Alinma Bank (1150) Earnings Call Transcript & Summary

Good morning to those joining us from the U.S. This is Mehmet Sevim from JPMorgan. Thank you for being with us. It's our pleasure to host Alinma Bank management this quarter as they walk through their second quarter results and take your questions. With that, I'll hand over to Arwa Alshehri, Head of Investor Relations, to start us off. Arwa, please go ahead.

Thank you, Mehmet, and thank you, JPMorgan, for hosting this call. Hello, everyone. Good day, and thank you for joining us today for our annual earnings call for the second quarter 2020. We will begin today with our MD and CEO Abdullah Bin Al Khalifa, who will be providing an overview of the financial highlights followed by the 2030 strategy recap and key achievements, including with the [indiscernible] progress for this year. After that, our CFO will give you a detailed presentation for the financial performance and ending with the guidance for the year. We will make sure to have 2% for Q&A, where our [indiscernible] retail digital risk. [indiscernible] Corporate Officer, Jameel Alhamdan will be answering your questions along with our CFO and CEO. With that, I'll hand it over [indiscernible].

Thank you, Arwa. Welcome, everyone. Thank you for taking the -- allocating the time for our earnings call. I'll start my presentation from Slide 6, high-level financial performance. In Q2, our financing increased by 6% year-to-date, and that's in line with our current guidance. Total assets also increased by 6% year-to-date. Our operating income increased by 7%, while our net income increased by 6%, our coverage ratio is 96% -- sorry, our NPL was 96 basis points, and our coverage ratio is 176. Customer [indiscernible] increased faster than loans, 8%. More importantly, CASA increased by 6% year-to-date as a result of faster increase in total assets compared to lower growth on CASA. Our CASA as a percentage of deposit is 47.3. Cost to income improved to 31.5% compared to -- I mean, this is the fully -- the half year but compared to first quarter, Q2 was much better. Net profit margin decreased by 6 basis points compared to the same period last year. Our ROE reached 17.8 million. On slide -- Slide 8, a quick reminder of our current strategy. The main headlines is basically the most customer centric most innovative bank underpinned by laser focus on profitability and followed by Nick page gives you more detail by casino. So in retail, in retail on the parallel aspire to for privacy to -- for all our customer segments and also innovate to segment-specific offering, delight our customers with leverable customer journey across all channels. In private banking, we want to set up market depreciating value proposition for our customers of a world-class global and exclusive investment opportunities corporate banking, again, the world primacy comes back because that's our target for all our customers as well as upgrade transaction banking and build best-in-class scalable operating model. Leveraging, obviously, the cutting-edge technologies and I, digital banking, I want to develop intelligent banking platform to drive privacy. Launch beyond banking digital offering through more strategic partnership and enhance operating model, including modernization, improvement and [indiscernible] collaboration with other business units. Treasury want to expand the options of funding, local and international as well as grow our FX and other derivatives and shift investments toward better real income for the bank. The next slide show you more expiration in our current strategy. So I want to be similar to what we had in our previous strategy. We want to be a leading employer of choice. Number one, basically, and established the bank as a digital leader by drug innovation, technology and data, leading also risk adjustment decisions and pricing as well as being the top -- among the top 5 brands in the country and market leader in operational excellence driven by digitalization and heavy use of AI. On net Slide 11 shows you on the achievements of [ RM ] in Q2. So we completed the two AI use cases One is proactive customer engagement and create the writing for retail. We also entered into finance and guaranteed program under the environment fund. We launched [indiscernible] around the FIFA -- recent FIFA World Cup results in over 100,000 new to bank customers being also introduced tailor lending and mortgage program for affluent experts and which -- we also -- as we mentioned before, we're the third largest in terms of asset management, by fully owned subsidiary. We experienced significant growth year-on-year as of half year. I also had experienced 28% increase in SME as well as a 23% increase in mid-corporates. We launched -- we issued SAR 3 billion as well as SAR 500 million AT1 support. Basically, this is to refinance our current or at the previous issuance that we did in 2021, SAR 5 billion that was paid at the beginning of July. We had also 24% year-on-year growth on pulp trade swaps, 106% year-on-year growth in FX forward. Some of the things that will be continually working on this year. want to build, obviously, R&D and innovation help to drive innovation in the bank at innovation is one of the main headlines in our current strategy, one advanced comprehensive customer engagements develop customer-focused use cases, additional use cases, driving hyper personalization sales journey. I want to continue to build more strategic partnerships with local asset management with global asset management to develop the regional specific investment opportunity for our customers develop and roll out clients, et cetera, privacy model for target customers. Strengthen trade finance as through partnership with global corporate banks, develop gene and high-powered companions to drive more usage of our customers, more engagement by our customers and more hyper-personalized journeys. With that, I give the floor to the CFO, [indiscernible] on the financial performance.

Thank you. A very good afternoon to you all, and welcome again to our [indiscernible] this year. As said, they will be walking you through the details on the financial performance for the first half, and then that will be followed by our outlook and the guidance for the remaining of the year. So starting on -- from Slide #14, on the balance sheet then, we have seen a growth of 6% of the total assets. Clearly, this was driven by the financing growth, SAR 14.2 billion for the first half from December which represents 6%. On the total liabilities, total movement we have seen a 6% growth, primarily driven by 8% growth in customer development. And also, we have seen SAR 2.2 billion growth in our other than customer development funding, which is the [ Sukuk ] and the certificates of [indiscernible] been active in issuing during the first half of this year. Moving to second slide, the Slide #18 on the P&L trend. The overall growth in the net income year-on-year. This was driven primarily by a 7% growth in total operating income, 6% growth that was offset by 6% growth in operating expenses. We have 9% in growth on the increase on the impairment. And we'll have more details on the expenses and also the income side. The overall operating income composition at the end of June, in the funded income at 12% at the risk from banking services and 3 percentage for investments and dividends and gains and FX income. On the following slide, Slide #16, on the financing, 2% growth on a sequential basis from Q1, we have seen from December 4% growth in corporate financing and also 14% growth in the retail financing from December. The lending book composition by end of June, last corporate and project financing represents 61%. 7% is mid-corporate. You've seen mid-corporate has taken more sites on the pie from the base of SAR 248 billion overall lending book cases remains mortgage book represents 13% and 14% for other retail products for consumable financing, which includes also the credit cards and also want to lead. In the following slide, which is Slide 17, on the deposits. The overall growth in customers developed 8% from December. This was driven by time base growth of 10%. We have seen CASA growth. In fact, the growth in time deposits being higher than the growth that we have seen in CASA in the first 6 months has diluted the cause as a percentage of total deposits, as you can see in the graph in the inter page, where we were as a percentage of total deposits in Q1 was 49.5%, get diluted by end of June being 47.3%. On the following slide, which is Slide #18 on the income -- the fund coming from investment and financing. We have seen a growth in sequential rise from Q1 the growth year-on-year is 7% from financing and also the funded income from investment is 9% growth year-on-year. In the bottom of the slide, you can see the movements on the net profit margin, 3 basis points contraction in investment yield and also by financing yield contracted 25 basis points, which was offset by reduction in cost of funding rate by 21 basis points. So the overall contraction growth for the 6 months year-on-year is 6 basis points. Moving from [indiscernible] in Q1, 3.47 basis points by end of June, where the profit margin is 3.46%. On the next slide, Slide #19, on the unfunded income. From what we have seen in the first quarter where there was a drop, 26% of the [indiscernible]. We started to see slight improvement on a sequential basis where the growth from Q1 was 8%. If you compare the -- we look at the movement of nonfunded income year-on-year is from banking services is lower by 14%, exchange income and lower by 9%. This was partially offset by SAR 44 million increase in the investment case and dividends. And also, there was a 5 million reduction in other income. The overall fees from banking services, 50% is in fund management, 4% the card services with the reduction we have seen in card services, where appears to be 1% from the overall fees from banking services. We have 12% related to trade fees and 8% on the brokerage and 26% on the others. On the following slide, Slide in the operating expenses, there is a reduction in the expenses on a sequential basis from Q1 by 3%. And as you can see from the slide, the is a 3% sequentially in the G&A. There was a reduction there and also 10% on the depreciation. So this reflects a 6% growth year-on-year on the overall expenses. The positive just that we have seen during the quarter of -- by end of June has positively impacted the cost-to-income ratio what it was by end of the Q1, 52.6%. If we look at the cost-to-income ratio for Q2 alone is 36%. On the following slide, Slide #21, which is on the impairment, just maybe to remind you that last quarter, which is Q1, the charge was SAR 154 million. There was a total recovery site recovery during Q1, which was totaling SAR 472 million. This quarter alone, the impairment charge for financing is SAR 388 million. Of course, you'll see in the P&L a total of SAR 400 million because it is a SAR 12 million related to investment related provision the growth in the provision year-on-year is 8%. This increase that we have seen in the second quarter of this year on the overall environment has increased the cost of risk from -- clearly from where we were in Q1, 26 basis points, we are standing by end of June, by 45 basis point cost per risk. And the following the slide, which is Slide #22 on the NPL and the BL coverage ratio. We have seen an 11% growth on the NPL if you look at the sequential basis, almost them builds are flat and this is also a reflection of where we were in Q1, 93 basis points on MB ratio. We are at 96%. We have seen a slight improvement in the NPL coverage ratio as well. standing at end of June at 175.9%. On the state-wise coverage, as you can see in the bottom of the slide, we have seen a reduction in the Stage 2 coverage. Stage 1 remains at 40 basis points flat. Stage 2 reduced to 9.8% from 11.6%. And also, we are able -- part of the provision that was taken to [indiscernible] recoveries that is increasing from Q1 ending at 73.9% or more 74%. On the following slide, Slide 23, on the capitalization and liquidity. On the capitalization, Tier 1 and Q2 capital for [indiscernible] risk is around 20%. And we have seen a drop on the ROE. Q1, we were at 18.4%. Now ROE standing at 17.8%. And also, we have seen 10 basis points reduction in the general assets. As far as the liquidity and prudential ratios all remain healthy. LCR is at 139% and also NTR is around 80 which is well below the regulatory maximum when we have [indiscernible] at 111.3 million, almost flat from where we were in Q1. On the following set the outlook and the guidance for the remaining of the year, we have achieved a growth of 6% on the financing of YTD, we are keeping the guidance at low teens for the full year of 2026. The 6 basis points contraction on the NIM year-on-year where we had 3.4% keeping the guidance also a change from minus 5 to minus 10 basis points. Also, the guidance for cost to income remained unchanged below 3.5%. The two guidance that we have changed, you can see at the cost of risk, cost of risk is revised from being 45% to 35% with the new trend that we are seeing on that especially the provision that's been taken during Q2 we are revising the guidance from 55% to 45%. And of course, as a result of that, we're revising the return on equity guidance from previously being above to go to the new guidance, which is 18% to 19%. [indiscernible] of Tier 1 and Tier 2 capital remained around 19%. Just a reminder, maybe in the long-term guidance that we gave the assets to grow at low double digits remain as a CAGR, return on equity above 22% and cost to income is below 2% and we are still keeping the long-term guidance for Carbon Tier 1 and C2 capital for billers above 18%. With that, I'll hand it back to the operator for the questions.

[Operator Instructions]

Yes, you are audible. Operator, can you start the Q&A session, please?

Absolutely. So our first question comes from Naresh Bilandani, I do not have his company, sorry, but this is our first question. If you would like to meet yourself, please.

Hi, can you hear me? Hello?

Yes.

Naresh Bilandani from Jefferies. Really useful. [indiscernible] Questions, please. just keen to your more color into the notable pickup that we've had in the impairment charges, which I think have taken the team of what is a good set of numbers actually in the second quarter. So just keen to understand what led to this pick up. I know you had a big recovery in Q1, but I think the Q2 charge still seems to be elevated. I mean, is it linked to the projects that were canceled and you have previously highlighted that there have been some exposures into projects that were canceled. Is this what is causing pressures? And if yes, do you feel that the second quarter sort of like impairment charges, the elevation -- the risk of evaluation is behind us? Or do you feel that conservatism is sort of justified as we go into the second half of this year? So just keen to understand the pickup behind the impairment charge, that's one. And my second question is on the fee income, and this is more of an industry-wide question also as much as for Alinma, do you feel the industry at this stage has fully borne the pressure of the fee income from regulatory changes that were implemented in the previous quarters and the sort of like the worst is behind us and we could see a recovery on the fee income line, especially for the industry as a whole as we go into the second half of this year? And maybe one final question, if I could please just add. I think if I take a look at the Slide 18, if I take a look at the net interest margin, clearly, I think the NIM has held up very well in the interim period. Do you see the case for getting a better-than-expected NIM than what is baked into your guidance by the year-end? Or you're just being somewhat conservative in your guidance. I'm just keen to hear some thoughts on the NIM line.

Thank you, Naresh. Let's cover the first point about the impairment charge. Yes, there was a large project that we financed a contractor and as we actually agreed to suspend or cancel that project. Now we understand that there should be some amount of some compensation paid to the contractor. However, being prudent and being conservative. We built that this may call for obviously set up some provision against that. And that's why our change in cost of risk from 35 to 45 basis point previous guidance now to 45% to 55%. So another effectively 10 basis point increase in that guidance. The difference between, obviously, Q1 and Q2, as you mentioned, Naresh, is because we had sizable recovery in Q1, and that's what led to big variance between Q1 and Q2 but it's better to be prudent and building up provision. We don't know at this moment. We don't know how much compensation will be paid to the contractors that were allowed to pay the back our exposure and whether the -- that will take time. That's obviously not something that can fund adequately. On the fee income, yes. Actually, look, the fee income story this year has been impacted by multiple factors. One, as you mentioned, the regulatory changes in terms of pricing on the cards business as well as remittance centimeters fees as well as the upfront management fee that we collect on the sun and mortgage fees, and that has been reflected in our results this year. We understand that we already have taken half the impact roughly of that already. But there are other stories within fees or fee income also. Maybe it's a chance to expand on that. One of the factors, obviously, international spend, I guess, the number of travelers overseas has reduced. So we see low international spend that affected our fee on cards. But another important factor is the -- we've done a new arrangement with a major supply or vendor of point-of-sale machines that has changed the business model to include profit sharing there. But unfortunately, you still have the story because the point-of-sale business previously had the fee, which obviously on the transaction, but there is also a light the leasing expenses that shows in G&A. So what you saw, you saw the impact on the fee. However, it doesn't show the impact on the saving on the leasing of these machines. Net-net impact is actually positive with this new deal that we've done. But unfortunately, because the amount split cost goes into other broad expense while the revenue on the top. So that's another one factor, another factor to consider. Also, we've seen trade finance, we lots of market share in trade finance. However, overall, probably saw from statistics from [indiscernible] the level of imports in the first 6 months compared to the same period last year has reduced by 5%, and that obviously had an impact on a wholesale business specifically. We've also seen an overall reduction in brokerage income because of the overall volume traded volume was lower in the first half this year versus last year. So I think that, in a way, summarizes the impact that we had on fee income.

Maybe on the NIM, [indiscernible] as you rightly said, I mean, if you look at the NIMs following the Q2 numbers, it still looks like it's holding up we're keeping the guidance for contraction 5% to 10% could be -- could we end up with the year based on any development that the end of the guidance, we'll definitely keep on reviewing the same. And of course, following Q4 basin development that would be communicated on time. you rightly said the NIMs that we are seeing in up so far. But the range, as you said, from 5 to 10 could this be at the end of the range of the 5. We'll definitely reupdate that when any changes needed following Q4, but this is the way we see it in terms of Q4, Q2.

Hello. We now have a question from Shabbir Malik, who's from Morgan Stanley. If you could just meet yourself and ask your question. Thanks so much.

Sorry about that. Can you hear me now?

Yes.

I have a question around your margin expectations. So there is an increasing chance of a rate hike this year. I was just curious in this assumption of NIMs that you've kind of -- or the guidance for NIM, what kind of rate expectations have you built in? And if you can also please remind us what's your sensitivity to a 25 basis point increase in interest rates. That would be pretty useful as well. Thank you.

[indiscernible] our role, we're rolling out with our forecast, we really take the net still curate market set. Now as you can appreciate, the volatility was huge really recently and also the probabilities for the rates that we have seen in the -- that's what's reflected held curves that was applied in our forecasting from as far as the guidance is concerned, the guidance, the probabilities of what type, but this probability, as I said, it's really volatile and hence the cost that we have taken probably do not reflect that. But as I mentioned, maybe it's [indiscernible] the previous question. It's actually, as we see it in Q2, it's holding up and along with the repricing that's being done, the expectation if it's achieved in the counter growth internally that we have will definitely update the same. This could be -- could we end up in the year by -- as I said, at the end of the range of this guidance probably. But to be sure, we will be, again, updating this fully or needed following Q3. But as part of the Q2, this is where we see it. And it could be end as I mentioned, by the end of the guidance, that's really [indiscernible].

And in terms of NIM sensitivity, if you can point towards that? And maybe if I can ask one more question. Year-to-date, your loan has been about 6%. You're targeting low teens. So that kind of suggests an uptick in the second half. So if you can comment on that as well.

Yes. So on the NIM sensitivity, again, did not change much as we previously communicated, we checked this space in our position by end of June. It's 1 to 2 basis points for every 25 bps. As far as the 6% growth, that's the guidance adjusts for the financing, you'd assume the portion of that would come from corporate and right market may be project financing along with and you will see a small portion of that coming also supported by retail growth for the second half of this year, both in mortgage and pursue financials.

Okay. So our next question comes from Jon Peace from UBS. If you could just unmute yourself, please, Jon.

First one is just on the cost of risk. Can you remind us what sort of run rate you had embedded in your 2030 plan? Should we imagine in the medium term, it stays around this 45 to 55 basis points range. And second question, please, was just a little bit more color on the lending outlook. Firstly, on retail, you seem to be gaining some good market share versus your peers. What's really driving that? Is it the products you're playing in? Is it the pricing? Just a little more color there. And secondly, on the project finance market. We can see in the data that the second quarter seems to have had quite a nice acceleration in new government project awards. What are you seeing in your pipeline?

Thank you. Obviously, on cost is we give guidance on a yearly basis and we can obviously update it every quarter. we haven't given the guidance -- specific guidance on 2030, what we use every year. But every year will come to you and give you guidance on that early. We give a few 2030 guidance like [indiscernible], ROE, cost to income but the cost of risk is not something that we provide guidance for. On the retail growth sale, Adel?

Yes. Again, we [indiscernible] on that. So we are not going in any lower price. We have enough customers. So we have to see the opportunities within the bank. As mentioned in this presentation and previous presentations, that we are one of the biggest bank and acquisition customers. Now we are a fair [indiscernible] and retail customer base. We also, as mentioned by the CEO, we invest a lot in customer journeys, especially in digital channels. So a lot of our products in retail, you can limit more with special finance, credit cards, outs are on our application end-to-end journeys, and we are monitored with this. So customer experience full range of products that we have turnaround time. This is what we always capitalized in our retail business.

I may add, this is not one-off. I mean we've been in a long track record now outperforming the industry in terms of loan growth in retail. On projects, project finance, as you have played the strange ment in some projects, and we have captured good working of infrastructure as well as power generation that will seed our future pipeline in this sector. In fact, significant portion of from now to the end of the year is also coming from project files, what we see on priming.

And our next question comes from Olga Veselova from Bank of America. If you could just mute yourself, please, Olga. Hello, Olga. I can see that you are now unmuted if you would like to ask your question. Thanks so much.

Operator, can you make sure that Olga have access to unmute herself.

Yes. I can see that Olga is unmuted.

Operator, can you go next in line and then come back to Olga?

Yes, no problem. So next, we have Rahul Bajaj from Citi. If you could please unmute yourself and ask your question, please, Rahul.

This is Rahul Bajaj from Citi. I have two questions mainly. The first one is on cost of risk. And as you mentioned, the increase in cost of risk in 2Q was largely driven by a particular project which was canceled and you're taking provisions prudently and it's good on part of that project. Are you concerned that there are other projects in your portfolio, which has been canceled or are facing delays. And these could drive higher cost of risk maybe in the second half of this year or through 2027, '28. Do you see that likelihood kind of shaping up as we move ahead or you think that the second quarter charge was just a one-off and you're not expecting any material change in sort of cost of risk expectations as we move ahead. So that's my first question. My second question is on margins. I see the second quarter margins have actually held up pretty well. I'm just trying to understand how this moves from here on. I see your guidance, which is 5 to 10 basis points, but then if I think about the components of margin cost of funding yields, how are you expecting these two components independently to move over the next few quarters? Also linked to it is the repricing of corporate loans. That was happening at the system level and [indiscernible] was also part of it. Just trying to understand, is the repricing all done? Or you expect some more repricing to happen on the corporate side as we move ahead.

Yes. Thank you, Rahul. Obviously, every year is a normal that you see that may be delayed, it may be canceled. But it's usually small size, nothing significant that we've seen. We had some projects before was canceled. But this time, when I mentioned the specific project, it was large. The size of the project is what really matters. We've seen smaller ones that has really small impact or little impact on our cost of risk, but this one is larger. That's why. In terms of -- as the CFO [indiscernible] already covered that. When we -- before the earnings call, we do reforecast again using the latest market yield forward use curve. We don't build our own model [indiscernible] we use the market itself. And our assessment is shown maintaining that guidance of 5 to 10 basis points. Now as Adam mentioned, there's also -- if you look at the market probability of rate hike, can keep changing significantly. Sometimes it's close to 100. Now I think recently it's about SAR 80 million. So obviously, that has an impact on the forward yield curve. And I guess on a daily basis, that for ulcers changing. And we will restart it again every quarter, and we will see a guidance changeable. We'll change the guidance.