Alinma Bank (1150) Earnings Call Transcript & Summary

Good day, and welcome to the Alinma Bank's Q4 2023 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Waleed Mohsin. Please go ahead.

Thank you much. Good day, everyone, and thank you for joining today's Alinma Bank's Fourth Quarter 2023 Earnings Call hosted by Goldman Sachs. The call is intended for investors and analysts only, and any media representatives should disconnect. It's my absolute pleasure to welcome Alinma Bank's management team joining the call today, Mr. Abdullah Khalifa, Chief Executive Officer; Mr. Saleh Alzumaie, Deputy CEO and Head of Retail and Digital Banking; Mr. Jameel Naif Alhamdan, Head of Corporate Banking; Mr. Adel Saleh Abalkhail, Chief Financial Officer; and Mr. Ahmed Sager, Head of Investor Relations. So without any further delay, let me pass the call on to Alinma Bank's CEO. Thank you.

Thank you, Waleed. Hi, everyone, and welcome to our earnings call. As usual, I'll take you through a quick presentation about high-level financial performance and a reminder of our strategy and our progress in implementing that strategy. Then I'll hand over to the CFO to take you through a detailed presentation on the financial statement, the performance of 2023. The idea, we'll try to make as much time as possible for Q&A. So with that, we start with Page 6 in the pack that was sent earlier. Our financing, our loans portfolio reached SAR 173.6 billion, an 18.5% growth over last year. Our total assets also witnessed a strong increase of 18% to reach SAR 236.7 billion as we now are the sixth largest bank in the country. Our operating income increased by 22%. Our net income increased by 34% to reach SAR 4.8 billion. Our NPL ratio reduced to 1.61%, and our coverage ratio improved to 155%. Customer deposits, we went through a strong growth of 29% to reach SAR 187.9 billion, but more importantly, the growth on CASA increased by 10% to reach SAR 90.6 billion. Obviously, with the strong growth in loans and that has to be financed by time deposits, our CASA has diluted as a percentage of total deposit to 48.2%. Cost to income improved from 34.7% last year to 31.3%. Our net profit margin or NIMs increased by 19 basis points to reach 3.81%. And our ROE increased by 353 basis points to reach 17.2%. Maybe it's a good opportunity since we finish now a third year of our current strategy, this journey, 5-year journey that we started, just to comment on the ROE, we have more than doubled the ROE that was in 2020. It was 8.4%. And within 3 years, it's more than doubled to reach 17.2%. Also something that we have not actually included in the presentation, but if we take total shareholder return, we reached, over the 3-year journey, 156% while I think the market competitors are averaging around 56%. So that's a good journey that we had over the last 3 years. If we flip to Page 8, which basically talks about our current strategy. And as you know, we wanted to be known as the fastest and most convenient bank in the country. We want to be #1 in Net Promoter Score. We want to be #1 in terms of employer of choice. More details on the next page. So in order to deliver on our strategy, we have to obviously deliver on building a digital factory. We also created and use more of the data in terms of making decisions and using advanced analytics and machine learning technologies. We also had a strong transformation in culture that really help us not only to attract but also retain the talents. In retail, the 3 pillars of our strategy there is basically building an affluent and high-net-worth franchise, focusing on attracting more of the youth segments and offer the best customer experience. In corporate, it's about being a core bank not only to large corporates and project finance that we will focus on from the beginning but also building that or expanding that to cover also mid-corporates. We want to develop our SME business and grow our cash and trade finance business. Treasury. We want to be the core bank partner for our corporates' needs in terms of hedging or investments as well as building more into the FI business and maintain high-quality ALM function. So far -- on the next page, Page 10. So far, out of this strategy that started, I think, with 64 initiatives, now it reached 77 initiatives. We already delivered 62 of those in 3 years' time. So just to highlight some of the things that was done during Q4. We expanded and implemented more advanced analytics to help us on the cross-sell. We've launched digital subscription for payroll services. We launched digital refinance. We also installed 24 more TCRs to reach 108. We're going to continue on that journey. In corporate, the RM sales tools has been implemented, the first phase at least of it. We had experienced 140% growth on mid-corporates, with 135% in non-funding on mid-corporates. On Kafalah, 20% growth, and achieved a forward FX business of SAR 28 billion. On the next page, we got to work on final 15 initiatives. And by the way, this is because of our success and implementing those initiatives and the speed of doing that. We're actually also working now to potentially bring in more initiatives because we have 2 more years on the strategy. We've delivered already 62 and got to deliver more this year. So we needed more initiatives, and this is what we're working on. But things that we're going to expand or work on it this year, we're going to continue to expand our digital factory. We want to continue to develop retail, and we're working on developing a new retail credit scoring system. We are working to digitize our journey and mortgage or mortgage journey as well as enhancing the family ecosystem. We're going to continue -- as you recall, we started last year to merge male and female branches. We've done -- we've successfully done 40 last year. And we're going to continue to expand on this process, which giving us obviously a much better efficiency in running our branches. We're going to continue to install the TCR, as I mentioned before. We're going to continue, for corporate, to develop our new portal for corporate clients. And we're going to complete the loan origination system. We launched one phase of it last year, 2023, want to complete it this year. We're going to continue to enhance our offering of structured deposits and working hard to basically generate more long-term funding. And with that -- I'm trying to be fast, so I can give more time for Q&A. With that, I leave the floor to our CFO to take you through a detailed presentation of our financial performance.

Thank you. A very good afternoon, and welcome you again for the earnings call for Q4 2023. As usual, I'll be running you through the financial performance, and that will be followed by our outlook and the guidance for the year 2024. Starting on Slide #13 on the balance sheet trends and growth, we continue to see a good growth in the financing that resulted in 18% growth in the overall balance sheet. As you can see in the top right graph, the overall asset growth, 18% year-on-year, was 28% growth in interbank, 12% growth in investments and more importantly 18.5% growth in net financing year-on-year. In the liability side, the growth was 20%. And obviously, this was mainly led by the 29% growth we have had in the customer deposits, SAR 42.7 billion growth year-on-year in customer deposits. As you will see in separate slides on deposits, this was mixed mainly in the time deposits but also have seen the 10% growth in CASA. Slide #14, where we'll see the P&L trends, 34% growth year-on-year. And we will have a separate slide both on funded and non-funded income, operating expenses and impairment. But the funded income, we have seen year-on-year 26% growth. We have seen also continuous growth, 9%, in the non-funded income year-on-year. Operating expenses, we closed the year with 10% growth in operating expenses. Impairments was 9% higher than the impairment charges we had last year. In the composition of the overall operating income, 79%, almost 80% on the funded income. Obviously, the 15% will be on the fees from banking services and the 6% will be foreign exchange and the other. Moving into Slide #15 on the financing specifically. We continue to see the growth in the gross basis. On a sequential basis, for Q4, we have seen 3%. As of December, the financing portfolio in the bank was 68% corporate -- large corporate and project financing. The mid-corporate, which is the commercial segment, represents 4% of the portfolio, another 4% for SMEs. And we have the 24% for retail split equally between business home financing and mortgage. If you can see in the bottom left graph on the segments, the growth year-on-year was, across all segments, 13% in the home financing. Personal financing was 19%. Large corporate and project financing, 15%. And we have seen higher growth, of course, it's a smaller base, but in corporate -- mid-corporate and SMEs, 140% and 31%, respectively. On Slide #16 on the deposits. We have seen an overall 29% growth in deposits during the year. Of course, 55% of that growth -- 55% was time deposits. That's SAR 34.7 billion. Of course, that was funding the growth we have seen in the financing, as we mentioned earlier. But more importantly, as mentioned by our CEO before, is the 10% we closed the year with the growth in CASA. If you can see in the graph in the center of this slide, the CASA as a percentage of time deposits -- of total deposits. As for the diluted there, of course, we have seen growth in time deposits on a sequential basis in Q4. If you recall, this percentage was 49.9% diluted, now 48.2%, but mostly on the growth we have seen in time deposits. Slide #17, this is sort of the details on the income from financing and investment. Overall, 74% growth in the funded income, as mentioned earlier, 45% was from investment portfolio, and also the 79% was growth from the financing income. If you can see the graph in the bottom left, this is the movement year-on-year on the NIMs. The net profit margin, we have seen an expansion of 19 basis points. And the breakdown of that, we have seen 189 basis points expansion on the financing along with 15 basis points expansion on the investment yield, that was all offset by 185 increase in cost of funding. So we closed the year at a NIM of 3.81%, as mentioned earlier, that was a 19 basis point expansion. Slide #18 on the non-funded income, fee and other income. On a sequential basis, we have 4% drop from Q3. However, if we look at the top right graph, looking into the year-on-year, non-funded income, overall 9%. And the breakdown, we have seen a 21% growth in the fees from banking services. Exchange income, also another good year to grow at 14%. And also the other income, 48, that was lower because of the one-offs book for the other income during 2022. Slide #19, on the operating expenses. As we can see on a sequential basis, only 1% growth in the OpEx for Q4 versus Q3. So that is translating into 10% growth in OpEx. This is lower than if we recall Q3 year-on-year, the growth in overall OpEx was 13%. So we are seeing a slower growth on a sequential basis in our OpEx. The growth in the OpEx year-on-year, 11%, was in personnel cost, depreciation and amortization, 17%, and the remaining 18% was from the other G&A. The graph in the center of the graph, this is actually showing where -- the direction of the cost-to-income ratio. The higher income and also, as I mentioned, lower expenses growth have led the cost-to-income ratio to reach 31.3%. This is down from even Q3, which -- where it was 51.7%. But overall, this is from where we ended December 2022, where cost to income was 34.7%. On the next slide, impairments, almost -- only 3% growth in the impairment charges overall, 6% year-on-year on the net impairment chart. The overall impairment allowance, 78%, relates to corporates. The remaining 22% will be for the retail portfolio. The graph in the center of the graph is showing the movement of cost of risk. If you recall, cost of risk year-to-year was 84. At end of the year, the cost of risk closed at 77 basis points. On the Slide 21 on the NPL and NPL coverage. If you look at the NPL, it's almost flat. There's 3%, but that would be just for rounding. But for the reduction in NPL from Q3, where we see Q4 NPL ratio standing at 1.61%. The NPL coverage ratio in the bottom left graph, we have seen an improvement from the same period last year where coverage ratio was 136%. We closed the year almost 155% coverage and as we mentioned earlier and before that we would always intend to be within the 150 average for the coverage ratio. Just in the stage-wise coverage, we'll see in the graph, the Stage 1 coverage slightly declined due to this acquisition of higher-quality credit. And also Stage 2 has seen a drop, but this is for certain movement from Stage 1 to Stage 2 with lower coverage. Of course, the reduction that we would see on Stage 3 would most likely be for the write-offs within -- during the year. On Slide 22, the capitalization and liquidity. Pillar 1, we are at 17.5%. And this is lower from last year, of course, for the growth in the risk-weighted assets given the growth in financing that we have. Profitability, ROE, as mentioned by the CEO earlier, expansion of the ROEs, we reached 17.2%. And also, this is also reflecting the ROA as well, which is standing at December of -- 2.2%. LCR on a comfortable level, well above the regulatory minimum, standing at 147%. LDR is at 80.5%. That's the regulatory LDR, which is well below the regulatory maximum. And also NSFR, we closed the year at almost 109%. And this is an improvement from Q3, which is well and above the regulatory minimum. Moving into the outlook and the guidance on Slide 24. We have guided for 2023 on the financing growth initially in the year, mid-teens. This was revised to high teens. So this is meeting the guidance where the growth year-on-year is 18.5%. The guidance for next year, expecting this strong growth in mid-corporate, SMEs and also continuing the growth in retail and also the project finance and corporate, we are guiding for mid-teens growth in financing for 2024. On the net profit margin, the NIMs, the guidance was, for 2023, 20 to 30 bps, 1 basis point below the lower range of the guidance where we closed 3.81%, which is a 19 basis point expansion. Within the expectation of rate cuts, and also that would -- partially will set by the expected improvements in margins, we are guiding almost to flat NIMs, minus 5 basis points to plus 5 basis points for 2024. The cost-to-income ratio, the guidance 2023 was below 52%. We closed well below the guidance, 31.3%. Of course, with the growth in income and also the digitalization and the impact of efficiency, we are guiding for 2024 for around 30% cost-to-income ratio. In the ROE, the guidance was above 17%. We closed the year at 17.2%, so within the guidance. For next year, with the improvement in the top line, we expect also efficiency to drive further improvement in ROE, and we are guiding for above 18% ROE for 2024. Cost of risk, the guidance was 65 to 75 basis points. It's 2 basis points more -- higher than the higher range of the guidance. Just for the bank, ensuring that we have a comfortable coverage ratio, we closed at 77 basis points. We are cautiously expecting stable credit. And the guidance for 2024, it remains as of that 2023, which is 65 to 75. As far as the CAR Pillar 1, we're guiding 2023 17% to 18%, actually 17.5%. With improvements in top line and also better management in equities, we are guiding for CAR Pillar 1, 19% to 20%. And that's just to remind us, the return on equity target for the long term 2025, which remains above 18%. With that, I will hand this back for the Q&A.

[Operator Instructions] Our first question comes from the line of Nida Iqbal with Morgan Stanley.

I've got 2 questions. Firstly, on the margin side of things, I just wanted to understand your margin guidance of minus 5 bps to plus 5 bps. Under what scenario do you expect the margins to expand plus 5 bps? It would be helpful to get some more details around the assumptions here. And then on your expectations for return on equity in 2025 remaining above 18%, if we could get some color around that because presumably, with rate cuts, we would expect margins to compress. And so therefore, what would you expect to be the offsetting drivers here in terms of keeping returns stable? And secondly, I wanted to ask on asset quality, you mentioned that you're cautiously expecting stable asset quality. So perhaps if you can shed some light on where you see the risks.

Thank you. Now on the margins, basically, when we prepare our business plan, we take the latest forward yield curve. And in preparation for the earnings call, we even refresh that with even more recent forward yield curve. And that's what it came to. Now what can help to expand this is obviously maybe if our expectation rates or rate decline next year what -- the market expectation. If it was delayed, the rate cuts obviously will be helping and expanding our margin. In terms of ROE, I think we look at ROE, you have to -- obviously, NIM is important, but also volume is important, the mixture of products. So we're more expanding, also doing very well and expanding in more profitable sectors like mid-corporate and SME that -- obviously better margins and the large corporate or even project finance. But also declining rates typically give you a positive impact initially on the funding deposits because obviously, time deposits tend to be shorter-term. So the rate cut typically comes first as good news in terms of your funding costs. Then probably you'll notice, maybe compared to other corporate banks in the country, we're more -- we're slower in repricing our assets. So in a way, it's really helping also our efforts on cross-selling, generating non-funded income from fees and FX and derivatives and so on. That's also helping to our ROE. On asset quality, I think -- I've always -- I think I've been asked before about, throughout the cycle, what would be our level. What I said, it really shouldn't be dropping significantly below 50. 50 to 60, maybe that's the right level. So we're in that process. We're moving towards that level. I think the economic activity that you see in the country, not only on the corporate side but also the impact on it on retail, is quite positive. But we said, look, continue to improve our coverage ratio. We want to be mindful of some of the legacy exposure. If something deteriorates, would that impact, for example, our provisions? So we're just trying to be -- at the beginning of the year to be as cautious as possible. Now that obviously, as we promised you, on a quarterly basis, we're going to reassess those guidance based on what we see. Obviously, when you put these targets at the beginning of the year, you have a full year ahead of you. Later on, maybe after 6 months, the picture might be much easier in terms of the credit risk. And that could be also subject to amendments.

Thank you so much. Can I just follow up on the margin question once more? You mentioned that you take the forward curve when you're doing your budgeting. That's been moving quite a bit. So if you could just flag exactly how many rate cuts have been baked into this guidance, it would be helpful.

Yes. As I said, we look at the forward yield curve as the market sees. This is like from Bloomberg. So we don't really build our own expectation. We just take what the whole market collectively see, and that's what is reflective of the forward yield curve.

We'll go next to Naresh Bilandani with JPMorgan Dubai.

A few questions, please. One, could you please just -- following on from the previous set of questions, would you please be able to guide what is your average 3-month SAIBOR expectation for this year? I'm sure you've created an expectation which -- on which you are basing your net interest margin. So any guidance there would be very helpful. Second is, as you've rightly pointed out, I think one reason for your NIM defensiveness was also the extended repricing duration of your asset book. I know you represent this only once in a year. This was indeed the case in FY '22. Has that trend and mix continued in FY '23? Have you been able to book more loans, which are linked to 6-month and 12-month SAIBOR, which kind of gives you some defensiveness on the NIM? Has that been the case? Also, I think continuing on volumes, would you please be able to guide whether you still expect a faster growth in the time deposits portion of your deposit book versus CASA this year? Is that fair? And my final question is, if you can please throw some light on why the cost of risk fell slightly above your expectations. I know it's not too far, but typically, I think when you give a range, the top end tends to build in a conservative expectation already. So just keen to understand what the negative surprise was that came through in the fourth quarter.

Thank you, Naresh. But can you repeat the third point? I think I missed that.

On the CASA.

Yes. The third question was mainly the expectation of the trend of growth in time deposits versus CASA this year. Do you still expect the time deposits to grow faster than CASA? And maybe just for -- just to clarify, I was -- my previous question prior to that was the difference in the NIM and the extended repricing duration of the book, if that trend has continued and at what pace in 2023.

Yes. Okay. Thanks. I'll cover some points, and I think Adel can -- maybe the 3-month. I don't recall exactly the 3-month that we use based on the forward yield care. But in terms of trend and repricing, we were actually -- previously, we were pushing for shorter benchmarks, like 3 months, really resistant on giving 6 months or 12 months. And to be honest with you, in the last -- at least the last half of the year, 2023, we were much more relaxed with it. In fact, we're encouraging clients to go for a longer duration. So in a way, that is not only necessarily very similar to what we had before, maybe improved yields a little bit further. On the time deposits, obviously, when we give targets of loan growth in the mid-teens, naturally that it cannot be only funded by CASA. So we're going to continue to obviously take more time deposits than we take CASA. We will focus a lot on customer acquisition or customer cross-selling products that help us in growing more CASA, and we're going to continue. And I think we have a good track record. I think in 2033, we had 10% growth. If you look at -- I think if you look at the markets, we'll be -- I'm sure it will be less than this. So I think we're one of the best in terms of improving on CASA. And the last point I'm going to cover, it is the cost of risk. Why did it go beyond -- slightly beyond our guidance. I think maybe to explain this, it's helpful that a company that we reached -- as a listed company that we reached a settlement. I think we announced that we reached a settlement with the bank. And they were actually instructed by, I think, the stock exchange to actually explain what -- or disclose the name of the bank, and they did disclose it. It's Alinma. That agreement, unfortunately, we were expecting to take place on Q4. That was based on our guidance. Even when we refreshed that guidance for Q3, we still kept it at 75 because of -- that settlement was pretty much almost assured. But it took delays, and the actual agreement was signed on the last day of the month. So we couldn't really book it because the agreement itself is not enough. We need obviously some sort of additional regulatory approvals. It's going to happen in Q1 now. It's not -- it's no longer a story of Q4. Had it happened in Q4, we would have been within our guidance.

Yes. Naresh, on the SAIBOR 3-month that's been on the guidance, so as mentioned before, as we keep on updating our yield curve and see how the impact on the overall portfolio, I can say that the 3-month SAIBOR average built in on the guidance is 5.74% for the full year average.

We'll go next to Aybek Islamov with HSBC.

I would say a couple of questions. The first one is about your capital adequacy. I've seen your guidance on the CAR. You see it improving in 2024. What's your assumption behind that improvement? Do you assume some active issuance of additional Tier 1 debt? And yes, could you also comment on your CET1 ratio? What kind of trends do you expect to see in the CET1 ratio in 2024? And also, how do you think about your balance sheet leverage? I'm referring to asset-to-equity multiple. Do you see further expansion in asset-to-equity multiple at the same time when you see your CAR increasing in 2024 versus last year? That's my first question. Now secondly, could you comment, at what level of interest rates would you expect to see mortgage refinancing demand becoming quite active in the market, right? And what would be Alinma Bank's attitude should the refinancing demand pick up significantly, let's say, towards end of this year or early next year? And then thirdly, what I'd like to ask is the repo funding. I see that Alinma Bank is not using repo funding as actively as some large-cap competitors. And we've been on the conference call earlier, Al Rajhi Bank had a strategy of growing their investment book, and I can see how they're using that to maximize their repo funding. What's the view of Alinma Bank on the repo funding?

Okay. Thanks, Aybek. Obviously, when we guide for an 18.5% -- sorry, not 18, mid-teens and loans and yet our CAR is improving, it's because -- and I've mentioned this before, we're going to issue Tier 1 instruments hopefully in this quarter. And that will obviously help the CAR. And obviously, leverage will continue to increase. One of the features of Saudi banks historically have been low leverage. But I think this loan growth and more issuance of debt instruments will help to continue to raise the leverage, and that obviously has a positive impact on ROE. In terms of your question about the repo funding, we are using, we've actually done repo to maturity where we actually use Saudi riyal assets to [ get dollars ]. That was sort of a repo to maturity, and we're also expanding and exploring. Obviously, we can do more, but it's always been a balance between the funding side but also the cost of fund. And so we're trying to get more attractive deals, and we are doing this. As you know, we have a $500 million Sukuk -- senior Sukuk program. We haven't issued any of that. We're looking for better rates, so we can issue. So that long-term funding is explored. We are also talking to some international regional players for potential long-term funding and even some institutions in Saudi to go for multiple-year financing rather than the normal short-term time deposits that we have. I think on mortgage, it's really hard to assess what's the level of interest we'll go to before organizing significant refinance and mortgage. Honestly don't expect to see that in 2024. Could be a story for '25 onward.

At least we need to see 100 basis point reduction in SAIBOR, so we can be -- see it move from one box to another. We didn't see this in personal finance because that runs -- usually it's 2 years, then the customer refinance themselves. But for mortgage, I think 100 to 150 basis points reduction might cause customers more problems, thanks to [ finance ].

And on the first question, just one follow-up. Core equity Tier 1 ratio, so obviously quite a strong capital consumption. You have not published your core equity Tier 1 ratio yet, but I believe it's around 14% or just over 14% compared to 15.8% in 2022. I know you're boosting CAR with additional Tier 1, but what's the floor for your core equity Tier 1? Obviously, the growth is quite impressive, you're executing very well, but how are you thinking about your minimum core equity Tier 1?

So Aybek, on the CET, of course, the financials was not published. It will be up on the website maybe tomorrow or early on Sunday. But CET1 did not move much in Q4 from what you have seen in Q3. It's around 14%. And as you know, the limitation on capital adequacy will be the overall capitalization that would be Pillar 1 and Pillar 2 for Pillar 1 and Pillar 2 risks. So it's -- as mentioned before, the intention for further support to the capital or to the equity is the AT1 Sukuk that would support the growth that is mentioned as mid-teens. And again, the CET1 did not move, as we mentioned, in Q4 as much -- from what we have seen in Q4. And usually, we didn't really guide on the CET1, but that's the Pillar 1 capital that we are guiding for 19% to 20%. And obviously, on your question on leverage, of course, the leverage will increase both the -- any planned issuance for any -- for AT1 issuance.

You have to be mindful, Aybek, that the limit the central bank actually give in terms of minimum coverage required is actually the total of Tier 1 and Tier 2 divided by the risk-weighted assets on Pillar 1 and Pillar 2. That's how it is calculated. So it's important to look at this. Obviously, we don't disclose Pillar 2. We're not allowed to do that. But this is what we have measured, and this is the minimum capital that was required by us.

Okay. That's clear. And if I may, one last one. Your ROE guidance, is it before interest on Tier 1 debt?

Our ROE is basically shareholders' return on equity. It does not include the Sukuk, yes, before the Sukuk.

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

A question around fee income. How much of your fee income in 2023 would be volume-linked or loan growth-linked? That's my first question. And secondly, in your comment on your NIM guidance, you mentioned that in the drivers, that is declining rates mixed with improving margins. What do you mean by improving margins? Is it loan spreads? Or is it basically targeting higher-yielding segments? So if you can please elaborate on that.

Sorry, Shabbir, I think the sound quality is not that good from your connection. Can you repeat the first point?

Yes. I was -- my first question was, how much of your fees would be loan growth-linked in 2023? And secondly, in your comments on NIM guidance, in the drivers, you mentioned that it's declining rates and improving margins. What do you mean by improving margins? Does it mean increase in loan spreads? Or does it mean shift in loans from, let's say, high-quality corporates to mid-corps, et cetera? So some clarification on what do you mean by improving margins. And first one is on fees.

Clear. Thanks. On the NIM, when I was talking about margin, I was obviously referring to NIMs because I mentioned to you that when rates decline, typically, we get the benefits first in terms of reducing cost of funding because cost of funding is much shorter-term and we're a bit slower compared to other corporate banks in terms of repricing our assets. So I was referring -- I think there was a question on how -- what would make it a NIMs expansion, and this is the scenario I was giving for that. On the fee, Adel?

Yes. Shabbir, on the fees and how much -- if I got the question right on how much of the loan growth is linked to the fees, as you know, the bulk of the fees linked directly to financing is -- as per the standard, it's classified as part of the funded income and being amortized and recognized through the period. So that wouldn't be part of the fee from banking services or the non-funded income. Of course, there will be the commission related to direct finance that would be part of the fee income. But also the indirect link of if you take the revolving credit card and whatever yields is related there, but then the interchange [ and these ] fees will be part of the funded income. So it's mostly in the fee services, the fees linked directly to the lending itself would most likely be classified and there'd be yield income in the top line.

We'll go next to Olga Veselova with Bank of America.

I have several remaining. One is again on capital adequacy. It's clear that the near-term priority is raising AT1. If we look longer term, not necessarily on 2024, would you consider any tools to support core Tier 1? And if yes, then what would be preferred choices for you, whether you go for potential capital issuance or maybe lower dividends? So how you would think about this in the -- not about the next year but about the next maybe 2, 3 years given how well you grow your risk-weighted assets. My second question is again on capital. At the beginning of January, you announced this bonus share issuance took a bit like SAR 5 billion from retained earnings. From what I understand, it doesn't really impact your CET1 ratio. Given that it does not, why is it helpful? Which ratios in the bank depend on this? So they do not depend on capital size, but they depend on this shift from one pocket to another. And the third question is on cost ratio again. So you gave some comments on CASA. But just for me to clarify, do you expect CASA as a percentage of deposits to go further down in 2024?

Thank you. Now on the CAR, as we mentioned, obviously, we're issuing a Tier 1 Sukuk. We're issuing, too, in a level -- we're targeting a level where it should be enough for the next 12 to 18 months. And the idea is if we continue that growth and not seeing -- and obviously, they'll be -- with higher income, they'll be more retained if we continue with the assumptions of similar level of dividend payout so that the internally generated capital will continue to be supporting our CAR. But it's an option. My -- our preferred option if we need to is to go for more instruments, either Tier 1 or Tier 2. The idea was, why not go for the whole size of issuance that covers the next 3 to 4 years? It's not -- nowadays, obviously, the interest rate is high. So this should cover us for at least 18 months. And then later on, obviously, it's following some rate cuts and so on that, that -- this instrument will be cheaper to issue compared to the current level. In terms of bonus shares, why have we done it? And it's -- in a way, I understand that it does not -- it's just an accounting in a way. It's from retained earnings to paid up capital. However, the market, and you've seen the reaction in the market historically in Saudi, they typically like that, shareholders or investors. They typically like that in a way, and they know it's a -- initially the price, which makes us more liquid, and more people can afford it. I can't explain why they love it, but this is something that we've been getting feedback from investors, from shareholders. And obviously, we're not going to do it on a yearly basis, but we felt that there was more demand for it, so we issued it. In CASA, in terms of potentially can dilute, yes, I mean if we had very little growth next year on loans or single digit, mid-single digits or something, then yes, we can afford obviously to take less time deposits and continue our drive to grow our CASA, which means we'll improve ratio. But as we go fast as mid-teens, as I mentioned, that needs to be financed by more time deposits. So we grow on CASA, but at the same time, CASA as a percentage may continue to dilute.

Sorry, just to come back on the second question, thank you that you disclosed your feel about that. So you mentioned it's just an accounting. So then what motivated you to do that? Was this SAMA who approached you and said it's the right exercise to do?

No, no. SAMA has nothing to do with this. This is basically -- has to be approved by SAMA naturally, but it's an initiative that we as a bank have taken. So this is something -- as I mentioned to you, there is good demand, strong demand coming, and we can hear comments in discussion with shareholders and investors that there's a good demand for this. As I said, historically, it's been always seen as very positive news when a company issued bonus share, and you've seen how the markets react. And I think it's going through the same trend. So it's improved the -- I think at least when the news came out, it's improved the price of the share. That's the reason we did it.

We'll go next to Shouq Alshahrani with Lazard.

Can you hear me?

Yes, we can.

This is Shouq Alshahrani from Lazard. I just have a question from my side. We saw the government announcing about [ Sah ] Sukuk, which is for retail -- Saudi retail, which is a saving product. And seeing that the rate on this Sukuk is 5 point [indiscernible].

Sorry, we're having a bad connection.

I'm sorry, Ms. Alshahrani, you did not come through quite clearly. If you could repeat your question.

[indiscernible] issuance [indiscernible] and they have a rate -- profit rate on that of 5.6%. Do you think that is putting any pressure on the cost of funding for banking system, for commercial banks?

Okay. Thank you, Shouq. Obviously, the program is to encourage more of the saving in the culture, the Saudi. As you know, the limit is 200,000 maximum. The rate currently is offered for 1 year. It's not multiyear. Compared with the market rates, it's not really very, very competitive that will drive a lot. We're still obviously monitoring this. Naturally, the more deposits taken will ultimately go back to the system in the form of payments to vendors, payment to -- salaries and so on and maybe more deposit. We've been receiving AGIs or government deposits since Q4 last 2022. And in a way, if they felt -- the Ministry of Finance or the central bank felt that this is negatively impacting liquidity, then these deposits can flow back to the system. I don't expect it to be significant at the moment, but it remains to be seen.

I heard something about that's going to be on monthly basis. Do you have any information on that? They will continue to issue that like on monthly basis going forward.

Yes, monthly subscription, but it's 1-year term. But still, the whole -- you cannot -- as a customer, my understanding, you cannot go for 200 every month. Once you reach 200 over this 1-year period, you can no longer subscribe any further. Most of the banks now offer 1 year rate as better than what was -- I mean that's my understanding of the countries now. So I don't see it as a major risk on us.

We'll go next to Mohammed Al-Rasheed with Ashmore.

Salaam alaikum. This is Mohammed Al-Rasheed from Ashmore. I have 2 questions from my side. The first question is regarding the overall asset quality in the sector. Specifically, for the overall sector, we see that there has been a widening gap between Stage 3 and NPL, where Stage 3 is becoming higher and higher compared to NPL. That's not the case for them now where Stage 3 is almost identical to the nonperforming loans. So I would just like to hear your thoughts on this divergence that we are seeing. What's the main reasons behind it? And if [ actually that ] this gap eventually close where Stage 3 should be very close to the NPL. My second question is regarding the maturity of your corporate book. So the way I see it, with a higher average SAIBOR, everyone was forced to reduce the spread of SAIBOR. So in the case of lower average SAIBOR, shall we expect some change or some refinancing to accelerate, to return, as I said, to normal levels or that might actually push up the asset yield in the overall sector as the [ core ] climbs?

Sure. Mohammed, I'll take the first question on the asset quality that -- what you might have seen in other banks difference between Stage 3 and NPLs. It's not the case for Alinma. And this usually should be the case. The exceptions you may have seen in other banks could be asked for those banks, but there could be many reasons. First, there could be some stage override for certain information that could -- that an account is maybe not moved to Stage 3 but still considered NPL. Or the other way is related to the Stage 3 itself, an account that will be still 90 days past due, but -- for certain qualitative information that is not embedded yet, and yet it's not moved to Stage 3. But as you rightly said, the ideal situation is the NPL to be equal to what you usually see under Stage 3. But we don't have a specific reason for that.

And on the spreads on -- relevant to the SAIBOR rates, yes, typically, when we saw -- when interest rate in the good old days was 70, 80 basis points, the spread was much higher than what we see now. This is not unusual. We've seen this in multiple cycles before. So when rate goes to 5 plus, whatever, usually, the spread is lower. But interest rates for 2024 is not going to be significant. Let's say, 100, let's say, by the end of the year. I don't think that automatically leads to higher spreads. However, that could be the story for '25 onward.

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

Salaam alaikum. My question is related to fee income. Fee income grew very nicely during 2023. How do you see the trend in fee income going into 2024? And if you could highlight any areas where you expect significant growth in 2024 as well as you witnessed in 2023. And also, if you can comment on growth in the exchange income, it was also pretty strong during the year. What led to it? And should we expect similar growth going forward as well?

Yes. On the non-funded income, yes, as you rightly said, we have seen strong growth coming in 2023. There are many reasons actually. I mean if you look at also specifically about your second question on the FX, as we have been mentioning earlier in previous calls on the efforts we are doing on the cross-selling, that is positively impacting the non-funded income. Also, if we look into the new product offerings that we have been -- credit card is one of the examples, is besides the normal fees that you would get, it's also the interchange that is ongoing based on the utilizations of the card. So FX, it's a volume, it's a cross-sell, and part of it is also the new products on FX forwards that has been introduced as part of the progress that we have seen in the strategy and also some part of it which relates to normal -- the nature of the business, the normal investment valuations, it goes sometimes ups and downs. But the fees from banking services, if you look at the major contributors there will be also the fund management from the Alinma Investments, our subsidiary, the card services, as I said, in general for debit and credit. And also the trade finance, we've seen the substantial growth in the trade finance where the commission there is also both funded and non-funded income. And of course, the remaining for brokerage and also the other remittance business, that's with the business growth. We'll obviously expect it to -- because we have seen the growth already, and with further cross-selling and also the growth of the business itself, we expect the non-funded also to be in line with that.

There are no...

Perfect. Thank you much. As we're approaching the end of the hour, I will pass on the call back to management for any closing remarks.

As usual, thank you all for your time to attend the call. We look forward for the next earnings call. Thank you.

Thank you much. That wraps up today's earnings call. Thank you much to all for joining. Thank you.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.