Banque Saudi Fransi (1050) Earnings Call Transcript & Summary

Good afternoon and good morning, everyone. On behalf of HSBC, I'm very glad to welcome you on Banque Saudi Fransi's Fourth Quarter 2024 Earnings Call. With no further ado, I'd like to hand over the call to Ms. Yasminah Abbas. Yasminah, over to you, please.

Good afternoon, ladies and gentlemen, and welcome to BSF's Q4 2024 Earnings Call. I'd like to thank you, Aybek and the HSBC team, for hosting us today. Speaking first is BSF's CEO, Mr. Bader Alsalloom, and he'll go over the earnings summary for the quarter as well as an overview of the strategy execution. He is then followed by CFO, Ramzy Darwish, for a more detailed walk through of the financial performance and then we will open the platform for Q&A. With that, I'll hand over to Bader.

Thank you, Yasminah. Good afternoon, everyone, and welcome to our earnings call. I'm pleased to present our fourth quarter and full year 2024 results today. This year we have built strong growth momentum despite a challenging operating environment. Our performance was driven by solid balance sheet expansion, disciplined risk management and strategic investments in growth areas. We delivered 8% net income growth supported by higher noninterest income and lower risk cost while carefully managing funding pressures and operating costs. We also remain focused on executing our long-term strategy, particularly in technology and digital transformation. Our omnichannel digital platform is now live enhancing customer engagement while our core banking system upgrade is progressing as planned. In addition, the rebranding initiative has already strengthened our market positioning and contributed to increased customer acquisition and engagement. Now let me walk you through our key financial highlights for the year-end 2024. We delivered strong and well-balanced loan growth of 14% year-on-year with both commercial and consumer lending contributing. On the investment side, our portfolio expanded by 24% year-on-year allowing us to optimize interest rate risk and yield opportunities. Deposits grew by 7% year-on-year with both interest-bearing and noninterest-bearing categories increasing. Turning to profitability. Operating income rose by 4% year-on-year with a 19% increase in noninterest income while net interest income showed a modest 1% increase reflecting margin compression in a high rate environment. Net income grew 8% year-on-year to SAR 4.54 billion supported by lower impairment charges, but particularly offset by higher operating expenses. Asset quality remained resilient with NPLs improving by 12 basis points over the past year to 0.93%. At the same time, our NPL coverage remained high at 181.7% reflecting strong risk management and our commitment to maintaining a robust and resilient balance sheet. The cost of risk improved to 58 basis points, a 38 basis point decline year-on-year driven by lower impairments in the commercial portfolio. Our capital position remained strong with a Tier 1 ratio of 18.8% and a CAR of 19.7% supported by retained earnings generation and issuance of additional Tier 1 sukuk. Liquidity remains healthy with an LCR of 162% and an NSFR of 114%, well above regulatory requirements. Now let's move to our strategic execution. We made consistent progress in our strategic initiatives throughout the year. By the end of 2024, we had achieved 79% completion, up from 75% last quarter and 62% at the end of 2023. Wholesale banking achieved 88% completion improving from 76% in 2023. Here we progressed in government client segmentation, which accelerated customer acquisition in this segment. We also expanded our financial institutions reach globally and introduced new trade finance, liquidity and cash management products further strengthening our market position. Personal banking progressed to 75% completion, a significant improvement from 40% in 2023. Key milestones included the launch of our new digital banking app, finalization of our branch network strategy and road map and strengthening our cross-sell framework with JB. Private banking successfully delivered on its strategic priorities achieving full completion in the third quarter of this year, up from 84% in 2023. Key developments included the launch of tailored family products, expanded collaboration with JB products and the introduction of an advisory program for relationship managers, reinforcing our leadership in this segment. We have recently kicked off a refresh to our private banking strategy, which should feed into our new bank-wide strategy. JB achieved 88% completion, up from 83% in 2023. It maintained a leading position in auto lease growing its market share to more than 34%, ranking first among nonbank financial institutions in both portfolio size and new sales. The successful implementation of a hybrid digital journey for auto lease and personal finance improved customer experience and accelerated sales. JB also made progress in optimizing mobile app services, enhancing its credit card proposition and improving the cross-sell framework with BSF. Another key milestone was the modernization of core systems, strengthening operational efficiency and scalability. Last, but not least, BSF Capital progressed to 55% completion by year-end compared to 42% in 2023. The business focused on expanding partnerships and collaboration initiatives and strengthening its position in investment in wealth management. It also launched a multi-asset model portfolio broadening investment solutions for clients. The introduction of our robo advisory services has enhanced digital wealth offerings while the real estate fund pipeline continues to progress expanding opportunities in alternative investments. Now let's move to our technology infrastructure upgrade on the next slide. We are making strong progress across our key IT and technology initiatives. The integrated corporate portal is advancing well with user training completed, testing underway and a data migration in progress. Phase 1 is scheduled to go live in Q2 2025. The omnichannel platform has begun customer migration and recent enhancements have improved functionalities. The official public release is underway and I'll give you some more details on the next slide. The core banking system upgrade remains on track. In 2024, we successfully implemented Release 2, the largest and most significant phase of the upgrade. We are now working on Release 3, retail deposit user testing is completed and corporate loan specification are finalized. Retail deposit deployments are set for Q1 2025 and corporate loan design phase is on track for Q3 2025 with full implementation in Q1 2026. These upgrades will enhance operational efficiency, scalability and digital banking capabilities. Speaking of our omnichannel platform, we are excited to announce the successful launch of our new digital app, which provides seamless banking experience for our customers. The app is designed for easy navigation, offering effortless access with a simple interface. Key features include streamlined payments, lightning-fast performance and access to multiple products in 1 place. Additionally, the app enhances the employee experience with an upgraded backend, improving operational efficiency and service quality. This launch represents a significant milestone in our omnichannel strategy and overall digital transformation and we remain committed to expanding its capabilities with more features coming in 2025. Public launch, which includes a marketing campaign, is scheduled for this quarter Q1 2025. And finally, I would like to share with you a significant strategic development. We have officially kicked off the BSF 2030 strategy exercise, a critical initiative to future-proofing the bank's market position and guiding us through the next phase of growth. In the medium term, our focus will be on repositioning the core businesses within traditional banking with the primary focus on ROE improvement. At the same time, we will explore and capitalize on future-proof business potential, expanding our reach and unlocking new areas of value creation even beyond traditional banking boundaries. This is our chance to redefine our business free from legacy constraints. Our goal is clear: close performance gaps where needed while building on our strength to capture new opportunities in niche products, services and customer segments. Directionally, some of the key areas we will be focusing on include retail banking where we will be focusing on expanding our franchise, enhancing our offering for affluent customers and developing a best-in-class banking and financial services app. We will also reimagine our branch network to better serve evolving customer needs. In corporate banking, we will continue to advance digitalization, expand our MSME platform and services and explore originate to distribute models. Within private banking, we are assessing opportunities to grow in alternative investments, wealth tech and offshore wealth management through strategic partnerships. Additionally, we aim to redefine our fintech collaborations and leverage AI and machine learning to improve efficiency and customer-facing capabilities. We're still in the early stages of formulating the strategy and expect to complete this exercise before the end of this year. We will of course update you in detail at that time. In summary, we have made strong progress across our key initiatives, including business execution, technology advancements, rebranding and commencing work on our new 5-year strategy cycle. Our commitment to innovation, operational excellence and customer focus will continue driving sustainable growth for the bank. I will now hand over to our CFO, Ramzy Darwish, to take you through our financial performance before we open the floor for questions. Over to you, Ramzy.

Thank you, Bader. Hello, everyone, and thank you for joining today's call. I'm pleased to have the opportunity to walk you through our financial results for the fourth quarter as well as the full year for 2024. There is a lot to discuss and I'm looking forward to taking you through the details. Reflecting on the year, I'm proud to share that we delivered a solid and resilient performance despite operating in an environment marked by margin compression, higher funding costs as well as strategic investments. These results highlight our ability to navigate changing environments while focusing on long-term value creation. Our net income growth of 8% was underpinned by strong asset expansion, robust fee and other income generation in addition to disciplined risk management. While we had to contend with one-off expenses and a developing cost environment, our focus on execution ensured we stayed on track. Let's start by discussing our balance sheet on Slide 11 and then we'll move through the other key areas of performance. So with reference to the balance sheet, our foundation remains strong. Total assets reached SAR 292.8 billion reflecting a 15% year-on-year increase. This growth was supported by a combination of strong lending activity as well as carefully managed investment growth. Loans and advances increased 14% year-on-year with contributions coming from both the commercial and consumer portfolios. The balanced nature of this growth reinforces our strategic focus on diversification. On the investment side, we achieved a 24% year-on-year increase. This was driven by higher yields and proactive management of interest rate risk. Turning to liabilities. Deposits remain our primary funding source growing by 7% year-on-year. Both interest-bearing and noninterest-bearing deposits contributed to this growth despite some outflows of transitory deposits we had highlighted previously in the third quarter earning call. Moreover, given the tighter liquidity environment, we actively adjusted our funding profile, leveraging both interbank activity as well as longer-term and more diversified bonds and sukuk to optimize our cost of funds. Finally, our capital position remains robust. Total equity increased by 13% year-on-year supported by retained earnings generation and the issuance of SAR 3 billion additional Tier 1 sukuk. We're continuously exploring ways to enhance our capital efficiency and future plans for the Tier 1 program in addition to Tier 2 remain a focus to strengthen the balance sheet and set ourselves up for continued growth. On the next slide, loan growth has been a key driver of our performance in 2024. Loan growth remained strong at 14% year-on-year with sequential growth in the fourth quarter of 2% as highlighted in the top right chart, somewhat slower than earlier in the year as we intentionally became more selective along with elevated corporate repayments, which typically occur toward the year-end. Commercial lending, shown in the bottom left chart, grew 13% year-on-year with demand strongest in the commerce, utilities and contracting sectors where we continue to see a strong opportunity set. Consumer lending on the bottom right chart increased 16% during the year. This was primarily driven as shown by mortgages and supported by auto financing from JB and personal loans. For personal loans specifically, this grew in both the unsecured segments offered by JB as well as on the secured loans with the bank. On the next slide, the deposit base grew 7% year-on-year. This was driven by what is shared in the bottom right chart, a 9% or SAR 8 billion increase in interest-bearing deposits and a 6% or SAR 5 billion increase in noninterest-bearing deposits despite again some outflows of transitory deposits in the fourth quarter. Our deposit mix remains relatively stable with noninterest-bearing deposits accounting for 46.5% of total deposits at the year-end. On the next slide, we cover the main items on the income statement. Net income grew 35% compared to the same quarter in 2023 and for the full year was up 8% to SAR 4.544 billion. This, as shown in the bottom right chart, was supported by a 26% decline in impairment charges and higher noninterest income. While costs did rise, this was aligned with our investment strategy and long-term growth priorities. On the table to the left, you will note operating income rose 17% versus the same quarter last year and was up 4% for the full year driven by a 19% increase in noninterest income while net interest income edged up by 1%. On the next slide, for net interest income, we witnessed an increase of slightly more than 1% as asset growth helped counteract the margin compression. This reflects the resilience of our core lending and funding strategies. In terms of attribution, the chart on the top right highlights the positive impact of over SAR 3 billion on loans, investments and cash were offset to a great extent by the rising cost on customer deposits and due to banks. Moreover, the charts on the bottom charts highlight the positive impact witnessed in the fourth quarter where interest expenses declined by 5% compared with a marginal decline of only 1% in interest income, again reflecting the faster repricing profile we see between liabilities and assets. On the next slide, we delve into the net interest margin. NIM stood at 305 basis points for the full year 2024 reflecting a higher funding cost environment and competitive pricing dynamics. Encouragingly though on a quarterly basis, NIM improved sequentially by 4 basis points to 302 basis points as funding costs adjusted faster than asset yields resulting in stabilization of the year-to-date net interest margin. On the next slide, as mentioned in previous quarters, we significantly reduced our sensitivity to interest rate changes. We estimate that the impact of 100 basis points rate change on NIM would remain at only 3 basis points, underscoring our improved insulation from rate volatility. At the same time, the notional amount of cash flow hedges is declining year-on-year as we have increased the fixed rate investments, creating a more natural hedge to manage interest rate risk. When taking into account the right-hand 2 charts together, we see the less than 1 year on the balance sheet gap of roughly SAR 35 billion is almost completely balanced with the cash flow hedges of SAR 31.2 billion in Q4 emphasizing again the limited rate sensitivity. On the next slide, noninterest income rose 19% year-on-year driven by higher trading income, further supported by a 6% growth in banking fees and exchange income along with investment-related income. 2/3 of the growth in trading income came from a one-off gain on the sale of an investment identified and sold in 2024 offset against other trading activities. The net effect after relevant costs amounted to SAR 107 million. Fee and commission income benefited notably from increased activity in brokerage and asset management, which saw a 28% year-on-year increase as well as trade finance recording 11% growth. On the next slide with regards to operating expenses. Expenses rose 13% year-on-year. This was driven primarily by general and administrative expenses reflecting investments in technology upgrades and rebranding as well as higher personnel costs. Fourth quarter expenses included nonrecurring exceptional items of SAR 117 million with 60% related to a discontinued investment loss, 25% to prior period operational items and 15% to staff-related items including severance payments. As a result, the cost to income ratio at 35.3% by year-end. However, adjusted for nonrecurring expenses and income, it would have stood at 34.5% and more in line with the third quarter and our guidance. On the next few slides, we take a deeper dive into the risk picture starting with impairments. The impairment charge was stable over the first 3 quarters of the year with an increase in the fourth quarter driven by the transition of 1 corporate account to Stage 3. Despite this, the cost of risk was 58 basis points for the year, down 38 basis points year-on-year primarily due to lower commercial impairments. We continue to see an overall healthy loan origination profile and no macro or sector-specific risks worth noting at the current time or in the future horizon. On the next slide, the stage migration mentioned earlier resulted in a slight increase in the NPL ratio in the fourth quarter to 93 basis points as can be seen in the top right chart. However, also in the chart, you will note there was a 12 basis points improvement over the course of the year, again demonstrating the bank's strong overall asset quality. The NPL coverage stood at 181.7% highlighting the bank's prudent provisioning approach. Coverage for Stage 3 loans declined slightly to 63.3% due to the transition of the single corporate account while improving Stage 2 coverage at the same time to 10.6% Lastly, also wanted to highlight that we updated our ECL macroeconomic model in the fourth quarter to incorporate the latest data on key economic variables such as oil sector GDP, debt to GDP and interest rates. The process was seamless with no additional ECL impact. On the next slide with reference to liquidity, liquidity continues to remain healthy with an LCR of 162% and a net stable funding ratio of 114%, well above regulatory thresholds. These were lower over the course of the year as we continue to optimize liquidity requirements and manage balance sheet growth more dynamically. Moreover, the regulatory loan-to-deposit ratio stood at a comfortable 83.6% while the headline ratio increased to 110% and reasonably close to where the sector average was at the end of the year. On the next slide, the bank maintains a solid capital position with a Tier 1 ratio of 18.8% and a capital adequacy ratio of 19.7%. Total capital increased driven by net income and the issuance of additional Tier 1 sukuk, which was partially offset by dividends. Also worth noting in December, we completed a capital increase of SAR 12.9 billion by issuing bonus shares at a ratio of approximately 1.07 shares for every existing share held. This was funded through the capitalization of SAR 5 billion from the statutory reserve and SAR 7.9 billion from retained earnings. The bank also recommended distributing cash dividends of SAR 0.50 per share for the second half of 2024. On the next slide, full year 2024 performance reflected strong loan growth and stable asset quality though profitability was impacted by cost pressures and margin compression. While some metrics aligned with the expectations, others were influenced by market dynamics, strategic investments and nonrecurring items. Let's go through these figures in detail. On loans and advances, we delivered strong loan growth of 13.8% year-on-year broadly in line with our mid-teens guidance. For NIM, this came in at 305 basis points within the guided range. This reflects the higher funding costs, which compressed margins earlier in the year. However, net interest margin started to improve sequentially in the fourth quarter as funding costs adjusted supporting future margin trends. Cost of risk stood at 58 basis points, comfortably within the guidance range. The cost to income ratio increased to 35.3%, above the 34% guidance. This was driven by investments in technology and rebranding again as well as nonrecurring expenses in the fourth quarter. Excluding one-off items, the adjusted ratio would have been 34.5% and more in line with guidance. On return on equity, this came in at 10.4%, slightly below the 11% guidance. This was due to higher operating expenses, which weighed on profitability in addition to the issuance of additional equity via Tier 1 during the third quarter of 2024. For the CET1 ratio, this was slightly below guidance despite improving over the last quarter. Higher operating expenses again impacted profitability limiting internal capital generation and preventing a stronger CET1 improvement. Lastly, on the next slide for the full year 2025 guidance. We remain committed to delivering sustainable growth while maintaining disciplined cost and risk management. Loan growth is expected to be in the low teens driven by continued momentum in commercial lending, which is projected to grow more or less in line with the market while consumer lending and JB are expected to outpace. Net interest margin is expected to range between 305 basis points and 315 basis points reflecting anticipated volume growth in noninterest-bearing deposits and lending. The declining rate environment may weigh on asset yields, but lower funding costs and cash flow hedges should provide an offset. Cost of risk is projected at 50 basis points to 60 basis points, remaining stable to slightly improved from last year at higher balance sheet levels supported by a resilient credit environment. Cost to income ratio is expected to be less than 33% reflecting more cost discipline, particularly in staff-related expenses. At the same time, other G&A costs will incorporate investments in marketing, locations and business volume expansion to support our growth objectives. Return on equity is expected to be above the 11% so between 11% and 12% supported by higher net interest income, increased fee generation and disciplined operating and risk cost containment. CET1 ratio is projected to be over 15%, improving through retained earnings while balancing growth-related capital consumption. Overall, our 2025 guidance reflects a balanced approach focused on profitable growth, margin resilience, cost control and maintaining strong asset quality. To summarize, 2024 has been another record year with continued resilience and progress. We balanced transformation, carrying higher costs and margin pressures with disciplined execution and strategic investments. These results reflect not just where we are, but where we're headed as we continue to strengthen our core business while preparing for future growth. As we look forward towards 2025, our focus will remain on sustainable loan growth, disciplined cost management and delivering value to our stakeholders. We look forward to your questions and thank you for your time today. Thank you.

So before we kick off the Q&A session, I think I'll start with couple of questions from my end. Well, firstly, I think funding is the key question that have been asked on every conference call. Given the situation with the funding markets in the Saudi banking sector, how much room does BSF -- your bank specifically, how much room do you see on funding cost optimization from the interbank, from the foreign markets, from the foreign funding? That's my first question. I think related to that, what kind of -- when you talk about the loan growth outlook, can you comment on the demand for loans by currency? Are you still seeing mostly Saudi riyal lending or are you seeing clients who are now taking more dollar lending in the sector, right? And does it indicate that you may go into more dollar funding if dollar lending demand is picking up, right? And I think secondly, we've seen quite a few mergers in the sector in the past and I think if we kind of extrapolate the Brent prices where we are currently versus the fiscal breakeven in Saudi Arabia, right? Do you think that the sector remains kind of in a good condition to see more consolidation, more mergers? Yes, that's all from my end. And after this, we're going to open up to the Q&A session.

Aybek, this is Zuhair. So I'll probably take the first question with regards to funding. So as part of our strategic initiative to diversify sources of funding through wholesale markets, interbank remains one of the pillars to look for in terms of optimization. So this would reflect our approach and funding cost optimization in a tightening market environment. Now given the competitive pressure we have seen in end of 2024 on deposit pricing, we leverage the interbank market as a cost effective and flexible funding source. This would allow us to continue our asset growth while maintaining our net interest margin discipline in line with our Board risk appetite and purely for optimization purposes. I pass it on to Ramzy for the next question.

Sure. I'll take the second question, which was regarding the growth and mainly the currency of the growth. We continue to have most of our growth dominated by Saudi riyal. We do see some dollar demand especially in the project finance space and structured finance. However, the overall majority continues to be in riyal and the demand in riyal.

And Aybek, for the third question, can you just repeat that? We're talking M&A in the Saudi economy as a whole or within banks specifically?

Yes. Within banks, your views on further potential consolidation given that the funding markets have remained tight, probably will remain tight given where the [ Brent ] prices are. And I think demand for asset growth obviously, what are your thoughts? Is there room for more consolidation in the sector or no? I mean your kind of professional opinion.

I mean I don't think it would be driven by the liquidity side of it in terms of deposits. Typically, I think banks would be looking at some sort of synergy, maybe economies of scale. But on the liquidity capture, I think all banks would still have to continue to abide by the regulatory ratios, the liquidity thresholds and the risk appetite and it would apply to a merged bank similar to 2 separate banks. I don't see it being a main driver that banks would be considering for liquidity purposes.

We'll now move on to our Q&A session. So given the audience, let's restrict the number of questions to 2. [Operator Instructions] So the first question comes from the line of Rahul Bajaj.

This is Rahul Bajaj from Citi. I have 2 questions mainly. So the NIM exit rate for 2024 was 3.02% and your guidance for 2025, 3.05% to 3.15% points to roughly up to 12 basis points, 13 basis points of NIM expansion in the best case and even in the worst case, it's pointing to kind of about 3 basis points to 4 basis points of NIM expansion in 2025. Just wanted to understand what do you think will be the building blocks for this expansion in NIM versus 2024 exit rate? Is your guidance baking in any rate cut for 2025 or you are assuming rates stay where they are? And you mentioned that noninterest-bearing deposit growth will be a key factor in the commentary. I mean how easy is it to get the noninterest-bearing deposits I mean compared to a more kind of -- when you're competing with banks, which are more kind of in the retail business? So that's my first question, the building blocks for NIMs. The second one is on cost. So 13% Y-o-Y increase in cost last year. You're guiding to a lower CIR for 2025. But I mean will there -- I mean are you expecting at this stage one-offs, which could be part of your guidance or there could be one-off costs, which will come on top of this guidance? Because we've been expecting a turnaround of sorts in the cost for last 6, 12 months and haven't really seen that. So when do we expect that kind of inflection in cost, if I could say so, in terms of cost growth?

Thank you for your questions. So I'll probably take the first question with regards to the NIM blocks or the attribution of NIM. So as the CFO had mentioned earlier, we do have limited sensitivity to interest rate movement. We're guiding the market as of a static balance sheet of 3 basis points for a 100 basis point move or shock in interest rates and that is actually a positive sensitivity should interest rate go down. On the other hand as well, we continue to grow our current account base, which is a positive for our net interest margins. Just to highlight as well, as we go by, we do have several investments maturities that were booked at lower yields. These will be replaced in a higher yield environment. That would also be a positive NIM contribution despite what is priced in today 2 cuts in 2025. That's as well as basically a flat interest rate sensitivity that is NIM positive going forward.

And I would add to that, Rahul, thank you for the questions. As the Treasurer had mentioned, it's based on a static balance sheet. But when we're looking at the guidance, we're building it off the budget, which includes obviously rate cuts, which would be fairly neutralized given the position of the bank currently, but it also builds on balance sheet growth both on the asset and liability side. So there would have to be some growth in NCBDs similar to what we've seen this year to maintain at least the CASA ratio at a reasonable level that would support this NIM expansion. The other item I'd highlight maybe on the competition side also, I think the cost of funds increasing, in particular what we saw over the course of the last year, would start to drive higher spreads in terms of corporate lending potentially even up into the retail space, but that remains to be seen. But I would venture to say that there has to be some spread adjustment on the lending side on the corporate space. So these together with what the Treasurer had mentioned build in the NIM expansion that we're guiding towards. For the second question on cost to income, I think for this year specifically it was really coming from 2 angles, but the major element is the fact that the revenue was impacted towards the end of last year Q4 2023 and fed all the way through 2024. So the cost to income ratio adjusted quite quickly in that fourth quarter and we've been coming off of that peak. But in terms of the one-off expenses, this did impact the cost to income ratio. If we look at it without these one-off expenses, it would have been a 9% growth year-on-year. A lot of investment has been made already in the marketing and rebrand side. So we do want to optimize. We still want to continue to spend and invest where it needs to be done. But this is going to be an element that we are going to manage for in 2025.

Our next question comes from the line of Naresh Bilandani.

It's [ Naresh Bilandani ] from [ Jefferies ]. Three questions, please, and I promise to keep this short. One, could you please highlight what is the source of interbank funding in the system in Q4? We've seen most of the large banks in the system increase their mix of interbank funding. I'm assuming this should be coming from SAMA, but we haven't seen a breakdown. So keen to get some insight from you and what structure is this funding taking if it is coming from SAMA? That's one. The second is equally so if the Fed should stay put -- and my apologies if I missed your interest rate assumptions baked into your budgeting this year. But should the Fed stay put this year due to inflationary pressures, can you please offer some thoughts on how we should see your NIM guidance change compared to what you set in your base case? And my third and the final question is given the uncertainty on the rates outlook, it would be extremely helpful if you can please offer what does your guidance imply in terms of NII growth and OpEx growth rather than the NIM and the cost to income ratio metrics?

Thanks, Naresh, for the questions, and welcome back to the market. So with regards to the source of interbank, it's actually a mix of both interbank borrowing from global markets through repo secured and unsecured activities as well as pledging our HQLAs and borrowing from SAMA in the repo market and open market operations. These are the main sources and they came at favorable pricing compared to what we have seen on the deposit side specifically during the year-end closing of balance sheets. On the second question, we did anticipate during the budget exercise 3 cuts during 2025. We know that the market is currently pricing in 2 cuts. Should this change, that will have obviously an impact on net interest margins. However, just to highlight that the NIM guidance is done through a static balance sheet and not an active one. We have seen an expansion recently due to the fact that liabilities would price faster than assets and that would obviously have some sort of an impact to NIM. However, I think we're quite close to neutrality and this will be a function on the evolution of current accounts and what kind of margins we pass on, the asset prices as well as the reinvestments on the credit that we invest in. So there are several movers to that. But I wouldn't expect a large deviation unless you have a major change in volume activities. I'll pass it on to Ramzy.

Yes. So on your third question, Naresh, and I would echo Zuhair in welcoming you back. In terms of the net interest income, we're looking at low teens in terms of growth and on the OpEx side, mid-single digits growth. So a positive jaws focus. But I would highlight at least on the net interest income side that this is built on forecast for balance sheet growth. So there would be constituents of lending and deposit growth there and part of that would be from the NCBD balances. But it also takes into account the forecast interest rates, which we would align with the treasury on in terms of where they would expect that to be and typically this is coming from the market. I know there has been more volatility driven there. But again I would highlight in terms of rate cuts stability or increase, the fact that the bank has positioned for more of a neutral position, it should not be a major driver and change on the net interest income. It will be more driven by the balances we see on the balance sheet.

We'll move on to our next question from Olga Veselova.

Olga Veselova, Bank of America. Several questions. One is on the strategy. You mentioned that you have approved 2030 strategy. Could you disclose probably any long-term targets? And also in the strategy, you mentioned that you will close the ROE gaps versus the sector. Where exactly do you see the gaps and what's the opportunity to close them? So that's question number one. And question number 2 is again on interest margin outlook. I understand that a part of your guidance or difference with consensus is repricing of investments. So can you maybe help us to understand how sizable are they as a percentage of total investment book, these investments which you want to replace? And would replacement happen in any particular quarter maybe and maybe you can even quantify the impact of this factor on margin? And finally, again on the margin. When you were explaining expected margin expansion, you mentioned that you believe spreads in lending can go up. Can you please elaborate on that?

Sure. So I'll take maybe the first and the last question there. On strategy, Olga, this is something the CEO highlighted as being kicked off. So we are starting this process earlier than we typically would, but we'd be going throughout the entire year. So it's really going to be closed, done and dusted by the end of the year and we would provide this externally probably by the first quarter of next year. So in terms of the strategy long-term targets, these are being developed as we speak. So nothing that we can really share because it's not even complete yet. On the spread side, I would venture to say I think even from our perspective for other banks or the sector as a whole, I think when we look at the deposits cost over the last year specifically in the last quarter. This has increased cost of funding to a certain extent and eventually, banks will have to pass on this cost to the eventual borrowers. It does take some time for this to feed through. We've seen this in the past and I think we'll see it again come up unless we see really an influx of liquidity into the system. So it's based on an assumption that we would expect to see. And for the question on the net interest margin, I'll pass it to Zuhair.

So I'm not sure if it's public, how much exactly I can share on the investment outstanding. But the way I would look at it is between cash flow hedges and below 1 year -- any fixed rate exposure below 1 year would be repriced at a significantly higher interest rate environment especially that we have seen recently a drop in short-term rates that would basically have a steeper curve environment.

Okay. Can you maybe disclose how much of total investment book do you plan to replace without giving yield or impact on margin?

How much do we want to replace margins?

Yes. exactly. So you mentioned that part of the reasons for margin expansion should be a replacement of a part of investment book by investments at a higher yield. So is this significant portion of existing investment portfolio?

Yes. So the replacement of, I would say, I'll ask you to think about it in a different way. If you think of the average duration of the book, which we have communicated in the past, is a bit slightly more than 4 years and you do have a similar split across every year. That would give you some sort of a feel on how much is being replaced. In addition, we do expect an expansion in our investment book obviously in line with the balance sheet growth mainly coming through HQLA, whether it's local debt or international HQLAs that would also be at current rate environment and a steeper curve environment. So that would answer.

And I would add to this, Olga, in the financial statements under Note 35, you'll have the liquidity profile of the assets and the liabilities. There you'll see we have roughly SAR 5 billion maturing within the next year. So you can make that assumption, SAR 5 billion out of a little over SAR 50 billion so just under 10%.

Our next question comes from the line of Shabbir Malik.

This is Shabbir Malik from EFG Hermes. I have a question regarding your loan growth outlook for next year. You mentioned that you expect corporate growth to be broadly in line with the market, but you're expecting retail to be a bit better than last year. So I just want to maybe see or hear your thoughts about what is helping you drive above-market growth in retail for 2025. And if you can also maybe give some insight into the funding strategy for next year. So do you expect all of this loan growth to be funded primarily by deposits or do you expect to see further increase in other sources of liabilities that's going to help you with this growth? And in your expense items that you mentioned this quarter, in fourth quarter, you said there were certain charges related to investments that are no longer taking place. If you can maybe comment on that and maybe quantify the one-off, that will be pretty helpful as well. Yes, those 2 questions, please.

Thank you for the question. I'll take the first question regarding loan growth outlook. As mentioned, our outlook is for low teens growth, more on the retail than the corporate mainly due to a lower base on the retail side. Given the traction that we have seen on the consumer lending area and even including JB, we do see that there's more of an upside given our lower base in the retail space.

With regards to the funding strategy, as we've communicated in the past that we do have several programs in place whether through EMTN, sukuk programs as well as being active in the loan borrowing market. These are all on the agenda for this year. I mean the idea is that we would tap the market at least once in a public format in terms of securities and we'll continue engaging with the investor community on the debt side to attract liquidity. We have done several public issuances as well as a syndicated loan in Asia whereby we had sourced some pool of liquidity into the bank and we'll continue engaging on that front. Apart from that, interbank remains another access to liquidity for optimization purposes, but the main goal would always be franchise growth through customer deposits.

Sorry, do you have a follow-up?

No, no, I just wanted the cost question, please, the one about the investments.

Yes. So I'll take the final question on the investments. So the total amount that we had was SAR 117 million of nonrecurring expenses. About 60% of that was for the discontinued investment. This was essentially investments in technology that were previously capitalized and also shared amongst the group and the impact was taken via both the depreciation line and the OpEx as it became no longer viable. So it was not used post investment and this is the reason we took this loss through both lines. But it was mainly -- it was a technology investment.

Got it. And maybe one more question on liquidity. Given that it looks like the liquidity was quite tight going into the year-end, has there been any changes to that since the beginning of 2025? Has there been any improvement on that front?

So the behavior that we've seen end of year is natural. We always see that end of year pressures. I would say that 2024 was a bit different given that we have seen elevated levels on, let's say, much more significant credit compared to deposits across the system, which had obviously been quite highlighted by the community. But we have seen some relief beginning of the year. But the fact is that today, the banking sector continue to witness faster credit growth than deposits, which basically incentivize commercial banks to source funding through other pockets. We at BSF, we continue to, as I mentioned earlier, to have all these programs in place and we do have several other initiatives that we have not tapped yet.

Well, I guess we have 2 minutes left for this call and we do have a few more questions on the line. I think do we have room for 1 question to ask.

Yes, please. And I think also to highlight that we can take questions after the call through the Investor Relations team, we'd be happy to respond.

Absolutely. So let's move on to the next question then and that's going to be the last question for today. So the next question comes from the line of Murad Ansari.

So I'll try to keep it quick. Just on credit costs, you're guiding to 50 basis points to 60 basis points, which is relatively flat versus last year. Given how aggressively you cleaned up book a couple of years ago, how much scope do you see for these credit costs to go down from these levels that you're guiding to on 50 basis points to 60 basis points? And secondly, on loan growth, you're guiding for low teens. I think first half was really strong. We've seen that growth fade into the year-end. You've talked about repayments. How significant were those in terms of impacting your loan growth numbers? And just on loan growth for next year low teens, do you think there's potential for positive surprises? I mean given that I think the corporate demand remains strong, we've seen some of your corporate focused peers grow mid- to high teens. So just your thoughts on how this guidance is a bit conservative.

Murad, I'll start off with the first question on credit costs. So we've highlighted this before for corporate banks, we would expect that the cost of risk be in this range around 60 basis points through the cycle. And given the cleanup we've had in previous years, we expect to maybe go slightly less than that in the short term, let's say. But when we look at the standards, the regulations, there are automatic provisions that have to be taken when lending. So we would assume this is roughly around 35 basis points to 40 basis points without any problem loans, without any transition and the only way really to get below that would be to really get additional recoveries on previously written-off loans. And there we want to make sure that we're not budgeting for it and guiding for it. They do come in on a case-by-case basis. on an ad hoc basis as well and it does take time typically to go through the legal system. So for next year, we would expect more of the same, but the larger balance sheet size would drive this lower cost of risk. But we don't have expectations to go significantly below that unless it's aided by recoveries.

Sure. And I'll take the second question regarding loan growth. Now loan growth in 2024, especially for the second half of the year, we did become selective in our loan growth with a shift in our focus to profitability and yield while of course at the same time maintaining our asset quality. For 2025, it will be a continuation of that approach of growing selectively with a focus on profitability and yield. rather than growth and at the same time of course maintaining the asset quality. On the second half of the question, which is regarding 2025 loan growth guidance and if we're expecting any surprises or if it was too conservative. We believe that given the current liquidity situation, we don't see any positive surprises unless of course that eases up towards the second half of the year. So lower teens is, yes, conservative, but at the same time it's mainly driven by the current liquidity situation.

Well, thank you very much. I'd like to thank the management team for the very useful insights as always. We are on top of the hour and ready to close the call. I'd like to pass back to management for any final remarks. Thank you.

Well, thank you very much. Thank you for joining us today and for your continued engagement. We are pleased with the growth momentum, the progress made in our strategic initiatives and of course the opportunities ahead. We appreciate your time and ongoing support and look forward to the next earnings call. Thank you very much.

Thank you, Aybek.

Thank you, everyone. So probably we're going to receive more questions after this call. But yes, I think that's business as usual.

Thank you, everyone. Thank you so much.