Banque Saudi Fransi (1050.SR) Q4 FY2025 Earnings Call Transcript & Summary

Hello there. This is Nathan. I'm one of the operators for the room. Just to let you know, this meeting is being recorded. So welcome to the BSF Q4 2025 Earnings Call. I'm now going to pass it over to Olga. Thank you very much.

Thank you. Good day, everyone, from my side as well. This is Olga Veselova, the Head of EMEA financial team at the Bank of America Global Equity Research. It's a pleasure and honor for us to host the BSF conference call today. Please allow me to pass the word to Yasminah Abbas, the Head of Group Commercial Delivery and Investor Relations and BSF team. Yasminah, please, over to you.

Good afternoon, everyone, and welcome to BSF's Q4 Earnings Call. I would like to thank you, Olga, and the Bank of America team for hosting us today. Speaking first is BSF's CEO, Bader Alsalloom, who will go over the earnings summary and concluding remarks on the existing strategy, followed by BSF's CFO, Ramzy Darwish, for a more detailed walk-through of the financial performance, and then the platform will be open for Q&A. We are also joined by Zuhair Mardam, Chief Treasury and Investment Officer, that will all participate in the Q&A session. Over to you, Bader.

Thank you, Yasminah, and a very good afternoon to everyone. We appreciate you joining us today as we review our fourth quarter and full year 2025 results. The financials that we are presenting today tell a story of solid growth in operating income and net profit achieved in a challenging and competitive environment. We focused on disciplined lending growth, improving operating efficiency and prudent risk management while continuing to strengthen our balance sheet and diversify our funding base. Let me start with a quick overview of the key financial highlights for the year. Loans grew by 5% year-on-year. This comprised of 2% rise in commercial loans, reflecting our selective approach to the segment and an 18% increase in consumer loans with growth recorded across all categories, particularly when it comes to home financing. On the funding side, customer deposits rose 5% year-on-year, matching our loan growth with a rise in interest-bearing deposits, a sector-wide trend that we have managed well within the broader liability mix. As a result, the NIB ratio moderated and supported stable funding while maintaining balance sheet resilience. In parallel, we continue to diversify our funding profile and strengthen the balance sheet through several successful capital market issuances, including term loans, private placement of bonds and Tier 1 and Tier 2 capital. This foundation, combined with positive jaws and lower impairments enabled us to close the year with record earnings of SAR 5.35 billion, marking an 18% increase year-on-year. Net interest margin was stable year-on-year at 3.04% with lower asset yields fully offset by a lower cost of funding and hedging gains. Quarter-on-quarter, NIM improved modestly to 2.97%. On the asset quality and capital liquidity, asset quality remained stable with only a marginal year-on-year increase in the NPL ratio, consistent with normal portfolio seasoning and migration. Strong coverage of 178% and a benign cost of risk reflect our disciplined underwriting standards and proactive risk management. Our liquidity coverage ratio remains strong, and we are well capitalized with adequate headroom to meet any capital requirements set by SAMA. With that, let me briefly touch on a few nonfinancial highlights for the year. Customer centricity remains the core of our growth and transformation agenda. In 2025, this translated into a rollout of our integrated omnichannel banking experience and a comprehensive branch transformation program, delivering a more seamless and consistent customer journey across physical and digital channels. On brand and visibility, we continue to apply a disciplined and targeted sponsorship strategy aligned with our positioning priorities. Finally, sustainability remains embedded across our governance and operations. In 2025, we launched Athar CSR program, supporting over 3,200 beneficiaries through education-focused initiatives. Now when it comes to our strategy execution, 2025 saw the conclusion of BSF's 2021 to 2025 strategy cycle. And I am delighted to confirm that this has given BSF a solid operational and financial foundation for our plans and targets through 2030. We will be holding a special event on the 16th of February, where management will present a detailed overview of the bank's strategic direction and priorities as well as the financial road map to deliver our vision of becoming a better, stronger and faster bank through disciplined execution and sustainable value creation. We are looking forward to sharing this with you, and I hope you will all save the date for this event. With that, I'll now hand it over to Ramzy, who will walk you through the financial performance for the full year. Over to you, Ramzy.

Thank you, Bader, and good day, everyone. Let me start by also adding my welcome, and thank you for joining us today. As the CEO just outlined, the year reflected an environment that continues to be dynamic with changing market conditions and competitive pressures across the industry. In that context, we've stayed true to ourselves, ensuring not only focus but also the underlying discipline to grow the business in a sustainable manner. Our focus throughout the period has been on the fundamentals: managing growth carefully, managing cost discipline and staying prudent on risk. These priorities continue to shape the way we allocate capital and run the balance sheet even as the external environment evolves. Furthermore, and in parallel, we've also been working to develop the strategic priorities for the upcoming years. As we look ahead, our priorities are clear: strengthening profitability, improving capital efficiency and positioning the bank for the next phase of its journey towards 2030. And we want to do this in a way that balances near-term performance with long-term value creation. With that context, let me walk you through the details of our financial performance for the full year of 2025 and provide an update on the progress we've made. We will then leave plenty of time for your questions. Let me start with the balance sheet on Slide #7. Overall, our balance sheet continues to reflect prudent growth with total assets and total liabilities, both up by 5% each year-on-year. More importantly, that growth reflects a deliberate balance between positioning, optimization and resilience, ensuring we maintain flexibility while supporting the business. Starting on the asset side, loan growth of 5% for the year was primarily driven by the consumer segment with growth on the commercial side remaining selective and measured. This was achieved despite regular repayments and settlements, most notably during the fourth quarter, which speaks to the underlying momentum in origination while maintaining discipline on risk and pricing. Alongside this, we expanded our investment portfolio by 13% with a clear focus on yield capture and balance sheet duration management. Within that, we increased our fixed rate investments by 15% year-on-year, allowing us not only to replace maturing investments, but also lock in higher yields while reducing earnings volatility. This was a deliberate positioning decision aimed at strengthening the stability of returns through the cycle. On the liability side, customer deposits grew 5% with growth skewed towards interest-bearing balances. While we would naturally prefer a higher proportion of noninterest-bearing deposits, this reflects a conscious trade-off to support asset growth in the current environment, while providing greater long-term flexibility for liability generation from the interbank market. Importantly, the deposit mix in the fourth quarter was more normalized compared to the third quarter end-of-period balances, which we had highlighted included some transitory balances. Nevertheless, overall funding costs remained well managed. In parallel, we continue to actively develop our capital market funding profile. Debt securities and term loans increased by 151% or SAR 23.4 billion, reflecting again a deliberate strategy to diversify funding sources, extend tenor and reduce reliance on sensitive deposits over time. During the quarter, we completed several private bond placements and secured a USD 750 million term loan facility, bringing the total for 2025 to SAR 23.4 billion of additional funding. This activity is not opportunistic. It's part of building on the consistent track record and creating long-term funding optionality as we support our growth ambitions towards the 2030 strategy. Turning to capital. Total equity rose 7% year-on-year, supported by retained earnings generation and improved OCI due to revaluation of investments. This was complemented by proactive capital actions, including additional Tier 1 issuances earlier in the year and in the fourth quarter. It was partially offset by a redemption of SAR 5 billion in Tier 1 in the fourth quarter, along with dividend payments. These actions again reflect a deliberate balance between capital efficiency and resilience, ensuring we remain well positioned to grow while optimizing returns at the same time. Stepping back, the balance sheet today provides us with the flexibility, resilience and capacity, all of which are critical as we remain focused on improving profitability and supporting sustainable growth. With that in mind, let me move on to the specifics on the loans and advances on Page #8. Total loans grew 5% year-on-year, supported by growth across consumer and commercial portfolios with a small plus/minus 1% change on a sequential basis. Commercial lending grew modestly by 2% year-on-year and slowed sequentially as we maintained a disciplined and selective origination approach, which was more than offset by close to SAR 9 billion in repayments and settlements. Demand nevertheless remained strong with growth moderating by our focus on profitability and risk-adjusted returns. By sector, balances increased in services, utilities and government, while commerce and contracting declined. Some of this volatility between the sectors, roughly SAR 7 billion reflects sector reclassifications that we had highlighted in the third quarter as a reflection in the now live systems kicked off along with completed contracting loans reallocated to other sectors and in aligning with the regulatory reporting. This process will continue throughout 2026 as migration into the new system completes. Looking through these, in terms of underlying actual sector changes, commerce declined whereas services and utility sectors increased. For consumer lending, they performed very well and was very strong in 2025, growing by 18% year-on-year with the positive momentum continuing in the fourth quarter. The strongest growth product was in mortgages, up 24% year-on-year. We remain strategically focused on growing the retail portfolio given its attractive margins and natural hedge against interest rate risk. It's also worth noting that JB, our finance company arm, contributed close to half of the growth in personal finance, and they would be all of the growth in auto loans, showing that continued strength and appeal of this franchise. Lastly, it's important to highlight the continued strong momentum in credit cards, which had a significant pickup of 34% powered by more comprehensive marketing initiatives alongside new card propositions to attract new-to-bank clients as well as improving the wallet share with existing clients. This turbocharge did come with additional costs and fee expenses, but the full value proposition continues to remain important for clients and the stand-alone product profitability when taking everything into account, continues to remain a standout amongst the product portfolio and one we will continue to move forward with. Next, we'll provide more information on customer deposits on Page 9. Customer deposits were up 5% year-on-year and quarter-on-quarter, supported by inflows from both retail and corporate clients, mainly again from interest-bearing deposits. These interest-bearing deposits rose 13% year-on-year and 16% quarter-on-quarter, supported by more rational pricing as liquidity conditions modestly eased during the fourth quarter. Deposits were also strategically added to support headline balance sheet ratios, including alignment with the bank's risk appetite framework and liquidity management objectives. Noninterest-bearing deposits fell 4% year-on-year and 6% Q-on-Q, largely driven by a reduction in corporate balances. We had highlighted in the third quarter that the spot balances included some transitory deposits that deviated from the average of the quarter and impacting the net interest margins at that time. Whereas for Q4, it is a more accurate reflection. Consequently, with the increase in interest-bearing deposits, along with the decline in noninterest-bearing deposits, the CASA ratio fell to 42.5%. This trend is likely to continue into the coming year, in line with the broader market. The rates outlook will continue to be a headwind to noninterest-bearing deposit gathering, albeit providing glimpses of abating with rates moving lower. But this is a factor we acknowledge and are planning for. We aim overall to maintain our noninterest-bearing deposit ratio above 40%, supported by disciplined balance sheet management and ongoing efforts to strengthen deposit mobilization across both, personal and wholesale banking segments. On the retail side, we are focused on acquiring new clients through the investments made in the omnichannel platform, digital capabilities enhancement and marketing investments such as with the Saudi Pro League sponsorship. From a wholesale perspective, we are investing across trade finance, SME and business banking to deepen client relationships and expand share of wallet. The ICP platform has already been launched and business banking is expected to go live by midyear 2026, opening new opportunities and avenues for the bank. Going forward, we will continue to manage deposits proactively, balancing, again, near-term performance with maintaining the flexibility and headroom required to support growth as opportunities accelerate. Now that we have covered the main elements on the balance sheet side, let's move into the P&L to look at how this translated into earnings during the year. Net income improved 18% year-on-year, supported by higher operating income, positive jaws and better impairments. However, on a quarter-on-quarter basis, net income declined 7%, driven by elevated OpEx on account of some nonrecurring expenses. I will cover these in more detail later. For operating income, here, we grew by 9% year-on-year, supported by 10% net interest income growth and 4% noninterest income growth. Whereas on a sequential basis, we grew operating income by close to 1% as NII had a 2.5% growth compared to a 7% decline in noninterest income, of which half of the impact was from credit card fees alone as highlighted earlier in this call, and we will see later in the fee details. ROE improved by 39 basis points year-on-year to 10.7%, reflecting improved underlying profitability, partly offset by higher average equity balances. Similar to what we had highlighted in the third quarter, there was a positive revaluation of an FVOCI investment during the year, which was not expected. Excluding this revaluation, the ROE would have been at 10.81%. Now also important to highlight, going forward, we will report ROE based on shareholders' equity, replacing the total equity definition used previously. This change aligns us with industry practice and provides a more accurate view of returns attributable to shareholders. For this quarter specifically, we have disclosed both measures for comparison. And our guidance for next year will be based on ROE on shareholders' equity. I'm happy to take questions on this in the Q&A. And just as a reference, the full year 2025 ROE based on shareholders' equity ended at 11.87%. That being said, let's turn next to net interest income on Slide 11. So net interest income increased by 10% year-on-year, driven by growth in average interest-earning assets by 10%, while margins held steady. Despite the 5% increase in customer deposits, interest expense on these deposits declined by 7%, reflecting lower benchmark rates and the bank's dynamic funding approach. Interest income grew by 7% year-on-year, while funding costs rose by a more modest 4%, contributing to the positive NII that we aim to achieve. On a quarterly basis, interest income was broadly stable, but funding costs declined by 2%, resulting in a slight quarter-on-quarter increase in net interest income. Looking at the constituents of net interest income year-on-year, we highlight the positive impact for loans, cash flow hedges, the investment book and customer deposits more than offset the change in due to bank and debt costs, contributing overall SAR 809 million in net interest income. We take a different view on this in Slide #12 next. So we have managed net interest margins effectively through a combination of short-term measures such as selective lending and long-term actions, primarily through interest rate hedging and investment strategies. For example, cash flow hedges contributed in reducing the impact on NIM from lower rates by 13 basis points throughout the year. As a result, full year net interest margin remained stable at 304 basis points with benefits from lower SAIBOR on deposit funding costs and cash flow hedges, offset by lower loan yields, higher funding costs on debt securities and term loans and a lower noninterest-bearing deposit ratio. On a quarterly basis, net interest margins improved 1 basis points quarter-over-quarter, primarily from a lower deposit funding cost. On the next slide, Slide 13, and more in line with our discussion on NIM and sensitivity, we highlight the salient points on rate sensitivity overall. Our interest rate sensitivity is currently negatively correlated to rate movements with 100 basis points downward rate shift estimated to impact NIM positively by approximately 4 basis points. This is reflected, albeit in an absolute basis in the chart at the bottom left of the page, but is clearly defined in the published Pillar 3 reports. It is important to highlight that this is based on a snapshot of the balance sheet as year-end and is subject to a static balance sheet going forward and includes many sensitivities, which importantly includes the CASA ratio. Hence, we would continue to view our sensitivity as relatively neutral given the small basis point sensitivity mentioned. The notional value of cash flow hedge swaps declined by 20% year-on-year and 11% quarter-over-quarter or by SAR 6.2 billion from 2024 year-end. This was a conscious decision to continue to manage interest rate sensitivity at an overall group and at a portfolio level as this reflects higher fixed rate investments of close to SAR 8 billion and growth in retail lending, which is fixed rate of close to SAR 7 billion, both of which naturally reduce balance sheet sensitivity and the need for hedging. Next, moving on to noninterest income on Slide 14. Noninterest income increased by 4% year-on-year, driven mainly by strong investment income, including capital gains of roughly SAR 117 million on FVOCI debt securities as well as other operating income, which includes a one-off gain of around SAR 30 million from the sale of an asset recorded in the second quarter of 2025. Trading income declined 18% year-on-year, reflecting the absence of a sizable one-off gain recorded in 2024. On an underlying basis, trading performance improved compared to the prior year. For reference, trading income in 2024 included a one-off gain on the sale of an investment with a net positive effect. When adjusting for this one-off, the year-on-year trading income growth would have been positive 34% in 2025 versus our headline numbers. Lastly, fee and commission income narrowed by 2% year-on-year on account of slightly higher credit card expenses driven by higher card fee expenses in addition to a reclassification of SAR 63 million in noninterest income to net interest income, as also mentioned last quarter. When adjusting for this one-off, the underlying fee income growth in the year would have been positive 5% or more in line with the balance sheet growth compared to the headline figure. On a quarterly basis, noninterest income declined 7% sequentially, driven by a low contribution from investment income, higher cards expenses related to airline campaigns and the impact of SAMA's fee caps for end customers. We are taking steps to partially offset this through high yield -- through higher yield rationalization. Next, we move on to operating expenses on Slide 15. Operating expenses were up 4% on a year-on-year basis, mainly on higher G&A expenses and depreciation. If we look in more detail at our year-end -- year-on-year cost growth, we see that staff costs were well contained, partly supported by provision releases in prior quarters and stable average headcount during the year. So we absorbed business growth with stable workforce, enabled the go-live of our digital transformation projects and the related improvements in efficiency. The flip side is that we did see depreciation and other G&A go up by approximately 11%, largely on higher recurring IT operational expenses and higher IT-related depreciation post the go-lives. Overall, we are comfortable with this cost growth trajectory where we improve operational efficiency on the back of our digital transformation programs. Despite these increases, the full year cost-to-income ratio improved by 152 basis points, demonstrating overall operational efficiency gains. On a quarterly basis, OpEx increased by 13%, mainly due to higher year-end true-up accruals across the board. The full-year OpEx also included around SAR 60 million of one-off expenses, including increases in provisions due to the revaluation and disposition of other real estate owned, others such as unbudgeted items for regulatory items, operational risk items and an agreed back payment with a commercial provider for prior year service. For the go-forward cost efficiency, we have cleared pending payments, which had been in dispute. We put in place stronger controls on the accrual process with a more system-wide approach going live in 2026, along with stricter cost approval processes to manage efficiency on the cost front. Moving next to Slide 16 on impairment charges, a positive story overall with impairments decreasing by 16% year-on-year, primarily due to lower commercial charges and remained unchanged quarter-on-quarter as an increase in credit losses was offset by reversals in off-balance sheet impairments. Cost of risk narrowed to 45 basis points for the full year, improving by 13 basis points year-on-year. Further into the risk slide, we go through the NPL and coverage on Slide 17. The NPL ratio inched up by 4 basis points year-on-year to 97 basis points from higher NPL balances for both consumer and commercial portfolios. This remains consistent with our normal portfolio seasoning and migration and stays comfortably within our risk appetite. On a quarterly basis, the NPL ratio improved marginally, supported by write-offs. For NPL coverage, this was at 178%, down 3 percentage points year-on-year, but up 4 percentage points sequentially, reflecting an increase in Stage 3 coverage to 70.5% from 64.8% in the previous quarter as we continue to focus on prudence in the approach to Stage 3 loans. Next, we take a deeper dive into capital on Slide 18. Our capital position continues to remain strong with the capital adequacy ratio rising to 21.4% following multiple issuances during the year. The Tier 1 ratio and CET1 ratio stood at 19.2% and 16.2%, respectively, improving year-on-year and quarter-on-quarter, reflecting strong capital generation as well as disciplined RWA growth. Moving on to the full year 2025 performance against guidance. And to summarize our full year 2025 performance, we met or exceeded 4 of our 6 guidance metrics. The main deviation was in the cost-to-income ratio, reflecting the one-off items discussed earlier. This, together with a stronger-than-anticipated capital base, resulted in a slight shortfall versus our ROE guidance. However, the underlying earnings momentum remains intact, and we continue to see clear levers to improve efficiency and ROE into 2026 and beyond. Moving finally to Slide 20 on the 2026 guidance. We expect a favorable year ahead and remain committed to improving profitability through sustainable loan growth, margin resilience and efficiency improvements. Loans are expected to grow by high single digits, supported by stronger volumes in both the commercial and consumer portfolios with JV driving growth in consumer lending. Net interest margin is expected to remain around the 3% level as a slight moderation in the noninterest-bearing deposit ratio is partially offset by expected repricing in the corporate book as well as growth in JV based on our assumption of 1 to 2 rate cuts during the year. Our cost of risk outlook is around 45 to 55 basis points, reflecting some normalization towards our through-the-cycle range of 60 basis points as well as increased JB lending and potentially lower recoveries. The cost-to-income ratio is expected to fall below 33% on strict cost discipline and improved fee generation from nonfunded lines. Lastly, we aim to maintain CET1 levels comfortably above 15%, supported by retained earnings generation while balancing growth-related capital consumption and increased regulatory requirements. Overall, BSF delivered steady progress in 2025. Our balance sheet agility, disciplined selectivity, effective NIM management and continued cost optimization throughout the year have supported a meaningful improvement in bottom line profitability. This positions us well for the journey ahead, and we look forward to outlining how this momentum will accelerate through 2030 in our upcoming strategy call. That concludes our full year 2025 presentation, and now we're happy to take your questions.

[Operator Instructions] I will start the Q&A. This is Olga Veselova from Bank of America. [Operator Instructions]. A couple of questions from my side. You guide 1, 2 percentage point improvement in profitability this year versus last year despite flattish net interest margin, higher cost of risk and a bit of improvement in cost-income ratio. So do you think this profitability improvement would be driven by efficiency? Or is there any other components which will help you to drive ROE up? That's question number one. And question number two is on the use of capital. Saudi Fransi has a robust capital adequacy ratio, comfortably meets requirements from SAMA, including after increases of countercyclical buffers, has a moderate balance sheet growth appetite. What prevents you from growing the dividend payout ratio in this environment?

Thank you, Olga. So just to confirm maybe on the first question on profitability, what I understood is the drivers of the ROE improvement going forward into 2026.

Correct. Yes, yes.

So I think we want to continue more or less the same as what we've been focusing on in 2025. So it is going to be marginal improvements overall, but the area is going to be twofold. On revenue growth, the maintenance on net interest margin alongside balance sheet growth would drive net interest income higher. But the big focus for BSF going forward is on nonfunded or noninterest income. And there, we see an opportunity compared to peers. We see the differentiation in terms of the decomposition of ROE. So nonfunded income is another area that we want to look at. At the same time, maintaining a positive jaws, so really focusing on a full-year basis for cost control and optimization, where we've done a lot of hard work over the last 2 years. We've had success, specifically this year on the staff expense side. So managing costs below the operating profit growth, we feel will continue to put us on this path for improving ROE on a sustainable basis. It may not be a step change year-on-year, but it's a positive change and positive momentum that we're really looking at for sustainable improvement there. On to the second question on capital, rightfully mentioned, very well capitalized. I think a few changes we witnessed last year and in the effort of being more prudent and conservative on one angle, given the changes on the regulatory side for capital requirements on a bilateral basis with the regulator, but also for the countercyclical buffer and the interest rate risk in the banking book. All 3 of these, I think we want to be sure we would be well covered in addition to allowing for potential growth on the lending side, albeit, again, one where we are willing to be more selective. But we feel the opportunity is there, and we want to be ready instead of having to issue capital on a basis where we need it. We want to have that prepared for dry powder going forward. So on the question for dividends, I think this is a bilateral discussion, again, we have typically with the Central Bank, not only on individual dividend payments, but also on overall capital requirements, and these go out really long term. So up to 3 years in terms of projections. So for that reason, I think we want to continue to maintain this balance between let's say, prudent capital allocation against dividend payments that we feel we can afford and still generate organic capital internally. I hope that clarifies.

Yes, it does. Thank you, Ramzy. Let me pass the word to the next attendee, Mehmet from JPMorgan.

I just had 2 questions, please. One, on the NIM outlook, and that's in line basically with your loan growth forecast also. So this year, you decoupled a little bit from your peers. You delivered very resilient NIM, but that obviously was on the back of also quite selective lending. And into 2026, you're guiding for a little bit of NIM improvement. But at the same time, I see you're guiding for high single-digit loan growth. So there will be some acceleration there. So how should we think about this? And what kind of assumptions you have for NIMs going into 2026? And you mentioned -- my second question, you mentioned nonfunded income will be a big driver of profitability improvement. I'm sure we'll hear more about that with the strategy presentation. But could you please help us understand the fee growth prospects for 2026, particularly on the back of the regulatory changes, but also the slower momentum we saw in 2025?

So I guess I'll take the first question. Thank you, Mehmet, for the question. So historically, BSF's balance sheet was predominantly skewed towards corporate assets with a high proportion of floating rate loans funded by [ NIBDs ], zero-cost current accounts, resulting in a structural earning variability across interest rate cycles. Now to manage interest rates, to manage this risk, as the CFO earlier mentioned, we have several venues to fix our balance sheet, whether through cash flow hedging, fixed rate investments or the natural on-balance sheet through retail fixed rate assets. And these basically would stabilize our net interest income through the cycle. As of today, we are relatively neutral. In fact, we're negatively correlated towards an interest rate drop in terms of profitability. So we expect that to have a positive impact on our net interest margin. In addition to that, we've been working on repricing our corporate assets, of which we have seen quite success. Now the only difference or the lever is basically the CASA ratio and how that would evolve vis-a-vis the asset growth. Moreover, we do have a maturity profile on our investment book, of which several fixed rate assets would mature in 2026, and that would also be replaced at higher yields in the current environment and would also have a positive impact on net interest margin.

I would just add maybe one more point to that on net interest margins. We've been able to do this, I think, starting quite early, almost 1.5 years ago in terms of the focus on repricing. And it was at a time where it was still very competitive in terms of market share capture amongst other banks. I think we've been hearing more that there is a bit more balance also coming at other banks. I think we've been seeing it on the ground as well. So I'd say the one difference compared to previous years is that it's not us alone that are going through this repricing exercise. So it should give more opportunity to grow more or less in line with the market at the same sort of repricing focus that we've had before. Now this still remains to be seen fully through the numbers, but that's our expectation that we would expect competition also on margin to start moving in the same direction.

Okay. And to answer the second question regarding the nonfunded income, as Ramzy mentioned, 2026 and beyond, there's going to be a lot of focus on nonfunded income, fees and commission to be specific and other lines. However, we will be able to elaborate further in our strategy call, but just highlighting where we expect that noninterest income to come from throughout the bank on the wholesale banking side with our focus on liquidity and cash management, trade finance and supply chain financing. On the BSF Capital side, we aim to maintain and also grow our investment banking fees and also push for more of our fair share of brokerage and asset management fees. On the treasury side, we see that there's an opportunity to grow fees by providing more hedging solutions to our clients, also growing FX and trading income in line with the overall growing the balance sheet. On the retail banking side, the largest component of fees is loan fees, which is reflected under interest income. And again, as mentioned, we will be able to elaborate further in our strategy call on the 16th of Feb.

Our next question is from Rahul Bajaj from Citibank.

This is Rahul from Citi. I have a couple of quick questions. First one is on -- just looking at the balance sheet asset side, very strong growth on the investment income line -- sorry, investment securities line compared to the loans. Just wanted to understand how are you thinking in terms of growing both these line items? Is it either or if you get an opportunity on the loans, you grow the loans or deploy it into investment securities? Or there is a kind of internal target to grow investment securities in a particular manner to kind of -- as you rightly said earlier, to lock in higher interest rate sort of investments? So just wanted to understand the growth there. The second question is on the guidance around loan growth. And you're now pointing to high single-digit growth compared to mid-single-digit growth last year. Just wanted to understand where are you seeing the delta in terms of the recovery? Is it more retail driven, which has remained pretty strong through last year for yourself? Or you think it will be wholesale where you will see incremental sort of growth coming. So where is the delta coming from? And maybe a small quick third question, if I may ask, please, and please correct me if I'm wrong. I think I heard that there was a one-off element in OpEx in 4Q. Are you able to quantify what was the size of that one-off element?

Rahul, thank you for your questions. So I'll take the first question with regards to the investment book growth. So as you mentioned, it's a bit of a combination of excess day-to-day funding, day-to-day liquidity, interest rate risk as well as the, let's say, slower-than-anticipated loan growth in addition to liquidity management. So all these combinations would basically place the bank in a decision on how to grow the investment book. I'd like also to note that we have been seeing favorable investment yields coming from the local government securities vis-a-vis the -- let's say, the interest rate swap done through cash flow hedge. Therefore, we're more inclined to invest and deploy in government securities as opposed to fixing our floating loan book. In addition, on what we have seen or witnessed in the retail book, particularly coming from mortgages. And this would also happen in line with the interest rate risk in the banking book framework, whereby we monitor our delta EV as well as our delta NII in terms of interest rate risk. So yes, that's the answer.

I'll take the second question regarding the loan growth guidance. We aim to continue our selective approach on lending in 2026, continuing our focus on sustainable loan growth across our businesses. In 2026, similar to the trend in 2025, we expect retail lending to outpace this level, including the contribution from JB. And for the corporate lending side or the commercial lending side, we expect it to be around the overall guided level or slightly below. But of course, dependent on pricing conditions in the market for corporate lending, commercial lending, we are willing to take on more or less growth on our balance sheet based on CASA liquidity and of course, pricing margins and pricing conditions. So again, similar to 2025, we do expect that the larger contribution when it comes to loan growth will come from the retail side, and we will continue our selective approach when it comes to the commercial side.

And I'll take the last question, Rahul. You're correct in that we did have one-off expenses in the fourth quarter. Several items we had highlighted. But if we're looking at sort of the full year overall as well, the one-off expenses examples would be a true-up in the fourth quarter for accruals on existing expenses. There was one item specific to a services contract, which had been a dispute. We did not view it as an area where we would have to provision given our initial analysis. But after looking at it with a third party, it became clear that it was something that we had to finalize. So that was almost SAR 30 million alone. We had also on real estate assets, as an example, on the full year for OREO, close to SAR 20 million in additional provisions that hit the G&A. I don't think a symptom of real estate, but these were in regions where maybe from prior years had not been adjusted in terms of book value. So those would be a few of the one-offs that we saw throughout the full year.

The next question is from Naresh Bilandani from Jefferies.

It's Naresh Bilandani from Jefferies. Two questions, please. One is, sorry, going back to the guidance, and I'll just flip it compared to some of my other counterparts have asked. So if I see your guidance, your targeted ROE increase this year is looking a lot more driven by improvement across the board. But you had started with an optimistic note last year, and you had changed your guidance over the course of the year as new realities emerged. So if you had to highlight certain areas that you think could be susceptible to pressures this year, either from macro or from regulation within the guidance, which would put your ROE targets at a threat, which ones would you feel which are the most vulnerable to a downgrade? So just trying to hear the negative point of view with regards to the guidance here. That's the first question. And second is, Ramzy, could you please repeat the point on reclassification of loans among sector exposures, especially the one which you attribute to decline in contracting loans. Has this helped you from a capital perspective in any manner? Is this summer led reclassifications across the industry or strictly your internal decision only?

Thank you, Naresh, for that. On the guidance, I think when we look at the different levers that could potentially impact many items, the one that I would argue continues to be on the radar is on the CASA ratio specifically, given it has an impact on many things, not just profitability, but also from a risk perspective, for example, on its impact on the interest rate risk. But that would be the one area where we really want to maintain a CASA ratio above 40%. We recognize there may continue to be some deterioration there given the increase mainly is coming from interest-bearing deposits, but that would be the one element where we'd be cautious as much as possible. And our counterbalance to that and how we try to mitigate it would be, again, looking at the loans and advances, preferably first from a margin perspective, but then second would be from a volume perspective. So that would be the one area we would highlight for now. For the others, we don't see cost of risk really becoming an issue on cost overall. We still believe we have the ability to maintain a positive jaws as we've done in 2025. So that stance is an area we're still going to continue to push on for 2026. For the reclassification, to be honest, it was many items, but the main elements now as we've gone live in our core banking system in preparation for that as opposed to reading from a system that looks at internal classification, the decision was made to link it directly towards SAMA or the regulatory classification. I don't have the specific terminology that is used, but it is more or less in line with the SAMA regulation. It does take time. So what I understood is about 50% of the adjustments have been made already to bring it more in line with the SAMA classification. The second item is, in particular, on contracting where a project goes live and it's completed, it moves to becoming operational and therefore, shift the sector to another sector, whether it's services, manufacturing or the like. I think for 2025, we saw a lot going from contracting into services, but not changing anything beyond that.

The next question is from Chiro Ghosh from SICO Invest.

This is Chiro Ghosh from SICO Bahrain. I have 2 questions, and it's primarily from the -- from a macro perspective, if you can give some more clarity. First is -- I know you gave some clarity, but a little more would be very helpful, is first purely from the liquidity side of it. So how is the liquidity environment in Saudi? How is the competitive market? So how is the struggle to generate deposits and -- some clarity on those direction would be very helpful, first. Second is your mortgage loan growth. That has been quite strong. Now again, I want to get a sense of what kind of demand is in that sector, especially in the context of slight easing of the real estate prices. So would it have any impact on it from -- especially from the asset quality side of it and overall demand? These are my 2 questions.

Thank you for your question. So I'll start off on the liquidity landscape. If you look at the local liquidity or local ratios of the banking sector, [ bad debt ] ratio in particular, you see that the Saudi banking sector is extremely comfortable with ample liquidity when it comes to the likes of liquidity coverage ratio and net stable funding ratio. Moreover, local banks hold significant size of government securities, whereby we get access to SAMA repo facility at outstanding level, not at market levels with only a 2% haircut. So in terms of actual funding, banks do have significant access to day-to-day liquidity. I think the challenge here is more structural. We've been seeing since 2017, retail -- in particular, mortgage reforms that had expanded credit in addition to the recent commercial activity, whereby we've seen credit outpacing deposits since 2022. And this basically incentivized many local banks to start raising debt from outside the Kingdom. I think the fact is that liquidity is available, but how are we able to price off our assets vis-a-vis the more expensive funding that we have been experiencing over the past couple of years. I think this is really the main challenge. As for us, we do have certain disciplines around how much we want to grow from our wholesale funding or how much cost we would like to bear in terms of cost of funding, especially if we're unable to pass on these costs to the asset prices. Otherwise, we maintain a certain discipline on our credit growth, vis-a-vis on how cheap we can raise the liability.

Purely from the deposit side, are -- is there a price pressure? I mean, are banks putting in -- giving out high rates, which is making it more competitive purely from the deposit side?

I think if you look at it tactically, over the past -- since December, there has been a relative ease in pressure. Hence, we have increased our deposit base when compared to our interbank borrowing. But again, I think the trend overall is that credit continues to outpace deposits across the system. But tactically, yes, there has been some relief in pressure.

And I'll take maybe the second question on the mortgage side. So I think important to highlight again, for BSF specifically, coming from a lower base. The opportunity was clear in that we could, especially with our client base being more affluent, continue to grow this portfolio. I recognize in percentage terms, 24%; in riyal terms, SAR 4.3 billion. But again, coming from a smaller base, looking at the full value proposition for clients, we still see an opportunity there, and we would have made some adjustments in pricing in the first half of the year, and now that we have captured that client base looking to adjust pricing slightly higher. And in terms of the changes that we witnessed overall, throughout 2025 from a macro and regulatory perspective, it would have had an impact at the time where there was still this lack of clarity. But I think since the clarity has come out on white land and the rental costs, we've seen a pickup again in terms of demand. And I would say, again, on the affluent side, we've not seen maybe as big of an impact just yet.

At this point, we conclude this call, and please let me pass the word to management for final remarks.

Thank you very much. I would like to thank you all for taking the time to join us today and for your continued engagement. We look forward to speaking with you at our upcoming Strategy Day to share further updates on our strategy and outlook for 2026 and beyond. Thank you very much, everyone.