did this, and we never will. In fact, pricing on some of those deals is attractive because during construction is perceived as a higher risk than a normal loan and then become repricing after 1 or 2 years of operations. In terms of the other question is about retail, we started -- we were -- let's put it this way, we were not very active selling retail in previous years. When we build the team now, we build the process, we build the KPIs, the mantra, and the culture of sales, the incentives and so on, we'll start really picking up and start [Technical Difficulty] grow much faster than the market. We're going to continue. We're not the biggest player in the market. So, it's very hard to achieve sizable growth in terms of ratios, but we certainly a smaller base and we're building this franchise very quickly by the combination of more products and much more focused now on customer acquisition and sales. I think I covered -- I hope I covered your point.

Yes. Can I follow up on the green and water plant and the other projects that are low carbon emissions? I mean this is opportunity for the banks in Saudi to issue green bonds and be able to access the market probably at cheaper cost of funding. I mean, is there any issue in terms of funding eligible project or eligible assets? Probably this project are green, but are they eligible? Is it easy to verify its eligible rating agency to agree on it? Because you do have excellent opportunity on infrastructure and the green assets and financing it's probably cheaper if you go through the route of green finance and green bonds, et cetera? Just what's your view?

I think the opportunity for green projects in the country is very high. If you take renewables, whether it's solar or wind is a significant number of projects coming to the country. The country needs about 58 gigawatts of electricity generated from both solar and wind by 2030 to meet its commitment of 50% of electricity generated by renewables. Then you add the water treatment or sewage treatment. You have green hydrogen, maybe blue hydrogen. There could be a variety of green projects, which we're very much interested in. Also, I mentioned that we're developing our Originate-to-Distribute. So, that also could be another idea to improve the yield on the retail portion and we can underwrite more and offload to other international interested parties. Potentially, can also do it in domestic to offer access to corporates and private bank customers to gain on this business. Issuing green bonds or green [Technical Difficulty] in our case. It's on the table, we will continue to assess all potential options to improve liquidity, to improve the funding structure and improve asset liability mismatch. So, that's not ruled out, but we haven't made a final decision on that.

We'll go next to Aybek Islamov with HSBC.

I have a couple of questions. The first one is NIM guidance definitely quite good. I appreciate that. Can you elaborate what Alinma Bank can do differently about its funding this year compared to other peers? For example, are you looking into raising foreign currency long-term funding in 2023? Is that a potential move that you're exploring? And I think also, I wanted to find out regarding the Tier 1 debt, you already have quite a bit of Tier 1 instruments outstanding. How much more Tier 1 debt can you issue? And I believe you haven't issued Tier 1 in 2022. Can you also elaborate why you didn't issue Tier 1 in 2022? So, that's -- these are my funding questions. Secondly, on the ROE guidance, the improvement that you expect to see in 2023. How much of that improvement do you expect to see on the back of rising balance sheet leverage? And does that ROE guidance imply that you expect loan growth to be mostly driven by retail products in particular mortgages, right? So, is that the way to understand your ROE guidance? That's my second question. And I think thirdly, a very impressive performance in the mortgage market. I mean, the way you raised your market share, is quite impressive. That mortgage loans that you've originated last year, how much of them are off-plan mortgages? How big is the share of off-plan in your originations in 2022? That's my last question.

Thank you, Aybek. In terms of funding, I think it's even our strategy to explore other types of funding, long-term funding through inter-bank multiyear repo. We're discussing this with some of the international names or through structured deposits and with longer-term, such a deposit with institutional depositors as well as affluent customers. We're also exploring the potential of issuing seniors [indiscernible] or potentially if we feel the need, we can actually think about capital instruments. You mentioned Tier 1, we did issue SAR 5 billion Tier 1. We don't see a need for another issuance immediately. That could be -- we continue to assess and forecast on like almost a 3-year cycle, how much loan growth, how much is expected CAR and so on, with the assumption that we continue to pay dividends. So, if we feel the need, that's always on the table, and we have a very good appetite for that. In terms of the ROE, you've asked about the ROE, in terms of...

Leverage.

Yes. I mean, obviously, ROE is impacted by multiple factors. If you improve, for example, your cost to income, if you improve your NIMs, if you improve, obviously, the your leverage, all these combinations will obviously and the cost of risk and others, all of this support of growth in ROE. So yes, obviously, you saw how our CAR reduced by almost 300 basis points from a year before. That means a better efficiency and better leverage and that obviously supportive of the ROE expansion. In terms of mortgage, I'll leave it to Saleh.

Yes, I think your question is about the off-plan percentage of the total portfolio. Currently, almost around 25% of our portfolio are new sales are on off-plan projects, given the fact that some of [indiscernible] still not yet having projects that fulfill our criteria to finance customers. As I mentioned, we had a very good growth in the mortgage. And again, we emphasize on the quality and we didn't go on the lower price with other competitors. We compete in the customer experience and journeys. We are one of the most efficient in terms of reducing the loan in a very short time to the customers. And this is what we give us a very good competitive advantage plus the things that the CEO mentioned that we are building the sales culture, we're acquiring more customers and we are also building a very good incentive scheme to our sales agents.

And just a follow-up question. When you talk about your loan growth expectations for 2023, how much of that do you expect to be driven by retail, specifically mortgages? Would you say 2/3 of the growth will be driven by mortgages? Is that how you see it this year? Or do you expect corporate contribution to increase materially?

We don't give a specific guidance as far as the -- where the growth is going to come in exactly as a percentage of the growth. However, as I mentioned in my introductory, we're expecting continued health -- very healthy growth rates on mortgage, on retail, not necessarily the whole market growth, but the way we're doing, we're focusing on customer experience, as Saleh mentioned, that allow us to increase our market share, not pricing. It's the quality of service that we provide, is the focus of sales. I mentioned one of the large contributor of the growth is going to be also project finance. Project finance amount is large, and this is the area of strength that we have. So, it's a combination of all of those plus obviously, the mid-corporate and SME.

We'll go next to [indiscernible].

Hello. Can you hear me?

Yes, we can hear you.

Yes. My questions were answered already, but I just want to go back on the NIM. So, I understand that a part the asset yield is going to be acquired from the back end of the corporate -- some of the corporate loans. But then again, if you're seeing the project finance and the other activities in the loans, don't you have like in this year that with the high interest rates that those projects might be delayed to 2024? And do you expect any savings from the liability side from the cost of funding?

Now as far as project finance, as you know, the PPP is obviously bidding process. Contractors or companies that base on their expected costs that we will incur during building and operating the projects, which they will include assumptions about interest rate costs and so on. So, that will be reflective on the price that we bid for. Maybe the project owner theoretically, when interest rate is much higher than the expected off-take sale or off-take lease, theoretically, would have been higher than if the interest rate was very long expected to be low naturally. But it does not jeopardize the projects to be deployed that if the country is focused on the long-term strategy, it's called 2030. There are so many initiatives to be delivered and the progress of these projects are happening significantly now. The other question was about the potential delay. So, we cover that. What's the other one? Did I cover your questions or something else I missed?

Yes. Just on the cost of funding. Since you're like assuming 30 bps to 40 bps almost NIM improvement, so a part of it is coming from the back end. But again, assuming -- I would assume that you would only assume 30 bps to 40 bps, if there's actually savings in the liability side. In other words, increasing your CASA percentage.

No. Look, I think when I talked about the NIMs or Adel talked about NIMs, it's -- we're saying that our cost of funding, we're expected to go higher next year, but not significantly because of the rate change because most of the liability already replaced with the close to the current market rate. Assets otherwise, on the other hand, would reprice, especially the 6-month SAIBOR loans, 1-year SAIBOR loan, that will come for a significant shift in terms of pricing. Liability will have -- or deposits will have an volume impact because the growth in loans will require us to grow or take more time deposits. There will be a volume impact, but not significant rate impact. That's what I'm saying. While it's going to be very significant for the corporates, the rate impact on the asset side.

Just one last part. And don't you probably think -- or did you actually guys charge like the clients make a discount from the SAIBOR cut the fixed portion? Or are you going to pass it all through to the client? Because I've known some banks like they do some cuts on the rates since the rate is very high. And that's how they get to keep the client or even increase the market share. So, do you expect to have all these rate pass through to the clients or not?

Of course, we're not in the business of lending below cost -- our cost. If you talk about retail, mortgage, for example, there's a maximum pricing by Ministry of Housing, a few have qualified for subsidies. So, these are applicable all the time. We don't go significantly below those pricing. If it's not -- if the customer is not beneficiary for the subsidies, then there's no limit of pricing, then you have to commit to the market. But honestly, I don't want to continue on explaining because I'm not very clear about your question.

We'll go next to Adnan Farooq with Jadwa Investment.

As-Salaam-Alaikum. Thank you for the presentation and congratulations on the numbers. I have a couple of questions. One is on the deposit mix. You mentioned that you expect cost of funding to go up because of the volume impact. I just wanted to take your opinion on where do you think the CASA mix will settle for you and for the sector because we are seeing acceleration in the shift when the rates started going up. Do you think most of the impact has happened? How much more do you think will move? That's the first question. And the second is on asset quality. You explained the asset quality very well on the corporate side, but we see a pickup in retail NPLs as well. Is there anything alarming? Or is it just that because your book has grown fast, these are Stage 1 or basic provisions that you have taken? Just wanted to confirm.

Thank you for these questions. Now CASA to be honest, I know we've been transparent, and I want to imagine the expectation of the market. As we said in the first -- at the end of the first half last year, we said, guidance we're expecting loan growth to continue, which means with interest rates, you also see a shift from current to time, that's a market phenomenon that we see. I don't expect CASA as a percentage to increase or even to maintain the levels that we had before. So -- and we've seen it. For next year, we're expecting further dilution in terms of CASA. We'll continue to obviously try our best to grow CASA through all the initiatives we're doing, whether it's cash, whether it's [ NIM ], whether it's new customers for mid-corporates, whether it's the customer acquisition within retail and so on. So, that -- all of this continue to push for higher growth in CASA. But reality is the growth in loans, which we gave guidance, now mid-teens certainly will be funded. A lot of that will be funded by expensive deposits. So, as a percentage, CASA is expected to dilute further. Your other questions about the migration you've seen in retail, not just corporate or sizeable deals because [ MBL ] explained the cases. I think in the retail, we started last year and we launched non-salaried assigned loans. As you know, these loans to be obviously higher risk, but the same price -- same time your pricing reflective of this risk and more. We had some migration some migration into Stage 3. We're very focused now on the process in place to ensure collection remind the customers because in order to make a deduction, deduction from salaries, non-salaries assigned, so the customer has to take action to pay the monthly installment. And I think we're getting this under control. We're obviously learning from this experience to improve our balance [indiscernible] and that will help because that's really going to be -- I don't know how many years it will take. But that will be in the future of retail, i.e., an salary assignment, I would expect in the long term. At the moment, this is the reason. Otherwise, the salary assigned in terms of risk is very, very low default rates, extremely low default rates. And this is not just Alinma, that's all interest rate.

Just one follow-up on this. What's the credit spread between salary assigned and non-salaried assigned loan. If you can give a ballpark number, that would be helpful.

You're asking for pricing basically. Look, we price different segments for non-salaried assigned, right?

Yes, this is different. We have a different substrates. This is depends on the employer and your salary income. So -- but there is significant differences between salaried and non-assigned in terms of rate, the pricing.

Perfect. With that, given that we're running out of time, I would like to thank Alinma Bank management for their time and to everyone for participating in this call. Thank you much. That ends today's call. Have a good evening, everyone.

Thank you all.

This does conclude today's conference. We thank you for your participation.