Alinma Bank (1150) Earnings Call Transcript & Summary

Hello and welcome to Alinma Bank Fourth Quarter 2024 Earnings Call. My name is Carla and I will be coordinating your call today. [Operator Instructions] I will now hand you over to Mr. Shabbir Malik at EFG Hermes to begin. Please go ahead when you're ready, Shabbir.

Thank you, Carla. Good afternoon and good evening, everyone. This is Shabbir Malik and on behalf of EFG Hermes, I welcome you to Alinma Bank's 2024 Results Call. I will now hand the call over to Ms. Arwa Alshehri, the Head of Investor Relations, to start the call. Arwa, over to you, please.

Thank you, Shabbir. Hello, everyone. Thank you for joining us today for Alinma Bank's earnings call for the fourth quarter of 2024. Our CEO, Mr. Abdullah AlKhalifa, will begin by providing overview of the bank's performance and financial update followed by a recap and an update of Alinma's strategy for 2025. Next our CFO, Mr. Adel Abalkhail, will present the full year financial performance for 2024 and share the updated guidance for 2025. We will conclude the call with a Q&A session where our CEO; Deputy CEO, Mr. Saleh Alzumaie; CFO; and Chief Corporate Officer, Mr. Jameel AlHamdan, will address your questions. I will hand it over now to our CEO, Mr. Abdullah.

Thank you, Arwa. Hello, everyone. Welcome to our earning call. On the high level financial performance review on Page 6, you see that our assets reached -- our financing reached SAR 202 billion. That's a growth of 16.5% over last year. Our total assets increased by 17% to reach almost SAR 277 billion. Operating income increased by 12.5% to reach SAR 10.9 billion. And as a result, our net income increased by 20.5% to reach SAR 5.8 billion. Our NPL ratio, 1.06% and our coverage ratio is 172%. Customer deposits increased by over 12% to reach SAR 210.5 billion. More importantly the growth in CASA, 20% growth year-on-year to reach almost SAR 109 billion. As a result, our CASA as a percentage of total customer deposits improved to 51.6%. Cost to income continued to drive to further reduce it, it reached 30.9%. NPMs reaches 3.7% and our ROE we closed the year of 18.8%. Now the next section on Page 8 is a quick reminder on our current 5-year strategy. Now 2025 will be the last year of this strategy. We are working now to develop 2030 strategy and following our earning call in Q4 this year, we will give you an update on the new strategy and the main highlights there. So our current strategy basically aspire the bank known to be the fastest and most convenient bank in the country, #1 in Net Promoter Score and #1 as employer of choice among the Saudi banks. In retail, we want to be the most digitally advanced and fastest and most convenient bank. In corporate, we want to be the best in terms of best customer experience as well as the best fastest turnaround time and for our Shariah to be the most innovative Shariah compliant treasury. On the next page, Page 9, gives you a bit further detail. So in retail, there are 3 main pillars in retail; the focus on the affluent and private, the focus on the youth segment and offering the best customer experience. In corporate, we want to be the core bank for not just large and project finance, but also corporate banking; we want to develop our SME franchise as well as grow our cash and trade. In treasury, obviously become the core partner for our clients' needs in terms of hedging interest rate risk or currency risk and grow our FI and of course maintain as well a high quality ALM function. Now the next page shows our journey so far. We closed, if you recall, we had 86 initiatives. We already delivered 75 of those. We still have 11 to go this year. So just to give you some flavor of things that has been achieved this year or this quarter. We launched Alinma new API, this is for open banking. We launched a new corporate portal. In retail, we launched Easy Payment Plan. We introduced persona and behavioral-based segmentation and we fully completed all the branch male and female mergers. We completed that process. All branches now are 1 branch, no more female and male sections. In corporate, we've experienced very good overall growth in corporate, 15% and also grow 14% the nonfunded assets. We had very strong growth on mid-corporates, 60% year-on-year growth as well as 39% growth in the SME business. We continue to drive and sell more of the FX forward and profit rate swaps and we've done -- so far up to Q4 we've done SAR 4.6 billion of cash flow hedge. Now on Page 11 shows the remaining 11 initiatives, things that we're working on. Not naming those 11 initiatives, but things we're working on. We try to accelerate the sale of insurance through our network and through our apps and Internet. Want to automate Customer Value Management. We want to introduce cash management and forecasting solutions for our corporate clients. We're about close to launching our new E-Trade system. And we're going to focus on treasury, continue to focus on long-term funding as well as cross-selling. And with that, I give the floor to our CFO to take you through a detailed presentation on the financial performance.

Thank you. Good afternoon to you all and welcome again for our earning call for Q4 results of 2024. As usual, I'll be walking you through the financial performance in a bit of detail. So starting with Slide #13 in the presentation on the balance sheet trend. Total assets movement year-on-year is 17%. We've seen 28% increase in interbank, 12% in investment; but more importantly, 17% growth year-on-year in the financing portfolio. In the total liability side in the same slide as well, the movement of liabilities is 16%. And as mentioned by CEO before, more importantly we'll cover CASA later, customers' deposit 12%. That was driven mainly of 20% on CASA growth and also we have seen a SAR 6.5 billion increase on the interbank. On the next slide, Slide #14 on the P&L trend. Net income for the full year of 2024, we see 21% increase year-on-year. This was supported by the growth in the operating income. Growth in operating income, 12.5%. So we can see the operating income composition as of December, 79% of that obviously is the net commission income, net interest income, net yield income; then 15% we have from the fees from banking services; 3% each for investment gains and also the exchange income. Slide #15, deep diving a bit into the financing. We have seen the financing has a growth of 16% on a gross basis and that's 3% on a sequential basis from Q3. This is also a result of 17% growth in the gross financing of retail portfolio and also we have seen 15% growth in the corporate portfolio, including the SME. If you can see in the top right-hand graph, the financing as a gross composition of the overall portfolio. The large corporates along with the project financing represent 66% of the portfolio; we have 5% on the mid-corporate and also we have 5% in the SMEs; 12% each split between the mortgage business and the personal financing or consumer financing. So the overall corporate as of December represent 76% of the portfolio and retail represent 24% of the overall financing portfolio. On Slide #16 on the deposits. As mentioned earlier, we have seen 12% growth year-on-year and this obviously came from very strong growth in CASA year-on-year, 20% and also we have 5% growth in the time deposits. This, as mentioned earlier, brings up the CASA to total deposits to be 15.6% from the overall deposits. You can see from the bottom left graph customer deposits composition, 62% is the overall retail deposits and the remaining is the deposits managed defined as non-retail. On Slide #17 on the NIM, the income from financing and investment. Gross funded income continues strong growth driven by 22% both in the investment and also from the financing income. We have seen as an amount the growth on the overall financing funded income as gross year-on-year at 12%. I think the graph in the bottom left slide -- in the slide in the bottom left, net profit margin year-on-year has contracted 10 basis points. This is a result of an improvement actually in the investment portfolio by 4 basis points, 30 basis points also improvement in the financing yield, but this was offset by 44 basis points increase in the cost of funding. So you can see on the graph in the center of the slide, the YTD NIMs were at 3.81% same period last year and we closed December 2024 with NIMs at 3.7%. On the next slide, Slide #18 on the fees of the nonfunded income also have seen strong growth year-on-year, 11%. This came actually from 10% growth in the fee from banking services, 15% growth year-on-year on the FX income and we have 12% on the revaluations and investment-related gains and dividends and we have a small drop in the other income. On Slide #19 on the OpEx, the operating expenses. This is an 11% growth year-on-year; mainly 13% growth driven by the personnel cost, depreciation and amortization 9% and we have the other G&A 9%. We have seen also the OpEx growth lower than the previous quarter on a sequential basis, only 1% growth between Q3 and Q4. So if we compare it to the cost to income ratio position last year, we were at 31.3%. We closed the year of cost to income ratio at 30.9%. On the impairments for financing, the full year 2024 impairment charge for financing decreased by 17% year-on-year and totaling to SAR 1.050 billion and this is also drive the cost of risk down from the previous year. So cost of risk for the full year for 2024 decreased by 23 basis points year-on-year to be 55 basis points. Our cost of risk for the full year of 2023 was 77 basis points. On the next slide, Slide 21, on the NPL and NPL coverage ratio. Our NPL ratio decreased by 55 basis points year-on-year and we closed the year at 1.06% NPL in Q4. Nonperforming loans decreased by 24% year-on-year and standing at SAR 2.2 billion by December 2024. NPL coverage ratio has increased by 17 points per thousand year-on-year. We closed the year at 172.3%, up from where the coverage ratio was by December of the previous year of around 155%. On the next slide, Slide #22 on the capitalization and liquidity. Capital and liquidity ratio remained healthy. If you can look at the capitalization, we are at 17.7%, that's CAR Pillar 1. On the profitability metrics, we have seen an improvement in the return on assets closing at 2.3% versus 2.2% last year and also at 18.8% in ROE versus 17.2% same period last year. On the bottom of the slide is the liquidity measures. We have the LCR we closed at 122%. This is well above the 100% which is the regulatory minimum. And also regulatory LDR we closed at 83.3%, which is again well below the regulatory maximum. For the NSFR, also stable and healthy above the regulatory minimum, we closed at 108.2%. With that, the other section is the outlook and guidance and how we also stand by December against the previously updated guidances for the year. The financing growth we closed at 16.5%. This remains within the guidance communicated, which was high teens. And also the net profit margin, we lost 10 basis points during 2024, we closed the NIMs at 3.7%. The guidance was 0 to minus 10 basis points. Cost to income ratio, the guidance was below 31%. We closed at 30.9%. Return on equity is 18.8%, above 18% which is the guidance provided before. Cost of risk, 0.55% which was within the guidance. The guidance was 60 to 50 basis points. And CAR Pillar 1, 17.2%, it's below the guidance provided before 18% to 19%. So coming into 2025 guidance on the financing growth. Expectation of the strong growth in mid-corporate SMEs and also the continued growth in retail, also the continuous growth expected in the corporate portfolio; we are guiding for mid-teens for 2025 financing growth. On the NIMs, the guidance for 2025 is flattish plus 5 basis points to minus 5 basis points. As far as cost to income ratio for 2025 is below 30%. The guidance for ROE for 2025 is above 19%. And the cost of risk guidance is lower than the guidance at the closing where we are at December, we are guiding for 55 to 45 basis points cost of risk for 2025. On the CAR Pillar 1, the guidance is 17% to 18% for 2025. With that, I'll hand it back for the Q&A. Thank you.

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

My first question is on the guidance for margins in 2025. Your guidance implies an improvement in the NIM trajectory year-on-year versus what we saw in 2024 and the midpoint of the guidance implies essentially flat margins. So just wanted to understand what policy rate assumptions do you embed in your guidance in terms of rate cuts in '25? And if you can please get the latest NIM sensitivity for each 25 bps and really the drivers that are driving you to expect flat margins in a declining rate environment? And then just following on from this, perhaps more of a bigger picture question. We see loan growth continuing to outpace deposit growth in the sector. Can you talk about your views on liquidity conditions in the sector and the risk of cost of funding headwinds in 2025?

On margins, yes, let's see, I'll maybe cover what happened this year. We were expecting further improvement on NIMs in Q4 as a result of lower rates that should first be reflected in your cost of funding because this tends to be shorter term in terms of repricing, repricing cycle is much shorter than our assets. But I think what we experienced in Q4 has been a bit intense competition on customer deposits that actually resulted, yes, rate is going down; but the amounts that banks were paying over and above the benchmark to get down deposits was, let's put it this way, much higher than we expected and that's why we ended the year at I think 10 basis points lower. Now for next year obviously just before the earning call, we do take the latest forward yield curve from the markets and we base our guidance based on that. And of course, as I mentioned, every quarter we will do the same based on the forward yield curve at that time plus our results for the previous quarter or quarters. We're assuming -- I think we expected to see 79 basis point on average, 3-month SAIBOR 79 basis point decline next year. And as I mentioned, the nature of our liabilities tend to be shorter term and that would drive lower cost of funding versus the speed of repricing of the assets. Then the other part that really helped is that we have reasonable portion of our portfolio as retail, 24% for retail and that is typically not surprisable as well as the fixed rate investments that we have plus the impact of the cash flow hedge that we've done. So these are 3 combinations. In addition to that, you've seen probably -- if you took our earning call document, let's say, a year ago and you see the percentage of mid-corporates as well as SME was lower than now, which means they actually better yield obviously and we expect it to continue that process of driving faster growth in mid-corporates and SME, which tend to improve our NIM. So that's the main assumptions behind that. I already covered liquidity. I think we've seen competition on Q4. In this year in 2025, I don't think liquidity will be easy. I think loans will continue to grow. I expect the industry to grow double digit again in 2025, which means more demand for liquidity. Obviously loans create deposits. But I've seen further and further trends in terms of large corporates going to international markets, Saudi banks tapping the international market. I think I saw the news of Ma'aden, saw Saudi electricity, Aramco, PIF, Saudi government. So this borrowing internationally should improve liquidity in addition to obviously the amount of foreign assets managed by the Central Bank. They have sizable assets that if the Central Bank see liquidity or require some injection, they can do that and they've done that back in in 2023, started actually Q4 '22 and we've seen it increasing in '23, been stable in '24 I have to say. But I think that could also improve liquidity.

That's very helpful. Just a follow-up on the NIM sensitivity. Are you able to provide the sensitivity for 25 bps now?

Yes. Sure, Nida. So we'll be uploading the full details of the financials tomorrow. So you can see the commercial sensitivity there. We have still a positive gap in the first 0 to 3 months. So as of December, this suggests that our sensitivity is for every 25, you have around 1.7 basis points drop for every 25 basis point rate cuts. Again that's with the usual qualifications. This again remain theoretical as of December. And as the CEO mentioned, going forward we always take the latest yield curve and we apply it based on the business development and we update our guidance accordingly.

And our next question comes from Olga Veselova with Bank of America.

Several questions. One is on provisioning, how cost of risk in project finance now compares with the cost of risk in the rest of the loan book? And I understand it can be in a wide range, but if you could give us maybe a blended average for project finance versus non-project finance. And generally, also how much is project finance as a percent of outstanding financing and new credit issuance? So this is my first question. Second, there was a slowdown in financing and deposit growth in the fourth quarter. It came below sector average especially in the corporate segment, which is not really usual for Alinma. So I wanted to ask why was this slowdown and what shall help you to reverse this trend in 2025? And finally, if you could comment for us what was behind the increase in NPLs in the fourth quarter and where do you see coverage going forward?

Okay. Let me cover the slowdown on the corporate loans in Q4 and I think that should have been -- maybe I should have commented on this when I was explaining the growth in financing this year. If you recall, our guidance was high teens and we ended up with 16.5%. Technically, you may or may not consider it high teens, but what we faced on Q4 was 2 combinations. Strangely despite the sort of intense competition on deposits, we've lost -- we had some significant prepayments that happened in Q4 in the corporate books driven mainly for 2 reasons. One significant reason was a bit aggressive pricing that some of our customers were offered and we didn't want to meet that. We felt it didn't make sense at the time where liquidity cost is going up, this is not really the time to reduce margins. Actually similar to what we've seen in 2015 or '16 when all banks actually was faced with the higher cost of liquidity, they were forced to increase their spreads on clients. So we find it a bit strange, but that was some of the reasons. The other reason is the excess liquidity some clients has got in Q4 as a result of the government payments or others and they prefer to reduce their orders. So significant portion of prepayment that came in Q4. That's the main reason. Now as far as provision of project finance, it's pretty much similar to Stage 1 provision. The impact whether it's project finance or not is not really on provision. It's really on the CAR calculation because the risk weighting is different. But as far as provision, it's very similar to any Stage 1 corporate loans that we give. Project finance as a percentage, Adel?

Yes. As far as the project financing as a percentage of the overall financing, it's actually half of what I mentioned before, large corporate and project financing represents 76%. So roughly project financing is half of that, which is 34% as of December on the overall financing. Just maybe one of your questions on the NPLs for Q4. It was for a couple of names that were sitting in Stage 2, it was just normal movement to Stage 3, nothing specific to any sector.

Can I check what is the risk weight for project finance? How is it different from the rest of portfolio?

Well, project financing again, as you know, Basel III reforms. Now there are 2 types. You have to segregate the projects into good quality operational, nonoperational and low quality. Most of what we do is in the nonoperational. There is still some projects on the operational side. So the trigger there is most of what if you look at the project financing as nonoperational good quality would be 150% as a capital risk-weighted charge for certain project financing.

The next question comes from Jon Peace with UBS.

So my first question, please, is on the cost of risk and the guidance that you've given for 2025 of 45 basis points to 55 basis points. Do you see that as a sustainable number into the long term given the mix that you've got or is this a little bit below the through-the-cycle rate because the economy is strong? And then my second question, please, is, what was your CET1 ratio and how low would you be comfortable with that going? I'm just wondering how long do you think you can sustain mid-teens loan growth and still have a very good payout at 50% or would you consider moving to a scrip dividend again to fund the strong balance sheet growth?

In terms of cost of risk, I think if you look at the trend for the last few years, it's been declining. This is attributed to the significant economic activity. All sectors are doing very well. Unemployment is declining significantly. Economic activity is really bothering the whole country almost every sector in the economy. So naturally this typically and throughout the cycles. We've seen this before when things are very rosy, typically cost of risk will go down. However, I think at least in the industry, you'll see that we tend to be among the high if not the highest in terms of cost of risk. So we're very conservative. I think I've said before that 40 to 50 is throughout the cycle for the provisioning and I think we're getting very close to it. You've seen our NPL ratio low, coverage ratio high. The outlook for the economy in Saudi is going to be quite rosy for the next 3 to 5 years. I would expect that to be maybe a little bit further decline maybe next year, but I don't think we're going to go aggressive in terms of lower cost of risk. We always tend to be conservative, prudent in terms of taking provisions or building more protection within our portfolio. And for the other point, the CET, Adel?

Yes. CET1, it's around 13% and this is well above, as you know, the minimum Basel requirements. There is typically no specific requirements as far as CET1 as far as the requirements related to total capital Tier 1 and Tier 2 over the Pillar 1 and Pillar 2 risks, which is something that gets assigned as a requirement by the Central Bank. So of course the internal generated capital and also we're always looking to the options related to the capital management and we forecast ahead the growth that we are expecting along with how much dividend payout that is expected as well and to see what are the actions need to be taken to support the capital. But as far as CET1 is around 15% and this is -- there's no specific requirements to maintain a minimum as far as where we are versus Basel is well above.

Just to clarify, do you think you'll be able to retain the 50% payout this year or is that a decision you'll take later if you might pay a shares dividend or something different?

The payout for this year is 47% as already announced. We always try to retain at least 50% of our net income. Obviously with faster growth and if we feel the need, lower payout ratio is an option on the table always. I don't think we're considering stopping paying dividends. But as our income grow, our net income grow and the value of dividends continue to increase, it may lead to a little bit or further decline in terms of payout ratio.

Our next question comes from Aybek Islamov with HSBC.

So I wanted to clarify a few things. Firstly, on the net interest margin, right? Can you comment what kind of benefits you've seen so far from the rate cuts, right? It looks like your asset yields in Q4 actually fell a bit sequentially. I've heard your comment about the funding cost that there was a bit of a pricing war on the deposit side. So any benefits from the rate cuts you've seen so far in Q4 and if not, do you expect to see them later in 2025? I think like based on your guidance, you imply that you will. That's the first question. Secondly, you do mention quite frequently about SME lending that you are quite active there, it's asset yield accretive and so on and so forth. So I truly appreciate this information. Has anything changed in terms of the credit quality of SME lending in Saudi Arabia? What kind of like risk environment or credit risk environment do you see in the SME segment?

In terms of NIMs, I mean the main reason for not showing an improvement in Q4, in fact I think we've also contracted NIMs, was what I mentioned on cost of funding. Honestly, through my 30-plus years in banking, I wasn't aware of some of the deals that we've heard in the market, things are going significantly higher than usual. We've seen periods where banks were paying 20 basis points, 30 basis points, 40 basis points, the level at least we've seen in the market was significant. Obviously with us continue to grow, we had obviously to fund this. We've done a fantastic job in growing our NIMs, our noninterest-bearing deposits. However, we had to obviously finance this growth and we had to compete on deposits not to the crazy level, to be honest with you, that I've seen in the market in Q4. And hopefully, things stabilizes further. In terms of SME lending, Naif?

Nothing changed in the lending environment for SME and it will continue the same thing. We do have a government support program and we expect as well a new initiative from some entity related to the government. Moreover, we are very diversified when it comes to program-based lending as well as traditional lending through risk acceptance criteria plus collateralized that has also covered a major portion on that one.

So our next question comes from Kazim Andac with Goldman Sachs.

My questions have already been answered.

Perfect. While we wait for any other questions in the queue, I will hand back over to Shabbir Malik for any questions.

Maybe 2 questions from my side. I was wondering if there is any changes or updates on corporate tax because in some of the other markets or jurisdictions we've been hearing about corporate tax in line with OECD requirements. So I wanted to hear if there's any updates for Saudi Arabia. Secondly, in terms of the competitive landscape, reading some news around new digital banks planning to set up in Saudi Arabia or that have already been set up in Saudi Arabia. How do you see that and do you see that potentially as potential challenges to your business or your retail business? And how would you rate your digital offering relative to some of these new challenger banks?

In terms of digital, we continue investing in digital and today we have a lot of products and services on digital. We also developed a new website for our corporate customers plus a very advanced mobile application for corporate will be released very soon. Also, we have a very good service for our new customers through a different application where it is like a lifestyle application called the [ Hez ] application. Also we are developing a new SME [ aggregator ] will be for micro financing and for the smaller merchants and SMEs. So yes, I think we place ourselves now in the top tier of digital offerings towards our customers, whether retail or corporate.

So obviously I think already 2 digital banks have started operating. Honestly, the level of digitalization that Saudi banks in general, us for sure, we don't see that as a major risk in our market share. In terms of the taxes?

So Malik, on the corporate tax, we are honestly hearing like what you hear. So nothing as we speak officially was received from the authorities in this regard. And so, as you know, we're paying Zakat around 10% on the net earnings, but nothing officially received on this regard. So really I cannot comment on that.

Got it. So maybe one more follow-up question. When I look at SAMA data and mortgage sales seem to be pretty solid in December. Is this mainly because of the reduction in interest rates that we saw this increase in mortgage sales and is that something that you saw for your bank as well?

I think the CEO mentioned that the cost of funds in December wasn't really very low compared to previous quarters, but we relate this to a very renowned real estate exhibition called Cityscape where it's attracted a lot of big developers plus the National Housing Company who offer their latest projects during this exhibition and thousands of units are sold during this exhibition. The developers tend to offer exclusive discounts are offered during the exhibition and the bank participates on this. Alinma Bank was participating in this as well along with other banks during this exhibition. So November, the sales happen usually after 1 month evaluation so December was big for everyone.

Got it. Carla, are there any other questions in the queue? Operator, are there any questions in the queue?

Our next question comes from Rahul Rajan from Bank of America.

A couple of questions from my end. One is on the non-NSAI income. There was a quarterly decline in 4Q, which I see is also coming from the other income side of things within that. So what was the reason which drove this decline in 4Q? If you could shed some light on that? That's number one. Number 2 is more at a sectoral level. You mentioned earlier that deposits or the lending growth would continue to be faster than the deposit growth at a sectoral level in 2025. So from a SAMA LDR perspective while it's at 90% is sort of the limit, at what level do you think SAMA would typically approach a bank and start intervening? Would it be at, say, 85%, 86% levels or would it be higher? So any light on that would be helpful.

Yes. Rahul, the question on the noncommission income drop on a sequential basis from Q3 and it's at 8%. But if you look at this from how we divide the noninterest income, actually the fees from banking services there is a net growth on a sequential basis by SAR 6 million. The drop basically what came from the other income as you rightly said and this is basically the normal -- comes from the normal quarter valuations being relating to our own investments or some of the investments and funds that is being held or invested by our investment, our own [indiscernible] investment.

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

I have 2. One is I'm trying to connect the dots in your guidance for the full year. So you're saying that margins will be flattish, cost of risk down, cost to income ratio down, balance sheet growth in mid-teens. And it feels like it should translate into broadly mid-teens, at least mid-teens growth of the P&L. However, your ROE guidance is not suggesting that. So you're saying it will be slightly marginally up to single-digit growth of EPS. What are we missing? So which line is the missing component unless I'm connecting the dots in a wrong way? And second question is on liquidity. Can SAMA ease mandatory reserve requirements to help liquidity in your view? This instrument has been used by some other central banks. Remind us what are the requirements now, if possible?

I'll cover the second question because I'm not very clear about the first one, Adel, maybe he would. In terms of liquidity, SAMA is very, very proactively monitoring the systems, always ensuring the safety and robust of the banking system. I personally -- I mean obviously I can't answer this on SAMA whether they're going to relax or not, but I see no sign of that. I don't think they may. I think we certainly can support the level of liquidity if needed. But as far as easing off some of the limits, I wouldn't expect that. This is what I read, but obviously I'm not the right person to answer this, but I would be very surprised if they do.

Yes, the question if I understand correctly. I mean as far as the guidance for 2025, looking to flattish NIMs and also further improvement as far as the guidance on the cost to income as we say from the growth in the top line and also the efficiency in the OpEx themselves. And also the lower guidance from this year or actual cost of risk of 0.55% this year, lower guidance for cost of risk next year. Of course this if you can look at, translates into our normal results of our guidance of ROE, which is above 19% as a guidance for 2025.

So now I get the answer to the question well. Just to add to what Mr. Adel mentioned, we have mid-teens growth. We're expecting mid-teen growth in loans. Even if NIM is flat, that would result in improvement in the bottom line and as well obviously grow in the non-yield income, fees and others and a better control I guess with slower growth on the operating expenses. All that coupled, as Adel mentioned, with lower cost of risk will lead to the forecasted ROE or the guided ROE.

Yes. Sorry, I just wanted to clarify maybe what I'm asking. So your ROE guidance suggests probably single-digit growth of the bottom line. However, if I combine all other lines of the guidance, including balance sheet and margin and everything, it should be a higher number. It should be double digit. So what's the difference between those 2? Do I make any sense?

Sorry, we did not give any guidance on the bottom line. We didn't say double digit or single digit. We gave guidance on the loan growth, on the cost of risk, on the NIMs, on the cost to income ratio. We have not given any guidance on this. I think you can derive from the guidance that is ROE above 19%.

Yes. Just to clarify, the guidance for ROE is above 19% not at 19%.

Our next question comes from Adnan Farooq with Jadwa Investment.

I have 3 quick questions. One, you mentioned cash flow hedges as something that is likely to support your NIMs in 2025. Can you comment on the size of these cash flow hedges? Secondly, in the last year you issued a Tier 1 instrument. You mentioned you might be looking into that going forward as well. What are your plans regarding any issuances in the market during 2025? And another question, I think you touched upon it, but if you can give some more color on the pickup in the NPL ratio during the fourth quarter, if it was related to any particular sector and do you see any further -- do you expect any further deterioration in your NPL ratio going forward? And maybe one last question on your noninterest income. You have done exceptionally well last year. How do you see that line item growing going forward? If you can comment on which areas do you expect significant growth in 2025 as well?

So in terms of cash flow, I think I mentioned in the presentation on the progress on the strategy that we've done SAR 4.6 billion at end of Q4. And also I mentioned I think, during the earnings call that we're forecasting average 3-month SAIBOR to go down by 79 basis points and that is supportive to the cash flow hedge. So that's obviously fixed income. And so cash flow hedge is basically we give up the floating leg and we start to see the fixed rate leg. In terms of Tier 1, yes, I think I was very clear I mean multiple times that we are not -- we didn't go in '24 for onetime. We should be able to come back to the market and most likely we'll do another issuance this year. In terms of the fees guidance or something like that, I think obviously we've been growing our business. You've seen mid-teens in loans. We're really focusing on gathering or growing fast on the retail side. We very much focus on growing our cash and trade. And all these combinations will continuously lead to us improving on the fee income. However, we don't typically give guidance on specific lines of the P&L, but you should expect to see continuous growth on that income. And the last one on the NPL.

Just follow-up on the NPLs for Q4 versus Q3. As I mentioned, just a couple of names were sitting in Stage 2 moved to Stage 3 as per the model. Nothing really trending there that we should be worried about for now. And as I mentioned before, it's not really specific to any sector.

And our next question comes from Murad Ansari with GTN.

Murad Ansari from GTN. Most of my questions have been answered, but maybe just a couple of follow-ups. On the retail side, you've had a good year in 2024, 17% growth in the book. I'm just trying to get a sense of how much does the lower interest rate environment help in kind of accelerating this growth in 2025? And secondly, just a follow-up on the forward curve and the interest rate outlook and fourth quarter kind of deposit competition. We've seen some of the results from the other banks suggesting that there has been Q-on-Q decline in a number of banks in terms of deposits. So there seems to be some banks that have lost deposits in this competition whereas you've kind of held on to your deposit base. Is that something -- when you talk about forward guidance on rates and the forward curve being lower, is this deposit competition something that was more specific to the end of the year? Is that something that you're already seeing signs of slowing down in terms of pricing that was visible in fourth quarter? And finally, on your Stage 3 coverage, you've built that up steadily over the past 3 quarters now at about 55%, 56% for fourth quarter. Is there a target that you're looking at? Because I mean pre-second quarter, it was roughly in the 70s kind of range. Is that something that you will look to build up further towards the -- through this year?

Obviously on the retail versus lower rates expected going forward, certainly that makes the retail business much more attractive compared to a couple of years ago for example. Mortgage, there was competition. Fixed price rate was going up. So margins was not as attractive as retail or the mortgage going forward. Same thing for the personal finance. So we're expecting to see better sort of margins on retail when rates going down. Yes, obviously you can offer lower rates and have to compete, but I think it's not directly linked. The lending to retail is not purely directly linked to SAIBOR plus all the time. There's a competition, there is also segmentation, pricing, there are different justification for better spreads. So with lower interest rates, that becomes more attractive. Now on deposits, I really wish that it's a year-end trend that's not expected to see. I hope so. I tend to be conservative. I tend to be cautious. But I suspect that we see continued fast growth on loans next year and hopefully, we'll see better higher level of TI and higher international borrowing from all the banks and as well as the large corporates and the government. That should continue to improve the liquidity. In terms of the Stage 3 coverage, I leave it to Adel.

Yes. So on the Stage 3 coverage, you're right, we were about 71% coverage for Stage 3 back in end of 2023. If you recall, this has dropped to around 50% Stage 3 coverage in Q2 2024 and the reason behind that we explained at that time. We had a sizable writeoff during Q2, which was actually, as you know, the writeoff would be for accounts that is fully covered. So we are writing off some accounts that is with high coverage and we have been building the coverage for Stage 3 since Q2 last year. So Q3 was 53%, Stage 3 coverage for Q4 was 55%. And of course the continuous -- because eventually we are monitoring the overall coverage ratio. But yes, the drop that, as I mentioned, was in Q2 and the coverage has improved since Q2 last year.

So is there a target that you're looking at or is this something that will steadily build up over the course of the year? I mean some targets on Stage 3 coverage that you want to be?

No specific target actually for Stage 3 coverage for every stage coverage. As you know, it's an IFRS 9 model driven result and there is no specific coverage.

We want to be aligned with the industry. I think that you can reasonably say that's in a way a target. We don't want to be below the market nor we want to be the highest also.

Great. Just to follow-up on your answer on the liquidity side. So my sense from your answer is that the pricing environment has continued to be quite challenging on the deposit side. Is that correct I mean over January and early February? And secondly, is there a push to kind of pass on some of this cost increase on the funding side to end customer in terms of better loan pricing?

Yes. I mean obviously we continue our success drive in terms of growing CASA and that is not happening only because of cross-selling cash and trade, which has also contributed well to that growth. But our ability to attract more and more customers in all segments whether on the corporate side segment or all segments within the retail, including obviously affluent, private, government and smaller SME, nonborrowing SMEs and so on. So that has been a fantastic journey that we've achieved so far over the years and we're going to continue that strong focus on growing our CASA. Now in terms of ability to reprice or pass on the additional liquidity cost to the customers, we have been, in many deals we've been increasing some prices. However, I mentioned to you that during Q4 despite the higher liquidity costs, we've seen we lost significant material amounts in the corporate side because of lower pricing from some of our competitors. So I'll leave it to them. But for us, we don't go that way. It doesn't make sense. It's very destructive if I'm paying higher cost for funding and yet I'm going aggressive on pricing my corporate loans.

Our next question comes from the line of Nauman Khan with SNB Capital.

Just a couple of questions, very brief ones. One is basically you're guiding mid-teens for this year, that's your growth guidance. What's the assumption for the industry that you are assuming? Would you be growing in line with the industry or will you be gaining market share? So my first question is on that front. So what's the broader industry loan growth guidance that you are factoring in?

Yes. I mean obviously we're going to continue to focus on growing project finance. We are among the leaders in that business and we expect more and more projects to come in line. Just take the example of renewables, which is the amount of investment on a yearly basis is significant as well as other project finance of course. So that's always going to be an area of good growth for us. But also, as I mentioned during the earning call, we are also focused on the mid-corporates, large corporates, the SMEs. So that will continue. When that's happening in the country in terms of economic activity, we expect not just a landmark. We expect to see, in my opinion, the industry will be double digit again this year as this year already. In terms of the retail also; unemployment, demographics; all of that is supportive of higher mortgage and higher personal credit card, auto loans and all retail business. We're going to continue to do better than the industry growth. We already have good 2 years of track record at least of growing faster than the market. We're going to continue that trend. So I think all these will lead to the mid-teen assumptions that we have.

So you're assuming higher than what the industry will grow, you will grow higher than the industry, right? That's safe to assume?

Well, I'm not forecasting how much exactly the industry to be compared to us. But as I said, the industry will be -- I expect to see double-digit growth. But I think if you see our at least 3 years of track record, you see that we've been growing higher than the market average.

Okay. One last question on the fact is that based on your -- assuming what you have given based on the guidance that you have provided, it seems that you will be relying more on Sukuks and Tier 1 Sukuk SCR as well as U.S. dollar. Just one thing. Given the interest rates, say, for example the recent issuance that the different banks have done, they've all been in the range of like 5.3% to 6% plus. So what's the rationale and do you think that rates will start normalizing going forward? Because given your yield at 6%, 6.5%, your Tier 1 Sukuks offering at like 5.5% to 6%, what's the economic sense of it?

Well, maybe the shortest answer, how much ROE we generate versus how much we pay in the Sukuks. So I think that's an important point. However, obviously Sukuk, Tier 1 Sukuk, Tier 2, even senior Sukuk tend to be a product of the U.S. Treasury 5-year rate and that keeps going up and down. We've seen examples where rate was lower, I wish we tapped at that time. One of our competitors did a good rate on that because U.S. Treasury 5-year rate declined significantly at that time. We will go choose obviously -- we try to focus on the issue in the right time, most likely maybe in the first half this year and we'll see. In terms of pricing, we actually got good pricing in our first issuance compared to some international names that issued similar instruments literally a day before. So I think being Islamic and being open to all kind of investors, including Islamic investors, make rates obviously we've seen a very good track record in terms of demand -- sorry, in terms of the demand or the order book last year and I think that will be a similar story this year. And that last year was our first international issuance. Now at least theoretically, that should make it easier. People are more familiar with us. They've seen our name. They've seen we issued before, makes it easier to issue another one and hopefully may lead to lower in terms of spread over U.S. treasuries.

So that was our final question from the Q&A portion. I will now hand you over to Shabbir for any final remarks.

That's all. Thank you very much. I'll hand it over to Abdullah or Arwa to see if they have any concluding remarks.

Thank you, Shabbir, and thank you, everyone, for your time.

Thank you.

Thanks a lot, everyone. Have a good evening.

Thank you, everyone. This concludes today's call. Have a nice day. You may now disconnect.