Banque Saudi Fransi (1050) Earnings Call Transcript & Summary

Good afternoon, and good morning -- good evening, everyone. I hope everyone is doing well. My name is Shabbir Malik. And on behalf of EFG Hermes, I welcome you to BSF's first quarter results call. The management will do a presentation, and then we'll open the floor for question and answers. I will now hand it over to Yasminah Abbas, the Head of Investor Relations. Yasminah, over to you.

Thank you. Good afternoon, and welcome to BSF Q1 2024 Earnings Call. I would like to thank you, Shabbir and team for hosting this call. Speaking first is BSF CEO Bader Alsalloom, and he will go over the earnings summary for the quarter as well as an overview of the strategy execution and share with us a couple of exciting updates. He then is followed by the CFO, Ramzy Darwish for a more detailed walk-through of the financial performance. And with that, I'll hand over to Bader.

Thank you, Yasminah. Good afternoon, and greetings to all for joining us on this call. We appreciate your time as we discuss our Q1 2024 performance over the next hour. I'm pleased to share this quarter's results with you, which reflect the return back to normal following the one-off impacts last quarter. Our results are also in line with our expectations and guidance. We're especially excited by 2 strategic milestones, which we have achieved year-to-date. The completion of Phase 2 of our new core banking system which happened in the first quarter. And most recently, albeit not in the first quarter, but important to highlight the launch of our new brand. We'll delve into them shortly, but first, let me take you through highlights of our financial performance. Our net income for the first quarter of 2024 saw a notable increase of 7% to SAR 1.15 billion with return on equity reaching 11.1%. This growth was primarily driven by a decrease in our cost of risk, while operating income grew 1% from nonfunded income growth. Growth in our loan book was also strong up by 13% year-on-year, supported by both commercial and consumer sectors. Customer deposits increased by 4% year-on-year, reaching SAR 174.8 billion, driven by increased interest-bearing deposits. although noninterest-bearing deposits increased on a sequential basis. Regarding asset quality, we saw significant improvements with our NPL ratio decreasing to 0.94% reflecting write-offs in our commercial book and the NPL coverage increased to 155%. Our capital position remains robust with 18.4% Tier 1 ratio. Additionally, our liquidity metrics are comfortably within regulatory limits further strengthening our financial resilience. Next, let's move on to our strategic updates. Overall, our strategy execution continues to show rapid enhancement with an overall progress rate now at 66% compared to 62% last quarter. In Wholesale Banking, we've taken significant steps achieving a completion rate of 78%. We've expanded onboarding and lending to government entities established a tracker for multinational corporate referrals, launched 3 supply chain financing products and activated government agreements. Moving to Personal Banking, progress stands at 46% compared to 40% last quarter. Notable achievements include the pilot launch of Lombard lending to our upper affluent segment and its leads management dashboard. We've also highlighted Elite plus, our new upper affluent segment and further progressed the partnership with wholesale banking, enhancing cross-sell opportunities and customer relationships. Private banking has seen impressive progress, reaching 86% completion rate. This includes, among others, finalizing a proposal for the advisory development program. Additionally, we posted several VIP experience events to enhance client engagements. I'll move on to the next slide. JB, previously Saudi Fransi Leasing has also made significant achievements with an 86% completion rate. We've introduced JB's new digital personal loan offering and achieved encouraging growth in this product. We've also defined a new credit card proposition and further refine JB's strategy and focus areas for this year and beyond. Lastly, at BSF Capital, progress stands at 43%. Key highlights include identifying their wealth tech partner, redesigning the onboarding and KYC process, automating internal reporting and starting the repositioning of the real estate advisory unit. We're also optimistic about the pipeline and real estate funds. Now let's talk about key enablers on our next slide. Looking at our technology infrastructure upgrade, first, starting with ICP our new corporate -- integrated corporate portal. Phase 1 back-end testing is in progress and is scheduled for rollout during this year. Our Phase 2 functional specifications are signed off and technical specifications are in progress. With omnichannel, our new retail and private banking platform. We've concluded several rounds of testing and piloting in 2023 and early 2024 and are expecting to go to market in mid-May. Next, on core banking system and rebranding efforts. I'll cover these in more detail in the following slides. Now when it comes to CBS, our core banking system, this is a significant project, replacing 30 fragmented systems and consolidating them into 1 unified system. Over the past few years, we have worked on deploying various releases of CBS, each more complex than the earlier one. Our first release was issued in December 2020, followed by subsequent releases. Major progress was made in 2023. Then we saw the completion of Phase 2 testing for user acceptance rolled out a family and friends technical pilot program and completed design, user training and change management activities. The hard work of 2023 enabled CBS release to go live in February 2024. This marked a pivotal milestone as we introduce critical functionalities such as corporate and retail accounts, Islamic and conventional recurring deposits and a comprehensive overall of our branch channel Looking ahead, we expect the rollout of Release 3 during 2025, which will further enhance our capabilities. Our CBS project journey is tested the dedication and hard work of our team, and I'm very happy and proud that the majority of the journey has already been completed successfully. Moving on to the next slide. CBS is not just a technical upgrade. It's a strategic initiative that underpins our digital transformation that will help us realize our ambitions. CBS enables us to enhance our product offering and services, predict client needs and streamline our operations using the latest innovations and advanced analytics. The benefits of CBS are many, from an enhanced customer experience with full digitalization and 24/7 self-service capabilities to improve efficiency and reduce IT workload. CBS is revolutionizing how we serve our customers and manage our operations. CBS also serves as a key enabler for our strategic ambition to position ourselves as a leader in customer experience. Already, we've realized significant benefits from CBS implementation, including future-proofing our tech landscape and improving efficiency. As 1 of many examples, we've witnessed an impressive 80% increase in straight-through processing rates for SARIE transactions. This is 1 of many examples. CBS has also streamlined our credit card and personal loan processes, making them 1x to 2x (sic) [ 1.5x to 2x ] faster and more efficient than before. Now let's switch to another important achievement, our new branding, which came to life recently a few days ago. Again, albeit that this is more of a most recent development, but lots of work was actually done in Q1 and worth mentioning here. As part of our strategic evolution, Bank Saudi Fransi has undergone a rebranding, emerging as BSF. The new brand was officially launched on the 2nd of May for BSF employees and senior management. We have also completed rebranding physical and digital assets, including over 70 branches, 300 ATMs, 6 offices in several e-channels and applications. With our heritage BSF inherited equitable values, trust and sophistication in our DNA. Our acronym BSF symbolizes the next generation of banking, making a pivotal shift in our industry positioning. Our brand strategy is founded on shared beliefs and active purpose and a compelling value proposition. But why the change to the rebranding of BSF. It's not just about refreshing our image. It's about strategic enablement for future growth. We aim for leadership and profitability within focused market segments, and our new brand gives us a competitive advantage in achieving this goal. We've responded to external changes by adapting to shifts in the economic landscape and the evolution of the banking sector, increasing customer expectations and technical advancements have also influenced our decision to rebrand ensuring we remain relevant and competitive in a rapidly changing environment. Overall, our new brand embodies our commitment to innovation, customers and sustainability. It's a symbol of our readiness to embrace change and drive a positive impact in the banking industry and beyond. Finally, I'd like to touch upon our ESG developments and some achievements in that area. ESG is part of BSF's DNA. It's deeply rooted in our bank strategy and processes, and allow me to remind you of our 5 key pillars: first, exemplifying the highest ethical and governance standards; second, accelerating sustainable economic growth; third, creating a thriving workplace; four, serving our clients and last but not least, protecting our communities. Moving on to the next slide, I'd like to highlight the progress BSF has made in boosting our ESG ratings. In 2023, our ESG risk rating score from sustainalytics stood at 28.4. In the first quarter of 2024, we've significantly improved achieving a score of 20.9, surpassing all Saudi banks as of March 2024. Additionally, I'm pleased to announce that BSF has retained the highest score in the S&P Global ESG rating among Saudi Banks for 2023. This achievement underscores our dedication to sustainable and responsible practices. We acknowledge that sustainability is a journey, and this success motivates us to enhance our ESG practices further. In conclusion, BSF is now well positioned to achieve its 3 core strategic goals. They've become a top player in our target segments, focus on profitability and returns and last but not least, deliver outstanding customer experience. These goals will drive our progress towards becoming 1 of the top 3 Saudi banks in our chosen market segments by 2025 and with aspirations to lead in private banking. Now I'll hand it over to our CFO, Ramzy Darwish who will delve into the financial performance. Ramzy the floor is yours.

Thank you, Bader. Good afternoon, everyone. Thank you for joining us today. Overall, we are pleased to report that our financial performance in the first quarter is back to normal, free from the one-offs that we discussed in Q4 of last year. Our net income for the quarter increased due to the normalization of cost of risk. The decline in margin year-on-year was counterbalanced by continued asset growth sustained in the first quarter this year as well. Additionally, asset quality metrics are also showing improvement. We'll delve into the details as we progress through the presentation, starting with an overview of the balance sheet on Slide 14. Total assets increased by 6% during the first quarter, primarily fueled by growth in lending and investments. The investment book itself increased by 9% year-to-date from high-quality liquid assets to manage interest rate risk while also capturing higher yields. You'll note on the right-hand top part of the slide, a chart that indicates the constituents of this change and the majority coming from the loans and advances with SAR 6 billion growth or 3% contributing the majority of the growth. On the bottom right-hand part of the slide, the liabilities overall indicated a 7% growth with deposits growing 2% mainly from noninterest-bearing deposits and increased wholesale funding, both short term through the interbank and FI market and also from the long-term senior debt with debt securities and term loans. On the next slide, we highlight loans and advances, which grew 3% year-to-date or 13% year-on-year, and this is coming from both commercial, which grew 3% as well as consumer growth of 5%. The commercial activity highlighted in the bottom left part of the slide reflects healthy corporate activity as commerce, contracting and services showed growth. On the bottom right-hand part of the slide with consumer loans, we indicate faster than market growth with particular strength in auto loans at 14%, personal finance at 6% and mortgages at 3% growth. It also be noted that a significant portion of this growth in auto loans and personal financing more specifically comes from JB where early success of the rebrand and strategy is gaining momentum. On the next slide, in terms of deposits, we had shown 2% year-to-date growth in deposits, primarily coming from the corporate segment. We had noninterest-bearing deposit growth of 3% for the quarter, again mainly coming from the corporate segment. Interest-bearing deposits had a growth of 1% as we continue to try and optimize cost and efficiency. As a result, on the bottom left-hand part of the slide, this dynamic resulted in stabilization and slight improvement in the share of noninterest-bearing deposits to total deposits which now stand at 47.6%. On the next slide, we discuss net income, which grew 7% year-on-year from lower impairment charges and increased at 39% relative to the fourth quarter of last year. The bottom table and chart provide color on where the main drivers were as net interest income was stable but a significant normalization and impairments more than offset the increase in operating expenses. Additionally, you will note normalization to the trend on noninterest income and operating expenses from the one-offs highlighted in the previous quarter. Now let's dive deeper into the composition of P&L, starting with net interest income on Page 18. Net interest income was broadly stable, as highlighted in the top right part of the slide, where expansion on interest-earning assets was offset by rising interest expense from hedging and interest -- and cost of funds. The bottom 2 charts indicate this in a different light with 9% quarter-on-quarter growth in interest income offset by 16% growth in interest expense. As a result, on Slide 19, we highlight the net interest margin, which trended lower compared to last year, mainly on the back of rising cost of funds, as shown in the top charts. Nevertheless, this has broadly stabilized with net interest margins at 319 basis points versus 322 basis points last quarter. There's also shown a different light in the bottom left chart where in the customer deposit costs more than offset increasing trends on the asset side. It's also worth noting that interest rate hedging had a relatively minor impact on margin with a 13 basis points impact year-over-year and 1 basis point on a sequential basis. Now let's delve into NIM sensitivity. As mentioned last quarter, the bank sensitivity significantly declined during 2023. And now all else equal is quite limited and is assessed plus/minus 3 basis points for every 100 basis points change in benchmark rates. It would be noted that this is calculated based on balance sheet and off-balance sheet items, and we provide more color on both of these on the right-hand side of the charts, where although cash flow hedges remain at the same notional amount, when added to the own balance sheet sensitivity, again, provides a view on more limited net interest margin sensitivity. On the next slide, we highlight noninterest income where we had a 5% year-over-year growth and 28% growth compared to last quarter, given one-offs discussed in the trading line in Q4. On the top right chart, you will note the main driver coming from trading income, reflecting more BAU volatility and market opportunities. The bottom right chart also shows the improvement driven by brokerage, asset management and increased trade finance income. With card fees lower, mainly due to the AlFursan campaign, which provided a boost in the first quarter of last year. On the next slide, in terms of operating expenses, we had an increase of 9% year-on-year, mainly on the back of employee-related costs, reflecting increased headcount, and the correlated pay to profitability. As a result, at the bottom left part of the slide, the chart show cost to income rising slightly to 33.2%, however, we maintain a positive outlook on this with the strategic investments expected to reap benefits in operational efficiency as well as frontline benefits such as customer experience, time to market and others. Additionally, cost to average interest-earning assets declined to 1.28% due to faster growth of earning assets. Sequentially, you will note a 9% drop in expenses again, attributed to one-offs and nonrecurring transformation-related expenses that had occurred in the fourth quarter last year, which we had discussed. On the next slide, when we dive into the cost of risk. The quality of the portfolio remains healthy with cost of risk normalizing to 60 basis points from higher levels last year. The impairment charge highlighted in the bottom charts show a significant 32% reduction from last year and 33% reduction from the last quarter, reflecting normalization absent the legacy account that was dealt with over the last 2 years. The quality is further reflected on Page 24 in the nonperforming loan ratio and the coverage ratios with NPLs coming down below 1% and coverage ratios improving to 155%. This is due to many factors, including growth in lending, conservative provisioning and write-offs over the past 12 months. You'll note stage-wise coverage improved on Stage 3 loans, specifically, whereas coverage for Stage 1 and Stage 2 loans remain broadly the same. On Slide 25, we highlight the liquidity position, which continues to remain robust and comfortably meeting regulatory requirements and the bank continues to opportunistically tap the debt capital markets to diversify and extend the liability profile. We executed a $700 million public Sukuk in the first quarter in addition to a $250 million term loan facility, reflecting the solid appetite available for the bank. The bottom 2 charts reflect the still robust position with LCR at 166% and the net stable funding ratio at 116%. Lastly, on capital. We experienced a slight reduction driven by RWA growth, but still reflecting more than adequate capital ratios with the CET1 ratio at 16.2% and the Tier 1 ratio at 18.4% and overall total CAR at 19%. To conclude a solid start to the year, which brings us to the guidance where on loans and advances, we experienced 3.4% growth year-to-date and the guidance having been at low double digits remains unchanged. We continue to view that the robust activity in the corporate segment will drive the majority of this loan growth for the year. Our net interest margin at 319 basis points remains in line with the guidance between 310 and 330 basis points. This is again subject to a change in deposit mix but also the growth in margins overall. On cost of risk at 60 basis points remains within guidance at the lower end of 60 to 70 basis points, and we continue to believe that the bank will be able to achieve these levels or even better. On cost to income, the ratio at 33.2% versus 32%. Again, expectations for limited cost growth with enhanced income growth expected to drive this below 32% by the close of the year. On return on equity at 11.1%, again, within guidance of 11% to 13%, and we expect to continue to remain within these levels. And finally, on the core equity Tier 1 ratio, 16.2%, slightly below the 17% to 18% guidance. We'll continue to monitor and manage this throughout the course of the year, but expectations as of now remain unchanged for the full year. With that, we bring a close to the financial highlights section, and we will pass it on to the operator for Q&A.

Thank you very much, Ramzy for the presentation. Also, Bader, thank you very much for your comments. We will now open the floor for Q&A. [Operator Instructions] We have a couple of hands raised. I'll start off with Nida Iqbal. Nida, your line should be open. Please go ahead.

I have 2 questions. Firstly, on the cost of funding and the funding dynamics this quarter. I saw that term deposit shares were down quarter-on-quarter. Do you think we're at the peak in terms of term deposit share? And where do you see cost of funding evolving from here? My second question is on the asset growth and the loan growth this quarter. I think the incremental [indiscernible].

I wasn't able to get the second one, but maybe you can start with the first 1 and then maybe she can try again. The first one was around cost of funds.

Thanks, Shabbir. This is Bader. So with regards to our cost of funding, it reflects the strategic positioning for the anticipated growth in credit, we have recently onboarded relatively more substantial medium-term liability through DCM and non borrowing compared to our peers. This proactive approach would ensure that our funding mix is optimized for upcoming credit growth opportunities. Obviously, this will allow us to capture a significant push in -- of asset growth going forward. We've also implemented several liability focused initiatives aimed to optimize costs. Now as of today, we stood at 47% NIBDs. However, we remain focusing on other borrowings, specifically in wholesale funding, and this will continue putting some pressure on cost of funding. On the next question...

So we were able to gather that it's about loan growth. So maybe, Nida, do you want to just go over the question 1 more time?

Nida your line is open. Please go ahead.

My second [indiscernible].

[indiscernible]. Can you type your question in the Q/A box [indiscernible]. We'll move to our next question, and this is from Rahul.

I have 3 questions, basically. The first 1 is on NPL and cost of risk. So we've seen some decent decline in absolute level of NPLs for Banque Saudi Fransi over the last several quarters now. Would you say that the majority of the legacy account cleanup that you've been doing now done? Or you think there is more to come. And just building on that, how do you see the normalized cost of risk level for the bank has changed through the cleanup. So is 60 basis points the new normal for the bank now after all the cleanup or you think it can go lower or probably higher? I mean that's kind of my first question. The second one is on the margin trajectory. We did see cost of funds go up and a slight pressure on margins sequentially in 1Q. How should we think about margin over the next couple of quarters as interest rates remain high -- higher for longer and there's no new cut. I'm assuming the hedges will continue to be slightly negative as we head into the next few quarters. But then overall, I would -- it would be great to understand how you're thinking about margins over the next couple of quarters. And my last and final question is on lending volume, lending growth. We saw very decent loan growth coming in the first Q. If you could please help us understand how your pipeline looks for 2Q and 3Q? That would be very useful.

Thank you, Rahul, for the question. Maybe to begin with the first on the NPL and cost of risk, I think the first part of that question is whether the majority of the legacy positions are done and dusted with. I think the short answer is, yes, the majority would be completed. I think when we look at the cost of risk through the cycle for corporate lending in general, we do expect somewhere between 60 to 70 basis points sort of in line with our guidance, again, through the cycle. In any given year, it could range slightly higher or slightly lower than that depending on recoveries. And I think that's an area where we continue to focus on not only this year, but in general, to make sure that for the loans that have defaulted in the past that there is some level of recovery that we can exercise and gather from that. So I would say compared to last year, when we had budgeted for some significant recoveries. This year, we had not done the same. So the cost of risk is excluding a lot of these potential positive surprises. And then on the margin question, just to highlight, I think, the impact that we've seen last quarter, given some of the deposit mix shift, a lot of that still does impact into the first quarter. I would say going forward, we would expect more normalization and stabilization there. So I would not suspect cost of funding to see a significant increase compared to what we saw in Q4 or Q1 of this year without a requisite change on the asset side. And given where we stand now in terms of interest rate risk positioning, we would view it as being, again, broadly stable and agnostic to where rates move going forward, subject to the growth of the balance sheet overall, depending on where it's coming from, whether it's interest-bearing or noninterest-bearing deposits, this does play a role. But I would suspect, again, if we continue to maintain the current level of deposit mix, we should not see a significant shift on the overall net interest margin.

I'll take the third question regarding the lending growth for the remainder of the year. Our pipeline continues to expand and is a robust pipeline. Key drivers when it comes to the pipeline for the remainder of the year, when it comes to our -- to achieving our guidance when it comes to loan growth includes the conversion of our existing business pipeline to actual exposures. We are also leveraging on existing clients when it comes to trade and supply -- supply chain financing. We continue to increase our participation on giga and mega projects and we continue to increase our focus when it comes to multinational corporates, MSMEs and also FIs to expand our corporate lending business. So to answer your question, we continue to have a robust pipeline for the remainder of the year, and we do expect the loan growth more specifically when it comes to our corporate book to continue throughout the year.

I'll now move to the next question. Naresh your line is open, please go ahead.

Okay. Perfect. It's Naresh Bilandani from JPMorgan. Just 2 questions, please. And please bear with me these might be a bit broad-based. So any insights there would be helpful. First, we've seen an -- recently seen an improvement in the mix of funding between noninterest-bearing and time deposits at the system level as we can deduce from the SAMA data. Now while the results of BSF and probably for the other banks don't show that any of these benefits translated positively on the funding costs. Can you please throw some light if you have seen any structural change in the liquidity dynamics at the system level in the recent months? And if you can expect that some of these benefits of the shifts in the funding that we have seen in the first quarter eventually trickle down as benefits in Q2 for the funding costs, any thoughts from you there would be super helpful. That's the first question. My second question is that the credit volumes for BSF and all the other peer banks in the system have been quite strong in Q1, would you please be able to throw some light on the underlying driver for the same? And I know you did throw some light on the previous question, whether the momentum could continue at the same pace. But I just want to get some firm clarification from you, if the momentum continues at the same robust pace as we go into the second quarter also. And I think more generally, the recent media headlines have been indicating rationalization of some of the large projects that are ongoing in the country. Do you reckon this affects the medium-term growth plans for the bank to in any form?

So I'll take the first question. So with regards to the mix funding components. We have seen an improvement across the sector. However, some of which of the demand deposits can really come from current accounts, which are remunerated demand deposits. So it's not necessarily coming at free money but could be coming at a cost. In our instance, we did see an improvement in our current account to total deposits. However, we have seen also a substantial increase in our wholesale funding, which has contributed to our cost of funding. We expect this to be maintained at current levels as the CFO had mentioned that our NIM guidelines have not changed. We've also seen quite some pressure on corporate margins, which had contributed towards that slight slump in our NIM. Going forward, we do not expect any major substantial change in costs.

I'll take the second question regarding loan growth, credit volumes and mainly when it comes to the momentum for the remainder of the year. We do see that the momentum is increasing when it comes to credit demand, especially on the corporate side, on the back of -- or I just previously mentioned mainly on these giga and mega projects. When it comes to the publicly announced re-rationalization that the government is currently conducting, we at BSF at least I do not expect this to dampen any of our growth plans for the remainder of the year given, of course, the massive investment required for this and banking or more specifically, local banking will play a smaller role. So we do not actually expect this to impact it nor have we seen it actually impact or dampen any of the credit demand, especially on the back of these giga and mega projects. So on that, we do expect the momentum to continue throughout the year even with this re-rationalization of projects.

That's clear. If I can please just have 1 follow-up question. You mentioned that some of the current accounts at the system level are not necessarily free and there's an element of remuneration on those accounts. Would you please be able to clarify that comment because that was not very clear, if I understood that right.

The demand deposit does consist of several categories, including saving accounts and current accounts. And these are remunerated based on an agreement or a bilateral agreement with certain customers. And these are not necessarily coming at -- basically at free money. So those are demand deposits but could potentially be remunerated. And those can incur costs on banks. They are categorized as demand deposits. However, they're actually part of the interest-paid liabilities of banks.

We'll now move to the next question. Aybek your line should be open. Aybek? can you hear us?

Can you hear me?

Yes, we can.

Excellent. I had, I would say, Three questions. The first 1 is your NIM sensitivity, you showed 1 slide where you discussed the margin sensitivity to a 100 basis point change in interest rates. But can you also comment on what happens to the margin if rates fall by between 25 to 75 basis points? I know we have a lot of hedges, but do these hedges kick in as early as we have a 25 basis points rate cut? Or do they actually become effective from the time when cumulative rate cuts 100 basis points and above? That's my first question. Second, can you talk about the liquidity release through potential mortgage securitization. I think quite a few banks are now considering securitizing mortgages with the international investors. Rather than with the Saudi refinancing company. How important is that liquidity release to securitization for Banque Saudi Fransi? That's my second question. And thirdly, regulatory create risk reserve. We know that Central Bank was planning to introduce this regulatory create risk reserve ahead of the pandemic but then the plans were delayed. Where are we now in terms of the introduction of this regulatory risk reserves? And can you give us some color? Is there any particular formulaic approach as to how these reserves will be calculated.