Alinma Bank (1150) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. We are ready to begin. For your information, today's conference is being recorded. I would now like to hand you over to Waleed Mohsin to open the call. Please go ahead, sir.

Good day, everyone. Thank you much for joining us for Alinma Bank's First Quarter 2023 Earnings Call, hosted by Goldman Sachs. On this call, it's my pleasure to welcome the Alinma management team, represented by Mr. Abdullah Al Khalifa, Chief Executive Officer; Mr. Saleh Alzumaie, Deputy CEO, Head of Retail and Digital Banking; and Mr. Adel Saleh Abalkhail, the Chief Financial Officer. Please note, this call is being recorded and is intended for investors and analysts only. Any media who's on the call must dial off at this moment. So without any further delays, I would pass on the call to Mr. Abdullah Khalifa, CEO, Alinma Bank.

Thank you, Waleed. Hi, everyone. Thank you for allocating the time to attend our earnings call for Q1 2023. And as usual, we will take you through a quick presentation first by me on the overall financial performance, as well as a reminder and also progress report on the implementation of our 2025 strategy. Then I will hand the mic to our CFO and take you through a detailed presentation and financial statements. We'll try to be as brief as possible in order to allow for longer time for your questions. On slide -- I'll take you to the slide. I believe you all have a copy of it. So Slide 4 shows you some overview. But I'll start with Slide 6, which talks about the high level of the financial performance. In Q1 2023, our financing reached SAR 153 billion. That's a 4.5% increase over Q4, and almost 19%, 18.8% year-on-year. In terms of total assets, again, a strong growth, 6.6% year-to-date or 19.1% year-on-year. Our operating income in Q1 increased by 20.6%. Our net income by 17.6%. We have a slight increase in NPL to reach 2.11%, and a drop in our coverage ratio to reach 121.5%. On that -- by the way, on the coverage ratio, we're fairly confident that by year-end, we will be in excess of 150%, our normal target. We're expecting some recovery from settlements during the year. Some of them are sizable, and that will help us to plus obviously our guidance and the cost of risk will help us to take the coverage ratio above that. First quarter, in terms of customer deposits, we have a year-on-year increase of 20%, almost 25%, and 10.2% quarter-on-quarter. CASA, we managed to increase it by almost 3% compared to the beginning of the year. That, as you might appreciate, it's a very hard achievement, considering the high interest rate now. So the ability, as we mentioned before, we will continue to focus on growing our overall CASA amount. However, in terms of percentage of total customer deposits, because of strong loan growth, naturally should dilute, and what you can see there in 1 of the boxes, you can see that our CASA as percentage of the deposits reached 53% compared to, I think, the highest we had is 71% in June 2022. In terms of cost-to-income ratio, we reached 34.8%. Net profit margin, we picked up 18 basis points when you compare against the full NIM for 2022, which is I recall 3.62% compared to Q4. We actually picked up 10 basis points compared to Q4. In terms of CAR, we are standing at 19.1%. Just a quick reminder, I will not go for a long time on the strategy, but just a reminder, in case there's new investors and refresh for the existing ones. Basically, our strategy calls for us to be the fastest and the most convenient bank in the country, to be the best provider of quality of service through being #1 in Net Promoter Score, and of course, being #1 in Employer of Choice. If you look at Page 9, which gives you more detail in terms of business and in terms of the bank overall, in order to really advance in terms of speed and quality of service, we needed to set up digital factory. We need to drive our decision based on analytics and advanced analytics, and we need the ability to have a cultural transformation, not only to attract the right talent, but also to retain them. In retail, one of the main pillars in our strategy is to focus and build on our affluent franchise, and also a second pillar is to focus on attracting the youth segment. As I mentioned multiple times, the youth are the future, basically, of the bank business, not necessarily a very profitable segment immediately, but certainly, when these college students take a job, they'll be able to develop our business with them and offer them multiple products, and of course, offer the best customer experience. In corporates, we want to be the main bank, not only for large as used to be, but also on project finance, but also for mid corporates, we want to develop high-quality SME business and grow our cash and trade. It's no longer just focused on financing. We want to develop and cross-sell multiple products. In Treasury, we want to be the main bank for our customer needs, whether it's hedging or investments as well as growing our FI and maintain higher quality heirloom. Now Page 10 talks about some of the activities that were done during Q1. However, overall, we have 77 initiatives. We added 1 more in Q1 this year. We already have delivered on 55 out of the 77, and some of the activities that took place this quarter. We introduced chatbot services for our Internet banking. We launched Alinma new mobile application with better features and better technology. Our female colleagues increased to 19.52% of total workforce. Delivered 2 more advanced analytics and implemented an artificial intelligence antifraud system. For retail, we continue to focus on enriching our mix of products. So we launched new off-plan commodity-based products as well as a commodity-based equity release product. We also introduced the new personal finance against the shares of portfolio. We also delivered on merging 10 branches. And that's, I think, a very important initiative. We may not have talked about it before, but we decided to get the Board's support to merge some of the branches this year, and that should give us a much better efficiency in terms of manpower for each branch. So we already delivered 10 branches around the country, and we're going to continue to focus on merging more branches coming few months. We've also delivered and implemented a new loyalty program called akthr. In terms of corporate, we continue our success in mid-corporate. We grew our loan portfolio by 49%, our nonfunding by 44%. Again, the growth in SMEs continued to accelerate. We had 13% Kafalah, but 53% on program-based lending. We developed Murabaha Overdraft product. In terms of treasury, we expanded our FI network by adding 6 more correspondents. We've increased the size of profit rates as well. So we were down already to 7.8%. We also worked on the funding side in terms of evergreen reports or profit rate caps and floor products. For this year, we're focusing on or working on remaining 22 initiatives out of the 77. We're going to continue to focus on expanding the products and services that Digital Factory will cover. We're going to continue on automating our procedures, our processes through either robotics or other ways of automation. In terms of retail, we're going to continue to design and improve our affluent network. We already opened a private bank center in Western Province. We have already delivered on the central province and soon to have the Western Province Center opened also. We're going to focus on enhancing family accounts ecosystem, digitize our mortgage journey, as well as other that is mentioned in the presentation. With corporate, we are in the process of implementing a new loan origination system for corporate as well as a new portal for all corporate segments with a focus on driving liabilities through cross-selling and through introducing further products. In treasury, we're going to focus on delivering on structured deposits, broaden the cross-sell, and shifting more towards longer-term financing. And with that, I give the floor to our CFO.

Thank you. Very good afternoon to you all, and I'm happy to talk through the financial performance of Q1, followed by our guidance as usual, and as mentioned by CEO, I'll try to run this quickly to allow more time for the Q&A session at the end. On Slide #13, on the balance sheet trend, we have seen 7% growth in the overall total assets, driven by 5% growth in financing and also 4% growth in our investments, SAR 1.4 billion, and also [indiscernible] 47% growth from December. And also in the total liabilities, 7% from December growth. This was driven by, as you can see in Slide #13, from 10% growth in the customers' deposits, which is SAR 14.8 billion. The next slide, Slide #14, in the P&L trend, we have seen a total operating income growth to 21%, while expenses have grown to 18% net income. Year-on-year, we have seen an 18% growth. This growth, as you can see in the top-right graph, came actually from funded income, which has grown year-on-year 52%. Non-funded income, we've seen 10% lower year-on-year, but this was mainly on the other income whereby there was one-off income in the other income same quarter last year that was booked. As you will see later in the fee slide, actually fees from banking services has grown 14%, exchange income was 19%. We have seen also impairment year-on-year has increased 41%. On Slide #15, to further dive in the financing portfolio. As mentioned, we have seen the growth -- 4.5% growth on the net financing year-on-year, that's an 18%. As of March, the overall financing book, 74% is corporate and 26% is retail financing. As you can see in the far left graph, the growth of 4% from December in the financing was driven by 5% growth in mortgage, home financing, regional financing and other retail financing, which includes the newly launched products of auto lease, and also the credit card has grown 11%. Corporate, which includes the mid-corporate, has grown 3%, and also saw the growth 6% from December on the SME business. On the next slide, Slide #16, we have seen a strong growth in deposits. As you can see in the top right graph, 10% growth from December in deposits, of which 3% growth was in CASA. And obviously, more Time deposits, 20% growth in the Time deposits, which has increased from December by SAR 12.6 billion. And obviously, as you can see in the graph in the center, as mentioned earlier by the CEO, we are continually growing CASA, but as much as Time deposit has grown, the CASA as a percentage of Time deposits of total deposits is diluted. It's standing at 53% now. As mentioned earlier, the [indiscernible] was at the end of June of 71%, and also Q1 last year, this percentage was 68.7%. In the next slide, Slide #17, which is more in the yield and the commission income. The yield income, we have seen a very strong growth, 89% on the gross yield income. 84% growth was coming from the investment portfolio. The majority, 96% was growth from the financing income. So as we can see in the bottom of this same slide, net profit margin stands at end of March at 3.8%. As mentioned earlier, also the full-year NIM last year ended at 3.62%. That's an 18 basis points expansion from the full year last year. And also looking into quarter versus quarter, we have also from Q4, a 10 basis points expansion at the end of March. In the left graph also, as we stand, we were 3.31% in the same quarter last year. That's 49 basis points improvement; 17 basis points were from [indiscernible], but majority of the improvement was on the financing, 2.21%. And this was offset by 187 basis points increase in the cost of funding. In the next slide, Slide #18. On the fees, as I mentioned earlier, as you can see in the top right graph, it's lower, the nonfunded income lower by 10% year-on-year. But this is adjusted by other income. If you see, this is lower SAR 53 million, which is around 91% drop? However, the main business, fees from banking services, 14%, and also exchange income has grown 19%. And we have lower mark-to-market and also some dividends, which is lower than last year by 52%. Still in the composition for fees from banking services, fund management represents 32%, card services 25%, as of March trade finance services represent 12% of the SAR 308 million overall nonfunded income for the first quarter. Brokerage also 9% and 22% composition is related to other income. In the next slide on the operating expenses. Operating expenses has increased year-on-year 18%. As you can see, salaries and employee-related expenses has increased 14%; depreciation 10%, other G&A 26%. This 18% that we have seen year-on-year on a sequential basis, it's actually only 1% growth. And that in one way or the other shows that the bank is moving or heading toward the end of the overall investment cycle that we've been mentioning in previous calls. So cost-to-income ratio at the end of March stands at 34.8%. This is almost flat from December, but it's actually lower than where we were in the same quarter last year. On the next slide, Slide #20, on the impairment. If you all remember, we had SAR 436 million net charge during Q4 last year. This quarter, 23% lower the net charge for financing, SAR 337 million. If you can see on the right, we have 40% growth in the impairment for financing for March if we compare it to the same quarter last year. So the impairment at the end of March is a composition of 22% of the impairment allowance relating to retail business, 78% is corporate. So you can see in the center of the graph also cost of risk has picked up and reaching now 88 basis points. On Slide #21 on the NPL and NPL coverage. NPL has picked up from Q4, reaching now to 2.11%. And also we have seen an increase in NPLs, nonperforming loans, from December by 15%. Coverage now is 121.5%. And the stage coverage, Stage 1 remains flat at 50 basis points, around 19.4% for Stage 2, and also lower Stage 3 coverage at 52.2%. Some of the write-off has been done during the quarter, which was getting more provisions. On the last slide on the performance of capitalization and liquidity, our ratios remain healthy. We've seen a drop on the CAR ratio, obviously, with the growth in the financing that we have seen, and also growth in the balance sheet, standing at 19.1%, which is to be 22.7% in Q1. Also improvement in ROE. ROE stands at 14.1% from December ROE 13.7%, and also an improvement from Q1 where ROE was only 12.6%. The lower ratios, all healthy, LCR well above the regulatory minimum at 134%. LCR also well below the regulatory maximum, 79.9%, almost 80% there. NSFR also continued to see the improvement in liquidity and 107% as end of the quarter versus 110% reported last quarter, which was 106% by December. On the next section on the outlook and the guidance, we've given the guidance in December, and as you can see, none of the guidances have been changed. The financing growth, we have seen 19% growth year-on-year, and we are still keeping the mid-teens guidance unchanged. And also the net profit margin, the NIM 3.8% we've had from quarter-on-quarter 13 bps, and also year-on-year 49 bps. Also from the full year, we have seen an 18 basis points improvement. We are still keeping the guidance unchanged to an expansion of 35 to 45 basis points. Cost-to-income ratio stands at 34.8%. We're expecting this to reduce as we expect the higher income, and 34.8% is flat to December, expecting this to -- and the guidance remains unchanged, below 32%, as previously we guided in the beginning of the year. For the return on equity, 14.1%, which we guided at end of March, end of the quarter, and the guidance remains unchanged at above 17%. Cost of risk, 88 basis points. And yet we're comfortable. As mentioned by the CEO previously, we are still giving the guidance of 60 to 70 basis points unchanged for the full year. CAR Pillar 1, 19.1%. As mentioned earlier, while we are expected to grow, as we're not changing our guidance on the financing, we are keeping the guidance unchanged for 17% to 18%. And just a reminder, the return on equity long-term target 2025 kept above 18%. So with that, I'll hand over back for the Q&A.

[Operator Instructions]

While we wait for questions, maybe a couple of questions from my side quickly. First, very strong growth on the deposit side, as you rightly noted. And now your regulatory LDR is well below the cap. And linked to this, if I look at your net interest margin guidance, it implies that for the next 3 quarters, you will be around 4% net interest margin. So how do you intend to get there? Is there room in terms of the LDR where you can optimize the deposit base and achieve cost of funding improvement, which will mainly drive your net interest margin? That's the first one. And then secondly, on asset quality, the increase in NPL and cost of risk, which sectors is driving the increase? And is this a legacy loan which is impacting the sector? Or is this more of a recent loan specific to Alinma?

Thank you, Waleed. Now if you probably, on the liquidity slide, I think you can see that LDR was in line with our target initially. I communicated this multiple times that we're trying to be efficient in liquidity, and we were targeting LDR to be in the range of 85% to 86%. And of course, there's always a last minute unexpected transaction, deposit/withdrawal, that may take us a little bit out of that range. And if you associate that with the NSFR, I think we've shown 103% in Q3 last year. So obviously, we had to take more deposits and improve the -- so the NSFR is also important to us. So we don't want to be efficient to the extent that we may get closer to the derivative limit of 100. So we had to sort of relax this LDR efficiency in order to maintain strong NSFR. So that's the reason we can really connect it for higher deposits taken. And the NIM, obviously as we mentioned in our presentation, we already picked up 18 basis points compared to the -- the guidance we give year-on-year, right? I mean the full year '23 versus full year '22. Year '22 full year was 3.62% and now we are at 3.80%, so we picked up 18 basis points. We are not surprised that cost of funding increased in Q1 versus Q4. And the reason for this is, again, further repricing that took place. If you go forward, if you look at the expectation for interest rate, it's not going to shift much, since Q1 should be a slower growth in cost of funding. While we have sizable assets that come for repricing or maturity that would be replaced with something, we would calibrate faster growth in the loans and we're confident that this guidance, 35 to 45 basis points will be achieved. Now back to your second point on asset quality. It's actually a combination of legacy plus new. The legacy is, I think, on the manufacturer side. I think there's some migration or some movement from Stage 2 to Stage 3 in Q1 this year. Risk of corporate loans, we're not seeing much deterioration on the existing loans. We'd expect that this is -- I mean, nobody can obviously have absolute assurance, but we don't see much of downgrading to Stage 3 from now to the end of the year for corporate. The new side of the growth and build has been some of the reasons. We opened the products for non-salary front, consumer loans, and to be honest with you, we had experienced some higher default than expected. Obviously, the pricing is higher than the normal salary assigned loans. But we're beefing up our collections, we're beefing up our capability to improve this. So it's a combination of both, I would say.

We'll move to our first question over the phone from Nida Iqbal with Morgan Stanley.

I just have a follow-up on the margin question asked earlier. If I look at your NIM trajectory so far comparing it to the first quarter of last year, the NIM expansion at Alinma has been lower than some of the peers despite having fairly high sensitivity to rates. So just wanted to understand what's driving that? Do you expect your margins to kind of continue to expand? Is there part of the book where asset deals have not repriced fully yet. So it would be great to get some further color on the margin trajectory from here, please. And then secondly, on the loan growth dynamics, they're quite interesting this quarter with the unsecured and the consumer loans growing faster than corporate. If you can just shed some light on your expectations going forward from here? Do you expect this trend to continue? And then on the corporate side, are you seeing a pickup in terms of Giga project link financing, some color there on the sector driving the corporate loan growth would be great, please.

Thank you. Now as far as the -- I think you mentioned that we may not have stronger NIM expansion compared to some of our competitors. I know one competitor has much higher CASA and that certainly helped because we've seen a significant increase in the cost of funding. If you recall, at the beginning of the year, we were like very low, now we closed the year at 5.50%. So that's a significant increase in rates. And of course, we have Time deposits that tend to be short term and reprice very quickly. But as I mentioned, you already picked up 18 basis points in our NIM in Q1. Our guidance is 35 bps to 45 bps. We're expecting better price pickup on the interest rates, on the assets. However, the cost of funding -- the rate itself is not expecting a significant change from now to the rest of the year. There could be some basis point increase, but certainly will be less than the basis point increase in the cost of funding that we see in Q1. By the way, on consumer loans, the expansion is not all [indiscernible] funds, a small portion is [indiscernible] cover the expectation of the consumer loans...

Yes, still our consumer loans portfolio, over 90% is already assigned, and we opened a new segment, quarter 1, 43% of the new segment which is totally collateralized, and we could rebracket in a few months. So the mix is now much better, and we could reprice almost 33% of the new sales [indiscernible], which gives us an opportunity to enhance [indiscernible].

I think you had a question about project finance. I think if you look at -- we had already witnessed strong growth, almost 4% in project finance in Q1 only compared to the end of the year last year. So we picked up 4% growth in consumer loans and that's in line with our expectation, and that will continue because I think we still continue to see significant demand coming from the project finance side.

We'll move to our next question from Naresh Bilandani with JPMorgan.

It's Naresh Bilandani from JPMorgan. I have 2 sets of questions. One is coming back to funding, and I'm sorry to tear hear a part of this one. Could you please throw some light on what has been the source of these deposits, because we've seen a pretty significant pace of deposits come through, not just in Alinma, but in some of the other peer banks also. So could you please shed some light on what has been the origination, what point has been the origination of these deposits? And what is the average tenor of this liquidity? I'm just trying to take a guess on how long will this liquidity stay on the balance sheet? And if this has to be rolled forward, what could be the pricing impact at this stage? On similar lines, given that you had 2 quarters of 10% quarter-on-quarter growth in deposits, do you intend to see this pace of deposit gathering continue in the second quarter as we have seen in Q4 and Q1? Or this is it? This was the liquidity build that you have to do. And from this point on, it will just be deployed towards growth? So that's the first set of questions. That's the average tenor of liquidity, the source of liquidity, and the pace of this liquidity. And the second one is just trying to understand if the current liquidity gathering was factored into your estimates at the start of the year, or not completely? I'm just trying to think if there could be any upside to your credit growth guidance? Given that you have significant liquidity on the balance sheet now, can this translate into higher than projected growth as we go forward into Q2 and Q3 from this point on?

Thank you, Naresh. Let's see if I fully understood your questions. I think the source of deposits, we had almost 3% growth in CASA. That's one source of deposits that we managed to grow. In terms of time, we had the government deposits that came in through Central Bank to all the Saudi banks, and we had further increase coming, I think, in Q1, I don't recall exactly how much was it more that came in. Of course, the quasi-government, the large depositors, the likes of -- it's well-known depositors that either PIF, [indiscernible], you name it. This is the usual names that you hear all the time as institutional depositors. As I mentioned in the previous I think question, we talked about the level of LDR being below 80%, almost 79.9%. And that's usually not very efficient. The reason was just to be much more comfortable NSFR. I think we reached a good level of ratio on NSFR. There could be a volume growth, yes, but I don't think it's going to be significant because I think we need to build the LDR higher, a little bit higher. So that means we can basically afford to grow our assets without having to take Time deposits again and up to a certain level. Then I think there is a question of...

Financing [indiscernible]...

The fact that LDR is lower, that means we're going to accelerate more. I mean we do look what was the demand and what is our risk advertised in terms of providing financing for these companies. I mean, you have strong growth in multiple sectors by the way. I mean, I mentioned 4% came quarter-on-quarter from project finance, but we had even stronger growth came from retail side, stronger growth came from mid-corporates. So it's a multi -- even SME had a very strong growth in Q4. So it's a multi -- and it's not like 1 sector or 1 industry that's really driving the growth. But obviously, in terms of size, mid-corporate and SME is small, but growing fast, but their impact on the portfolio is less, obviously, than the impact of say large corporates or project finance. I hope I answered your questions.

You did, indeed. Just a follow-up on this one. I think one point that I also was keen to know, what is the average tenor of the liquidity of the deposits that you have been able to garner. And perhaps just checking on one point, maybe on the flip side, as I earlier asked you if this could offer an side risk to the credit growth guidance. As we can see, half of your loan growth actually came from retail. Now with the slowdown coming in mortgages, do you believe that this actually offers some downside risk to growth from this point on? And is retail growing as fast as it was in the first quarter? Or have you seen some slowdown?

I'll take the first part, and leave the second part of retail to Saleh. In terms of deposits, ancillary market in general is not surprising. The tenor tends to be very short term. We try to push for longer duration. The problem is, if we go for 1-year deposits, for example, from customers, very few institutional depositors do over 1 year, okay? So it's not that our intention is we only take short-term deposits. The demand of the institutional depositors always tends to be short term. We get sometimes institutional depositors asking for rate for even like 3-week deposits or 1-month deposit, not necessarily even 3 months. So we're trying to do this. We worked on the banking side to get a longer-term funding, but that's our customer deposit, but it's part of the funding strategy in the bank. We continue to push. As we mentioned, in our efforts to introduce maybe structured deposits that may incentivize customers to go for a longer duration, but floating, so they can get the recent rates, but allow us to have longer maturity deposits. And as you know, we still -- we have -- potentially, on the table, we can go and issue also internationally some support that will provide also longer duration. On the retail side, I leave it to Saleh.

Yes. As mentioned by the CEO at the beginning that we introduced more products this year, and we will start seeing the results of those products. Also, we are focusing in the new segment, as I mentioned, that it will be fully collateralized funding and repriceable. And as I said, 43% of the sales in Q1 come from this segment. We continue to focus on our credit card and building the portfolio. It is a very sound portfolio. And we have got awards from Giga International that we have the highest growth in our credit cards in Saudi last year, and we still see this growth happening this year. Also, the new products, for example, the auto lease became from zero to hero, and maybe the CFO will increase the target for us this year, because we achieved the full year target in Q1. The better quality of service and enhancing of status as mentioned will continue to acquire more customers and focus on the new profitable segments. We think our collection team will introduce more extensive work at collection team. We had more people to help out collecting on the right time and be on top of things if other things go unexpected.

But also in terms of -- if I may add, in terms of non-salaried assigned loans that we offered and we have seen some migration to Tier 3s, closure is one aspect, but the other aspect is our tightness of the lending criteria. So with lesson learn, we continue to improve on how do we lend to this segment, and that will give better results going forward.

We'll move to our next question from Shabbir Malik with EFG Hermes.

Just wanted a few clarifications. So I think you mentioned in the earlier part of this call that you're aiming to increase NPL coverage to 150%. Is that -- did I hear that correct? And is your cost of risk guidance factoring in taking into account that target? Second question is on the cost of funding side, again, a clarification. Just with the improvement in liquidity and maybe a moderate increase in interest rates, do you expect cost of funds to be relatively stable going forward for the bank? And thirdly, do you expect any risk of repayments on the corporate lending side, especially because of higher interest rates going forward?

Now on the NPL, we said that we're fairly confident that our coverage ratio will be above 150%. And I mentioned, I think, during my presentation that we are in the process of finalizing some settlements, some recoveries, we're fairly confident in certain cases, as well as the guidance and our cost of risk will all lead to higher provision -- higher coverage ratio above 150%. Your other point about potential repayment. Actually, when we looked at our corporate portfolio, we looked at the ones that are subject to 1-year SAIBOR. And we start working very closely with the clients through the ability to reduce pricing on the spread, plus potentially maybe additional financing for the good clients in order to incentivize them to move to a 3-month rate. And we had some success story there. That's in our efforts to improve the repricing. So the NIM, yes, guidance, we're fairly confident of it. We have not seen significant prepayments. We had prepayment last year, if you recall, when I said there was intense competition on pricing, and we lost some deals because of the very low price that was offered by some of our competitors.

And just maybe on the funding side. So we've seen good growth in deposits and it seems to be a sector-wide trend. But specific to you, what has been your success in terms of targeting some of the nontraditional sectors, not just government, but let's say, the private sector retail. What has been your success on that front?

Well, I think in early days, when we talked about our strategy, we said, look, we were very good in giving financing, but not much in terms of capturing salary businesses. That completely changed. Over the last 2 years, we've been focusing on -- yes, we're still going to be -- obviously, our core business is to finance. But when we finance corporates, we try as much as possible to win more business with them in terms of cash. If they have outlets, we have point-of-sale businesses with us. If they have online payments, they want to have e-commerce payments with us. Obviously, they have payroll, they have employees who want to have the payroll, the operating account with us. We're also putting significant efforts in attracting new segments in the corporate side, whether the SME, whether the mid-corporate, whether the new projects we're financing. Even the idea of having the hedging instrument or hedging derivatives now in our treasury has allowed us to improve the project finance to not only be the financing side, but also the hedging side. That's why we beefed up our derivatives and we expect that to continue to increase. So yes, it's efforts from acquiring new customers in all segments, including retail and affluent and private. Our affluent and private are the main provider of noninterest-bearing deposits, but as well as cross-selling and acquiring new customer position in all segments within core.

[Operator Instructions] For our next question, we'll move to Rahul Bajaj with Citi.

This is Rahul Bajaj from Citi. Thanks for the presentation. Two quick questions from my side. The first one is on OpEx cost. So I think you mentioned that you closed 10 branches during the quarter, in first quarter. Just wanted to understand is the impact of those closures kind of baked in, in the first quarter numbers? And you mentioned there are more branches to be closed soon. So just wanted to understand what is the kind of size of branch closure we are talking about here and over what period will these be closed? And could there be kind of restructuring or one-off charges for closing of these branches, or those kind of one-off charges are pretty limited? So that's kind of my first question. The second question is on the Time deposit growth. I'm sorry to go back to that point. You mentioned that a large part of the Time deposit growth came in towards the end of the quarter. So is it fair to assume that the cost of funding increase coming from those Time deposits will be felt primarily in that second quarter and it is not reflected in the first quarter numbers? Or are they already there in the first quarter numbers?

Let me address the second point because I think you were not very clear about the question. I mean, if you look at, I think, Page 20 or something, with liquidity, you can see that how we dropped from starting, I think, Q4 and Q1 this year, right? So we reduced the LDR in order to have a better also improvement on NSFR as I mentioned. And you can see NSFR dip to 103%, and that's why we actually relaxed the sufficiency rules on liquidity, so that we could take more deposits in Q4 as well as Q1. So the growth of deposits not only came in Q1, but also some came in Q4. In terms of growth on the cost of funding, I already talked about it. Most of our liability is pretty much close to the current rate, and we're not expecting significant repricing in the quarters to come. There could be some potential volume impact, but if we had another strong quarter of growth in lending, we may need to relax this or unrope this LDR efficiency. That'll allow us to grow without having taken deposit, but if the growth is faster, we have to take some deposit, as well as our tier effort to improve CASA. So Time deposits is the last resort. Efficiency, the growth in CASA, and then you have to make it up from Time deposit. By the way, closure, I think there is misunderstanding. When I say merging branches, I don't mean 2 branches been merged. I meant what I -- maybe I didn't explain before. Currently, typically, in 1 branch, we have a male section and then, say, on a second floor or first floor, we have a female section. So you have -- typically, I would say [indiscernible] 10 men plus 5 ladies, 15, typically. What we did is now we made it a mixed environment where we still have 10 people, mixed, ladies and men, it's no longer separated. And that could dramatically release 4 to 5, maybe, let's say, be conservative, 4 head counts. Those 4 head counts would be used for the branches that we're opening or used in other areas of business without having to hire new people. For the cost, I leave it to Adel.

The first point on the OpEx and the question you're linking this with the merger, of course, there will be some cost impact there as a saving on the OpEx. But overall, if you see on side, as mentioned on Slide #19, the growth quarter-on-quarter was 18%. But if you look at it on a sequential basis, the overall OpEx has grown by 1%. And looking into this 1%, if you compare to the fact that this 1% actually is lower than the average growth sequentially in the last 4 quarters, which used to be on average 5% or more. So from Q4, we are seeing the expenses. Of course, there will be some expenses remaining that is normally associated with the maintenance and the growth business. But as I mentioned, this sequential growth that you start to see from Q1 in one way or the other tells that the bank is heading towards maybe the end of the investment cycle that we've been talking about throughout last year. But sequentially, we see the growth in OpEx between Q2 and Q3 last year was 7%, 6% was from Q3 to Q4, and then now we're talking about almost 1% on a sequential basis growth. So that's just hopefully answering the question on the overall OpEx and then back to the merger to finish.

We'll move to our next question from Chiro Ghosh with SICO.

This is Chiro Ghosh from SICO Bahrain. Two quick questions. The first one is, when we were speaking one of your peer banks, they witnessed some kind of asset quality deterioration in the SME sector. So this remains to be one of your focus areas. So are you also witnessing deterioration in asset quality in the SME sector? And what exactly is this program-based lending. So I understand what is Kafalah. Please pardon ignorance, but if you can please explain what exactly does this program-based lending comprise of?

Yes. I mean the program-based lending is basically a lending similar to retail. Retail -- in typically, consumer loans or mortgage, there are conditions need to be met in order to have the loan. So you have to be clear in scenario, you have to have capacity for the payment of the monthly installments, and so on. So there's certain conditions, you have to be employed, you have to transfer your salary, whatever reason. And once you tick all the boxes, you get the loan. That's exactly what we're doing...

Is there any kind of government backing which will lead to lower default, or there is nothing like that?

Well, yes, we can. Theoretically, we can give program-based lending, and if we felt, we can go and apply for Kafalah. We can do that. But the idea of program-based lending, let me give you an example, based on your average or point-of-sale financing. So based on your average sales volume over the last 6 months, we can -- and you're going to work with us, your point of sale with us, then we can give you a percentage of that to market lease for loans. And then one program for payroll payments and so on. So it's a criteria-based lending. When we say program-based, it's a criteria. You tick all the boxes, you get the loan. I think you had a point about deterioration on SME, which I don't know why you mentioned this, based on what?

No, I'm asking because when there was conference call by a peer bank, so they were witnessing SME defaults, I mean. So are you also witnessing something? Or it is some specific ones which they witnessed?

You are saying that you're hearing this deterioration from another peer bank. We are not seeing any significant deterioration on the SME portfolio.

Our next question comes from Nauman Khan with SNB Capital.

Majority of my questions have been answered. Just a couple of questions. One, coming back to the margin expectations. You're talking about 35 to 45 basis point increase year-on-year. So does this assumption include any rate cut towards the end of the year? Or it doesn't? This is one part of my question. The other is about the cost again. You talked about the cost there was 18% and 1% sequential increase quarter-on-quarter as well. Was there any one-off, because you're talking about less than 32 basis points -- 32% cost to income by the end of the year as well, currently standing at 34.8. So do you think there was any one-off in Q1, which we need to adjust? Or it's just a factor of increased operating income, that's why 32% coming down cost-to-income ratio?

Thank you. As you know, we will and we continue to commit to fully review the guidance every quarter, and we felt, as a management, we see it differently, we will report it differently. At the moment, our current forecast is in line with our guidance. Based on second quarter results, we will reassess all these guidance and if we felt there is something changed or something better than expected or lower than expected, that would lead to us -- I mean, the guidance will do that. We do it every quarter. We don't communicate guidance and ignore it for the year. We do assess it every quarter. I think on the cost-to-income ratio, we have to realize, as you see, the growth in operating expenses quarter 1 versus quarter 4, only 1%, and we've been saying that we've already done -- bulk of our investment is already done and we should see a much lower growth of expenses compared to what we've seen over the last couple of years. At the same time, we should expect to see a faster growth on our top line. So over time you're going to see faster growth in the top line versus the operating expenses, which will lead to continuous improvement, and we believe our guidance on cost-to-income below 32% is still valid.

Just one question that I asked earlier about the margins, are you assuming any rate cut towards the end of the year? Or it doesn't include that?

No. Whenever we forecast, we take the forward yield curve as the markets see it on the day we actually reforecast. So if the market has different views, there is somebody saying -- you can hear someone saying potentially another 25 basis points, you see the message from Central Bank, not likely any cuts or much rate increase, it's all depending on the CPI numbers that will continue to come. And if it is under control, the number of new jobs created seems strong, supporting further increases, there is a need for further action to control the CPI. I think the CPI list recently just came 4.9%. So that's a bit of a good news that's declining, maybe should expect it around the market expectation, but we always look at the yield curve as the market as we take it from like the Bloomberg of Reuters.

Our next question comes from Aybek Islamov with HSBC.

I'll be very quick. So first question, can you remind us what's happening with the introduction of the open banking directive in Saudi Arabia? That's the first question. And how is it going to help Alinma Bank specifically? What are your thoughts here? And the second question is AT1 funding. Are you planning to issue AT1 funding this year? Obviously, your deposits have increased quite a bit in the first quarter. So what are the thoughts about additional Tier 1 funding? And is it going to be in dollars or in Saudi riyal, if you can comment?

Thank you, Aybek. Now in terms of open banking, we're fully in line to be fully compliant with that. We already have our effort, even our open banking strategy. This has been finalized. Whether it's opportunity or risk, it depends how you look at it. For us, I think it's at present both. I think there's good opportunities if you can do a good job. And based on our strategy, we may also have better value in terms of the business that we can do. If you're not investing, you do not have the right strategy, it could be also a risk. For the AT1, I mean, we don't plan Tier 1 instruments this year. We still have it on the table all the time if we need it. If we do issue, maybe potentially, say, for sake of argument, strong growth plans continue, and we wanted, as I mentioned, to also continue to get the opportunities of this loan growth as well as continue to pay dividends, if we see a need, it's always on the table. I can imagine if we do a Tier 1 in order to improve, we will liquidity in the market, it's better to go international. We have not been very active. We saw the banks collectively have not been very active in tapping the international markets. If we go locally, it means basically some CASA being converted into investment of support. And that's not always ideal. So we may go international if needed. We do have senior program that we can go on to international in dollars. If we feel the need, if we see more liquidity, better spread, better pricing, yes, we'll consider. It's always on the table, these instruments, whether Tier 1, Tier 2, or senior.

Our next question comes from Olga Veselova with Bank of America.

I have 2 questions today. One is again about the deposit inflow in the first quarter, which was very impressive. So we noticed a spike of monetary base M3 in March. And this holds well with your solid inflow of deposits. And you mentioned during this Q&A that these were driven by the government funds. Can you share more light on that? Was there some tactical change in government behavior on allocation of state funds? How these deposits are allocated? Are they going into the banking system on auction basis or not? And if not, then how exactly the government decides which portion of deposits each bank gets? So this is my first question on M3, on monetary base. And second question is on Shareek. There was some additional news regarding Shareek program announced in the first quarter. Can you share your thoughts on potential implications of announced details for Saudi banks, including Alinma? Any color would be helpful.

Thank you. I think in deposits, I think there was a question that I was giving like main sources of deposits. And I mentioned as one source is the government deposit that came in, but I mentioned also the institutional deposits like the names that I mentioned, the growth in CASA, all these are helped in terms of getting deposits. So it's not just one source. Those are -- I hope you have not misunderstood that the deposits only came from the government. However, Central Bank do also act as a bank for the government, and they do manage the government funds. They place a lot of that money overseas. And as then their role, if they see a need for more liquidity in the market, it's no secret, I mean, it's been with a strong loan growth. And of course, some of the liquidity has been a bit squeezed, I would say, not an issue of finding deposits. It's always just translation of the cost of deposits. So when competition is high, you tend to pay more, a lot more typically than when liquidity is ample. You end up taking the path below SAIBOR. You may get a SAIBOR dear and lower. But at the start, you end up having to compete for this deposit and you end up paying like 30 basis points or more to get the deposits. So on these orders, they can replace that money in banks. And I guess they allocate that. I mean, I don't talk on their behalf, but I would imagine they not getting the size of the bank. They allocate that money based on the size of the bank. In terms of Shareek, what is Shareek? Shareek is an investment commitment by some of the private sector companies, large corporates. We as a bank don't have direct commitment in Shareek. However, when any corporate is committed to invest a certain amount in the next few years, that amount of investment will certainly require financing. And this is where we benefit as banks by supporting this program. We're actually benefiting from seeing more demand on credit. And that is where it's a win-win. It gets the financing. We also get more demand of credit.

Thank you much. Given that we've come to the end of the time for the call, I would like to thank the Alinma Bank management team for their insights and the time on the call. And I would also like to thank all the participants for dialing in and for their questions. This concludes today's call. Thank you very much for joining. Have a good day ahead.

This concludes today's call. Thank you again for your participation. You may now disconnect. Have a great day.