Banque Saudi Fransi (1050) Earnings Call Transcript & Summary

Greetings, everyone. This is Nauman Khan. On behalf of SNB Capital, I would like to welcome you to a conference call with BSF management regarding the Q3 '25 Earnings Results of the Bank. I will hand over to Yasmin Abbas, Head of Investor Relations at BSF, to introduce the speakers and take the presentation forward. Yasmin, if you can take the presentation forward. BSF management, if you can, unmute yourself.

Hello? Can you hear us now?

Nauman Khan Yes, Yasmin, we can hear now. If you can start off, go ahead, please. Thank you.

Okay, Good afternoon, everyone, and welcome to BSF's Q3 2025 earnings call. Let me start by thanking you, Nauman, and SNB Capital team for hosting us today. Kicking off the session will be BSF CEO, Bader AlSalloom, who will walk us through the earnings summary and give a strategy update. He is then followed by CSFO, Ramzy Darwish, who will offer a deeper dive into the financial performance. We are also joined by Zuhair Mardam, our CTIO, who will be available to answer questions once we open the floor for Q&A. I'll hand over the mic to you, Bader. Thank you.

Thank you, Yasminah. Good afternoon, everyone. It's a pleasure to have you with us today, and I'm pleased to present our results for the first nine months of 2025. BSF's performance for the first nine months of the year has been strong, reflecting the continued strength of our strategy and the resilience of our operating model. Despite the challenging and competitive environment, the bank's strategy continues to deliver a solid financial performance characterized by solid revenue generation, improved operational efficiency, and healthy asset quality. Let me start by walking you through the key financial highlights for the quarter. We saw a loan growth of 7% year-on-year. The commercial portfolio grew by 5%, reflecting our selective and disciplined approach to credit underwriting and increasingly competitive lending market. The consumer loan portfolio grew by 19%, reflecting sustained demand and our continued strategic focus on retail and affluent lending. On the funding side, customer deposits declined 4% year-on-year, largely due to a 6% reduction in interest-bearing balances, a result of our deliberate efforts to optimize our funding mix. We have also proactively diversified our funding base through active debt capital market issuances across tenors and seniority. This has reduced our dependency on traditional deposit funding while strengthening the bank's long-term funding profile. On the investment front, we delivered 13% year-on-year growth, successfully capturing attractive yields while actively managing interest rate risk. Our prudent asset allocation and effective hedging strategies contributed to a 2-basis point year-on-year improvement in net interest margin, bringing it to 3.06%. While there was a decline of 17 basis points in NIM, this was primarily driven by rising cost of funds in line with broader market trends. Overall, the strong top line performance, along with positive jaws and improved cost of risk, translated into a 19% year-on-year growth in net income. Our disciplined approach to credit risk management continues to pay off with the cost of risk improving by 12 basis points year-on-year to 0.44%, while the NPL ratio edged up by 17 basis points to 99%, below 1%. Our strong coverage levels of 174.5% demonstrate the prudent provisioning we maintain. Capital strength remains a cornerstone of our balance sheet with a Tier 1 ratio at a healthy 19.6%. Liquidity also remains solid as our liquidity coverage ratio stood at 160%, comfortably above regulatory thresholds. With that, let me give you an update on our strategy. As we near the completion of our 2021 to 2025 strategy cycle, I'm pleased to report that we've successfully completed nearly 90% of our strategic initiatives. Over these years, BSF has truly transformed as today, we have a solid foundation, modern infrastructure, a digital-first model and improved operations. These efforts have enabled us to improve profitability since 2021, as our ROE increased by over 200 basis points to 10.9%. Maintained resilience in NIM, which has gone up by 2 basis points to 3.1%, enhanced efficiency as our cost-to-income ratio improved by 1.6% to 32.8%. And of course, strengthening our loan -- our loan book quality as our NPL declined by over 150 basis points to below 1% at 0.99%, and upholding healthy capital levels and diversifying our funding resources. With the successful conclusion of the 5-year strategic journey at the end of this year, the bank is now ready to enter into the next phase of our strategic journey towards 2030. While the full details of our 2030 strategy will be unveiled in the first half of 2026, the overarching focus will be clear, sustainable and profitable growth that drives stronger return on equity and creates long-term shareholder value. Until then, you can expect to see continued momentum as we leverage technology to increase efficiency and agility, deepen client engagement and maintain balance sheet strength. With that, I'll now hand it over to Ramzy, who will take you through the financial performance in more detail. Over to you, Ramzy.

Thank you, Bader, and good day to all. Really appreciate you joining us today. As we wrap up the third quarter of 2025, I'm genuinely pleased with the progress we're making. It's been a year of navigating and shifting economic conditions, staying disciplined on execution and also pushing forward on our long-term strategy. And that's exactly what you see in the results. Net income grew 19% year-on-year. That performance didn't come from just one area. It reflects really healthy operating income across businesses, tighter cost management, and a continued improvement on the risk side. In short, we're seeing the benefits of the decisions we've been making quarter after quarter. But what I'm especially proud of is what we're doing all of this while continuing the technology transformation and while keeping our eyes on the future. We're laying the foundation for the next phase of our journey towards 2030, focusing on higher returns on equity, building leadership in our priority growth areas, and creating sustainable value for our customers, our people, and of course, our shareholders. So, with that big picture in mind, let's dive into the details, opening with Slide 7, we'll start with the balance sheet. Our total assets increased by 7% year to date, a clear sign that business activity continues to expand. That growth has been driven primarily by a 6% growth in loans supported by an 8% uplift in our investment portfolio as we continue to deploy capital in a balanced and disciplined manner. On the funding side, total liabilities increased 7% year to date, reflecting the steps we've taken to support growth while strengthening our funding mix. This was primarily from a SAR 20.6 billion increase in debt instruments and term loans following successful issuances throughout the year. Notably, we raised a $1 billion Tier 2 capital in the third quarter as part of our medium-term notes program, alongside placements of certificates of deposit and bonds. This reflects our ongoing efforts to diversify funding sources, optimize the maturity profile, and maintain our presence as a regular issuer in the market. Shareholders' equity also rose 10% year to date. This was supported by retained earnings generation and the restatement of an equity position through reserves. This was further supported by the issuance of $650 million in additional Tier 1 capital during the previous quarters, partly offset by dividend payments. This positions us for growth and to account for additional capital requirements going into next year. On the next slide, slide 8, we turn to the loan book. We continue to see healthy and well-balanced growth. Year-to-date total loans are up by 6%, with both our consumer and commercial portfolios contributing roughly SAR 6 billion each to that expansion. That balanced performance tells us we're supporting economic activity across key areas while continuing to deepen relationships with individual customers. Starting on the commercial side, lending grew 3% year to date and 2% on a sequential basis. Part of the changes in the sectors reflect genuine business momentum where we've seen good demand, for example, in areas like services or utilities, while others have moderated a bit as projects mature or as payments come through. That said, a portion of the shifts is also due to updating the categorization, for example, when a contracting project reaches completion, its exposure naturally transitions into a different category. So, what might look like a decline in one area and a jump in another is, in certain cases, just a reclassification in line with internal and external mapping. So overall, the underlying portfolio dynamics remained quite stable and there's no structural change in our risk appetite or sector focused, really more a reflection of the timing and reclassification effects rather than any fundamental shifts. We did see some contraction in contracting and commerce during this period. We believe this is largely tied to shifts in business sentiment and timing of project execution. We will continue to monitor these trends closely. On the consumer side, performance was even stronger as total consumer lending delivered a robust 17% growth or 7% on a sequential basis. Mortgages grew 20% and personal loans were up 14%, highlighting our increased focus on retail, particularly in the affluent and JV, and the impact of our earlier strategic investments in the omnichannel platform, digital capabilities and the Saudi Pro League sponsorship. Also worth noting, we had a significant pickup of 33% in credit card loans, fueled by targeted marketing initiatives that brought new customers to the bank and deepened the wallet share with existing clients. Overall, this quarter really shows the payoff from our continued investment in digital capabilities, improved customer experience, critical marketing and a sharper focus on the consumer. On the next slide, Slide 9, for deposits. Overall, deposits have remained broadly stable year-to-date and in fact, increased by 2% on a sequential basis. What we're seeing is a shift in mix, healthy inflows from retail and the consumer offsetting softer corporate balances during that period. That reflects both seasonality and the natural ebb and flow of business liquidity needs. One bright spot is noninterest-bearing deposits, which grew 3% year-to-date, supported by strong inflows late in the third quarter. On a spot basis, these balances now represent 47.8% of total deposits, a level that contributes positively to funding resilience. That said, the average balances were lower through much of the quarter, which did weigh on net interest margin during the third quarter. Interest-bearing deposits declined 2% year-to-date, and were stable quarter-on-quarter. This is very much aligned with how we're managing the balance sheet. Our focus has been on optimizing funding costs given a lower need for incremental liquidity as we pursue selective, disciplined asset growth, we've also taken advantage of alternative funding channels, including term borrowing and capital market issuances to extend and diversify the maturity profile, providing flexibility and efficiency to support the business. In short, we are proactively managing deposits to support performance today while preserving headroom to continue funding growth as opportunities accelerate. So with a balanced balance sheet and strong foundations in place, let's move into the P&L to look at how this translated into earnings in the third quarter, where net income for the 9 months of 2025 rose 19% year-on-year, and that was really supported by higher operating income, positive operating leverage and reduced impairments. So good momentum overall on that front. Now if we look at the quarter-on-quarter, we did see a decline of 4%. That's mainly due to some margin pressure due to higher cost of funds, and lower fee and commission income during the period. I'll unpack both of those in a bit more detail later. On the top line, operating income was up 12% year-on-year during the first 9 months. That's double-digit growth in both our net interest income and noninterest income, which is encouraging and shows the strength of our diversified revenue base. In terms of returns, the return on equity improved by 39 basis points year-on-year to 10.9%, reflecting the stronger underlying profitability even after absorbing a higher equity base, which was impacted by our additional Tier 1 issuance earlier and the revaluation of FVOCI investments. If we strip out the revaluation impact, ROE would have been even stronger at 11.03% and better than what the reported numbers suggest. Let's turn next to the slide on net interest income, which was up by 11% year-on-year, mainly supported by an 11% increase in average interest-earning assets and a 1 basis point margin expansion. If we look at the 9-month period as a whole, interest income rose by 7%, whereas funding costs saw only a modest 3% increase. So we continue to see positive leverage there, reflecting a good balance between asset growth and cost discipline. Now focusing on the quarter itself. Interest income increased 4% Q-on-Q, whereas interest expense starting at a smaller base rose by about 11%, that's largely driven by higher average interest-bearing balances during the quarter, which resulted in a slight decline in net interest income sequentially. On the next slide, for net interest margin. NIM improved by 1 basis point year-on-year, which reflects good balance overall. The improvement came mainly from lower deposit funding costs and the benefit of our cash flow hedges. though this was partly offset by lower loan yields and higher funding costs on debt securities as well as term loans. On a quarterly basis, the net interest margin declined by 17 basis points primarily from higher funding costs, both for deposits and debt securities as we witnessed a shift in the mix in terms of average balances. On Slide 13, with regards to rate sensitivity, our interest rate sensitivity remains limited with a 100 basis point rate shift estimated to impact NIMs by approximately 4 basis points, slightly down from the last quarter. The notional value of cash flow hedge swaps also decreased 10% year-to-date as we continue to manage interest rate sensitivity via the cash flow hedge and alternative such as the investment book and retail lending. On the next slide, Slide 14, for noninterest income. This was up 16% year-on-year, this was mainly driven by strong investment income, where we took advantage of market volatility to capture gains while also working to improve overall yield. This growth was supported by strong FX income and the one-off gain on sale of an asset in the previous quarter for around SAR 30 million. This is included in the other noninterest income in the top right of the charts. Finally, fee and commission income saw a steady growth of 3% year-on-year on account of improved trade finance and asset management fees. These were partly offset by a dip in other fees because of an accounting reclassification of penalty fees to net interest income compared to the prior year. On a quarterly basis, noninterest income declined 9% quarter-over-quarter, mainly from higher card expenses on new campaign launches and seasonally lower trade finance activity. Moving on to operating expenses on Slide 15. For the 9 months of 2025, operating expenses increased 6% year-over-year, mainly from increased G&A expenses. This was mostly for IT maintenance, professional services as well as residual branding expenses. Depreciation also contributed to cost growth, increasing by 16% during the period, as many projects and initiatives came online. On a quarterly basis, OpEx declined by 2% Q-on-Q, mainly due to increased cost discipline along with a one-off staff-related provision reversal during the quarter. On the next slide -- sorry, also in terms of overall cost growth, which was contained below revenue growth. The cost-to-income ratio improved 165 basis points year-on-year to reach 32.8% over the 9 months of the year. The cost to average interest-earning assets fell to 1.22%, supported by a 10% expansion in average interest-earning assets compared with a 6% increase in expenses. Now to the next slide on the risk side, specifically for impairment charges, impairments decreased by 9% year-on-year for the 9 months of 2025, primarily due to lower commercial charges, which benefited from a net recovery in the third quarter, along with 2 exposures that migrated to NPL during the quarter. This improvement outweighed the higher consumer impairments linked to recent loan growth and additional provisions for off-balance sheet exposures classified under investments and other that arose due to business as usual variability in trade finance facility utilization. Consequently, the cost of risk narrowed to 44 basis points for the 9 months, marking a 12 basis point improvement from the previous year. This highlights the selective origination strategy that balances volume and risk-adjusted returns and insurance portfolio quality remains within the bank's overall risk appetite. Moving to Slide 17. The NPL ratio increased to 99 basis points in the third quarter due to an uptick in commercial NPL balances. However, it remains within our expectations. For NPL coverage, this is at 174.5%, remaining healthy with the sequential drop arising from the write-offs as well as the NPLs movement we highlighted. This also impacted Stage 2 provisioning, which slightly decreased Q-on-Q to 9.1%, while Stage 1 and Stage 3 provision coverage remained broadly stable. Moving next to liquidity on Slide 18. Liquidity is remaining robust with the liquidity coverage ratio at 160%, and the net stable funding ratio at 120%. You'll see the regulatory loan-to-deposit ratio has improved to 77.5% primarily due to issuance of longer-dated debt securities, and this provides a substantial cushion for future growth. The simple loan-to-deposit ratio remains in the 115% range. Moving next to capital. Our capital position remains strong with the capital adequacy ratio rising to 21.9% following the recent Tier 2 issuance. The Tier 1 ratio and CET1 ratio stood at 19.6% and 15.7%, respectively, reflecting healthy levels despite a sequential decline driven by risk-weighted asset growth and dividend distributions. It is also worth highlighting that we recently announced a riyal-denominated AT1 sukuk issuance to offer existing investors the opportunity to maintain their current positions as we prepare for the upcoming call of SAR 5 billion additional Tier 1 capital in November. It is expected to be at a smaller scale than the existing SAR 5 billion. Finally, moving on to guidance on Slide 20. As we look ahead, we are making a few adjustments to our full year 2025 outlook. First, we are revising our loan growth guidance from high single digits to mid-single digits. This reflects our more selective approach to lending as well as elevated repayment levels anticipated towards the year-end. Second, we are adjusting our net interest income margin guidance to a range of 3% to 3.05%, down around 10 basis points from our earlier range of 3.05% to 3.15%, this adjustment reflects higher-than-anticipated pressures on funding costs amid tightened liquidity conditions and broader market trends. We're also revising our cost of risk down by 5 to 10 basis points, currently at 45 -- or going to a 45 to 50 basis points range. All other guidance remains unchanged. Now to conclude, as we reflect on our performance over the past 9 months, the results demonstrate strong growth in profitability, operational efficiencies and strategic execution. We remain focused on sustaining this momentum through the remainder of the year and going into 2026. We now will move on and welcome your questions. Thank you.

[Operator Instructions] Our first question is coming from the line of Mr. Chiradeep Ghosh.

A couple of questions from my side. First one is from the margin perspective. So I see that the sensibility has significantly come up. So basically 1 basis point for roughly any 25 basis point cut. But then I want to get a sense that why did the NIM contract so much in this quarter. And just quarter-on-quarter side of it. I understand the funding cost went up. But -- if you can give some more color on that? And in the same line, how is the hedging product helping you in that context? That's the first one. And the second question is -- sorry, I think I missed a little bit. So when I see the numbers, your coverage -- the Stage III coverage has broadly remained flattish and overall has slightly come off and NPL ratio has also gone up a little bit. So in that backdrop if your cost of risk is coming down, as well as your guidance for cost of risk is coming down. So if you can give some more clarity on that side of it. Yes, these are my 2 questions.

Yeah. Hi. So, I'll probably take the first couple of questions on NIM and margin. So, we have revised our NIM guidance to a range of 3% to 3.05%, 10 basis points lower. This is basically a reflection of a tighter liquidity and higher funding cost across the sector. The change reflects the tighter liquidity and higher funding costs that we have witnessed recently. So, our margin defense will be around the CASA ratio, trying to maintain a 45% to 50% CASA ratio. And should this maintain, we expect that to be well achieved throughout the quarter. On the sensitivity to interest rates, we maintain neutrality. We are 4 basis points sensitive to 100 basis point shock to interest rate driven by several tools, mainly on balance sheet and off-balance sheet items, which is the natural on balance sheet coming from retail, personal finance and mortgages, which continues to grow. The cash flow hedge program outstanding as well as the investment book, of which we have maintained an increased duration to slightly above 4 years in terms of interest rate risk. And this should really contribute to protecting our books from a drop in interest rates.

And maybe I'll add to that point. So maybe more direct to the question. When we look at the interest rate sensitivity from a market perspective, it is still relatively insensitive, but we've been highlighting throughout the course of the last year that it's also dependent on the balance sheet mix. And as you're looking at the deposit mix for Q3, it may not give the complete picture because it's a spot to spot. And there, it looks like there's an increase in the CASA ratio. But when we look at the average balance during the third quarter, it was actually a slight decline. And this is really what led to, I'd say, the balance sheet mix impacting the net interest margin. We did see it recover since then. So the balance has shifted again in favor of noninterest-bearing deposits towards the end of September, but it will not be factored in, in the average and thus impacting the profitability as a result. Since then, in October, as an example, we've seen it stabilize at a level similar to what it was in the second quarter. For the cost of risk side, maybe I misunderstood the question, but I think it's several moving factors that contribute to this. So we did have a movement in terms of staging towards Stage 3 but it would be dependent on the provisions for those names. And on top of this, there would be write-offs and recoveries that we would have to be including -- so for that reason, it looks like, again, nothing significant in terms of change, but there was some transition and there would be additional provisions that would have been taken offset against recoveries during the quarter.

[Operator Instructions] Mr. Rahul Bajaj.

I have a few quick questions actually. The first 1 is on OpEx. So, we've seen 6% almost growth Y-on-Y for the 9-month period, which is a considerable improvement in terms of growth run rate, which we've seen in 2023, 2024. How should we think about the growth going forward? Is this kind of the mid-single-digit to slightly higher than mid-single-digit run rate something that we should expect BSF to maintain in the near future over the next few years? Or you expect cost escalations and cost growth to go back to the double-digit run rate. So that's my first question. My second question is on the fee income line. 3Q has seen a sizable drop in the fee and commission income line I think you mentioned, Ramzy, was something around lower trade finance fees and some extra sort of card sort of campaigns. Is it fair to assume that fee income in 4Q and going forward will return back to the quarterly run rate that we've seen in the first half of the year. So the first half of the year average was around SAR 270 million every quarter. This quarter, 3Q was around SAR 212. So considerably -- considerably lower than that kind of first half run rate. Is it fair to assume that we go back to that run rate in 4Q and going forward? Or you think there are areas where there could be further pressure on fee income. That's my second question. And my third and final question, if I may, please, is on the CASA balances that you mentioned, which came in towards the end of 3Q, how sticky are these balances? I mean, have they still -- have they since been around and they've stayed around within the BSF system or they have gone out in the month of October. So those are my 3 questions.

Thank you, Rahul. I'll go through these one by one. So on the OpEx side, I think we've been highlighting for some time that we've been really trying to be more vigilant on the cost side, making sure that it is worthwhile in terms of the investment. In particular, I think the areas on people and technology. We still want to continue to invest in. But at the same time, starting to reap some of the benefits from the previous investments we've done which were quite heavy over the last few years, in particular on the technology transformation. So the intention is to continue to be vigilant on that front, focus on positive jobs, and maintain something alongside what we've done in the last quarter, noting though that the quarter did have a one-off adjustment to staff expenses, roughly about SAR 20 million. So it's not significant in terms of its overall impact, but we do expect to see this come back in the fourth quarter as it goes through. But we would be targeting somewhere around mid-single digits for cost growth given what we're targeting on the revenue side. For the fee income, in terms of decline, so we highlighted on the trade side, some seasonality that was witnessed I think cards was 1 element that was more an expense than anything else as we activated quite a few campaigns to attract new business on the card side, where we have been successful and increasing the loan balance amongst other things, but we would not expect to see the same sort of investment for fee expense in the fourth quarter. So we would see that come back quarter-on-quarter. Just for context, the second quarter card fees was negative SAR 3 million for the third quarter, it is negative SAR 33 million. So this was primarily a result of these campaigns that we had activated. They are now complete, and we don't foresee any significant amount in the fourth quarter. And lastly, I'll just highlight on the investment banking side. This would be volatile throughout the year, and we've had good success from BSF capital throughout the year in terms of IPOs and different advisory items. There was an expectation that we had for some elements to be in the third quarter, these would be pushed into the fourth quarter. So we do expect an uplift there as well. Lastly, on the CASA, just to highlight, so we did have a decline in the average CASA throughout the quarter. On a spot basis, it did recover very close to the end of the month in September. And since then, we see it having stabilized at that position. It's very similar to what it was towards the end of the second quarter.

[Operator Instructions] Our next set of questions, which is coming from the line of Ms. Olga.

I have several. One is again on fee income. You mentioned during your presentation, there was some reclassification of fees into net interest income, if I understood it correctly. What was the amount of this reclassification? And do I get it right that without it? Net interest margin would fall even more quarter-over-quarter. So that's question number one. Second, on your capital, can I ask if you faced an increase in Pillar 2 requirements? And when do they come in force and generally like zooming out, why do you have to face these increases despite having a very moderate loan growth, which rationale some provides to you when they communicate to you, Pillar 2? And third question is on again on less interest margin, I hear your arguments about the cost of funding pressure. But still, can I check because the funding went up so much quarter-over-quarter, the change in CASA ratio was relatively moderate. Average cyber was flattish quarter-over-quarter. So what else was happening there? Did you have an increase in interest rates on deposits, maybe certificates of deposits were expensive for you. So any other factors which will drive in cost of funds in the third quarter.

Thanks, Olga. Maybe I'll start with the last question on the expensive deposits. Yes, the system continues to witness pressure on deposit competition. We have seen an increase in customer deposits, and this is reflective rightly, as you mentioned, in the cyber rates whereby we haven't seen the cyber rates mimicking Fed fund rates as the cutting rate cycle continue. On the other hand, what we've been doing in order to protect marginally -- our net interest margin is our continuous effort on repricing our loan book. And this is an ongoing exercise, but it will take time to fully feed in as we go by through the current cycle.

Hi, Olga. I'll tackle the other 2 questions. So on the reclassification of fees, maybe just to highlight, this wasn't done just in this quarter. So it should not have a impact quarter-on-quarter. It was done from the beginning of the year, but we want to make sure we highlight it. So this would be something on the penalty fees that would apply now on the net interest income. So we moved it towards the earlier part of this year to accurately reflect within the accounting standards. That total was about SAR 50 million year-to-date for the 9 months. And then on the second question on capital requirements. We recognize, I think, well capitalized at the current position. Again, the Tier 1 call will adjust that total position but still give us quite a lot of breathing room in terms of looking forward. Nevertheless, there are changes this year that have already occurred across the banks, I would assume, particularly on the bilateral capital ratio as a result of the Pillar 2 risks. So there has been an increase there. Separately, there will be a countercyclical buffer increase starting in May of next year. And I'd say a smaller interest rate risk in the banking book adjustment in January of next year. All these together alongside with the loan growth aspirations that we have. We do agree it is moderate right now. We don't suspect that this will continue to be the same position going forward. So to have that dry powder is an area that we want to focus on instead of having to chase the capital once the opportunity is there. We want to have a bit more dry powder to be able to effectively execute and grow.

If I can squeeze in a small additional question. In which sectors did you have an increase in NPL? In which sectors did you face increase in NPLs?

It was in the contracting sector. There were 2 names that had transitioned during the quarter.

The next question is from Rahul Rajan.

Firstly, is on the deposit side, I mean, you do mention that you have invested pretty significantly on the tech side of things which enables you to get loan growth from retail. Just wondering what's not -- why is that not helping you generate deposits among retail investors especially given that in Saudi, probably people are tech-enabled. So why is it that you're getting loan growth from technology-related investments, but not really deposit growth. That's number one. And secondly is considering from a SAMA LDR perspective, it's probably now amongst the lowest -- in Saudi if not the lowest. I mean that should give you a sufficient cushion to grow faster. I mean, you might want to protect NIMs that could be a reason for not growing loans. But apart from that, is there any other reasons why despite having low SAMA LDRs, you choose to not grow as much as the market.

Okay. So I'll start with the first one. Thank you for the question. So you're right. There has been a lot of investment on the technology side, quite a lot on the foundation and then more recently on the channels and the customer-facing operation side. In terms of the loan growth, I think that has been an area of strength so far this year, albeit coming from a lower base. Nevertheless, I think when we look at deposits it's not really specific to any one bank but at a sector level it has been a challenge to see the non-interest-bearing deposits in terms of growth and the interest-bearing deposits have become quite expensive. And I think from that perspective, we've tried to shy away from that competition given the potential impact it has on not only net interest margin but profitability overall. We have tried to counter this with repricing on the asset side, starting from last year. Maybe a bit early compared to some of -- what we hear in the sector, but as these cost of funds increase, we do expect other banks to also look at the profitability angle and start to reprice, opening up at least the avenue or the opportunity to grow at the same pace as others. I'll pass on to my colleague for the loan to deposit question.

So we continue to see some divergence between the SAMA LDR, which basically includes a waiting for longer-term liability and the denominator of the loan-to-deposit ratio. However, if you look at the simple loan-to-deposit ratio, we stood at 116%, which is basically quite diverse from the regulatory one. This is purely due to the fact that we've been quite active in raising medium-term liability and which is reflective in our healthy NSFR ratio at 120%. We expect to remain within these ranges with no much divergence specifically on the simple loan-to-deposit ratio.

The next set of questions which is coming from the line of Mr. Murad Ansari.

Same time, we've seen some improvement in asset yields also coming through, and BSF has been, you know, indicating that they've been a lot more selective and that kind of explains some of this, but you know it's, it's also visible across the sector as well. So, just wanted to get a sense of it seems that the push towards better pricing seems to be getting some traction, you know, for you and for the rest of the sector as well if this RCT numbers, if we look at that. And I'm just wondering whether this increasing demand on capital, the countercyclical buffers, plus the interest rate and banking book regulate -- stress testing of 275 basis points, I mean, the demand that's making on the capital ratios, is that going to fast-track this push towards better loan pricing? So that's one. The second question is your guidance on loan growth that you've revised down. So essentially, just a rough calculation suggests that you're expecting sequentially book to be flat -- roughly flat by -- in fourth quarter. And how much of that is driven by expectations of corporate repayments versus you being -- the bank being a lot more -- becoming a lot more selective in terms of lending? And you know when you suggest that it's -- you know, you've been select -- you're getting selective on lending. I also want to -- you know, maybe add a question of -- on this IRBB regulations where you know it adds to -- adds more pressure or adds more sensitivity when it comes to the mortgage book. So, going forward, I mean, with these regulations due, does that kind of temper with your preference in terms of where you want to grow? I mean, in your case, you have a decent buffer, but does it kind of influence your decision in terms of preference for growth in mortgages versus corporate?

Thank you for your question. I'll actually take the first 2 questions, then I'll hand it over to my colleague for the third question. Your first question was on asset yields. This is an exercise that we actually started implementing the second half of last year when it came to repricing our assets. And going into this year, the focus was on origination shifting towards mid-market to maintain the -- our portfolio margin and for a more diversified exposure and to capture higher yield opportunities while maintaining relationships, of course, with our larger corporates. So there is where the improvement in asset yields is coming from. In addition to repricing exercise that we started the second half of last year, which continued throughout the year and will continue throughout this year and going into 2026, the origination is also shifting towards mid-market for better quality and to capture higher yields. That's for the first question. The second question on loan growth guidance and our loan growth guidance and expectations for Q4. We do expect it to be, as you highlighted to be flattish. And -- to answer your question, it's going to be coming from both. We do expect end of year repayments, especially on the corporate side, in our larger corporates. While at the same time, we will continue to originate and selectively new assets. So they will offset each other, and we expect them to offset each other to arrive at a flattish loan growth mainly on the corporate side.

Maybe I'll take the interest rate risk in the banking book question with regards to sensitivity. We do realize that the fast growth in mortgages do add on to the interest rate risk. However, we have ample room to grow. The nature of the book is that we're mostly skewed towards corporate or floating rates environment. And if the fact is that today, we are quite neutral or actually 4 basis point benefit in case of a 100 basis point drop in rates. And we do -- we're well set up in terms of hedging capabilities. So we can always flip partially some of our fixed rate investments or hedged some of the fixed rate assets, or floated, let's say, convert it into floating. So we're not too concerned from that respect.

Yes. I would just add to that in terms of preference on the asset side. So we take note of the interest rate risk in the banking book at a portfolio level, so more holistic but we would need to make sure that we allocate capital accordingly. So -- or liquidity and the mortgage would command a higher cost of funding, at least on an internal basis and this would potentially limit the margin as opposed to corporate lending or personal finance. But it does vary depending on the timing, depending on the liquidity situation. But we would not be looking at the preference coming as a result of interest rate risk in the banking book on a solo basis.

[Operator Instructions] The next question is from [indiscernible]. I guess we have some problem listening to [indiscernible]. We'll be moving on to our next set of questions which is coming from Mr. Abdulla Alburaidi.

Just a small follow-up on the guidance. So basically, it's almost flat for the fourth quarter, and you're talking about pricing better, whatever that will get prepaid. And given the flat guidance, so there is no pressure from extra financing and paying on deposits because of the extra finance again expanding the number growth. So -- why the guiding for lower NIM compared to the 3.06 that we are standing at currently? This is for the guidance? And second question, one of the competitors have mentioned that there was further clarification from SAMA regarding the calculation of the operational right risk-weighted assets. which reduced the risk-weighted asset density on operational -- on the operational calculation and enhance the capital ratios. Have you noticed any of such? Or is it some company specific to that bank?

I'll handle the last question first on the operational risk. We believe this would be specific to the bank. From our side, we can confirm that there is no change and we're already applying the regulation as had been requested previously. So no change implementation. I think it was 2023. On the first question, in terms of the net interest margin with flat growth expectation -- what we did see is that the quarter net interest margin was at 296 basis points, so slightly lower for the specific quarter. And it was mainly driven, again, by the balance sheet mix between noninterest-bearing and interest-bearing deposits. Assuming no significant change there, we would be at a similar level -- and that's why we wanted to at least build out this range that would give us opportunity to grow, but we are cognizant that it is highly dependent on that CASA mix. So we want to have at this range that we feel comfortable with for that fourth quarter, recognizing that the current position is relatively strong.

So we'll just be taking the last question which is coming from the line of [indiscernible].

Yeah. This is [Niranjan] from Derayah and thank you for the presentation and taking our questions. So a couple of questions from my side. The first one is on the repricing. So I just wanted to know whether there is a repricing that you have been doing is really for the new originations or -- is it being done for the existing balances as well. Also, it would be good to know how much headroom do you see in your clients' cash flows to absorb these higher interest costs that you are trying to pass down to them and across all your sort of the client tiers, perhaps maybe it's easier to pass down on the high net worth and the top tier and whether it's more difficult when it comes to the SME and the lower-tier clients, lower credit quality clients. So that's the question on the repricing side. And the question is on the funding -- so how much of your funding is coming from foreign sources. And how much more headroom do you see where you can increase this -- the offshore funding and perhaps whether that could help bringing down your funding costs. And just also wondering whether by borrowing from a broad, whether you can capture that difference between [indiscernible] and cyber. Also, it will be good to know if you can tell us what sort of the -- your CDs, how cheaper or expensive are these compared with your other sources of borrowing. So those are my questions.

Thank you for the questions. I just want maybe before tackling the ones you had highlighted, we did have questions in the chat box, so I want to make sure we tackle that as well. On the first one, in terms of the penalty fees or the reclassification of fees, these had been implemented at the beginning of the year, and these would be penalty fees on retail loans, that were, in the past, taken into the fee line. But given it is related to the interest rate loan, we have moved them into net interest income. So they would be on the interest income side of the P&L. And the second question, just in terms of interest rate cuts. The forecast that we have from the treasury group is around 2 cuts for the remainder of the year. With that, I'll pass it on to tackle your questions to the CEO.

Thank you for your question. Regarding the question on repricing and is it being exercised and is it being implemented on existing or new. It's actually being implemented on new originations. And as I mentioned before, with our focus on mid-market, it does allow us for higher pricing. But that being said, even on the larger corporates -- when it comes to new origination, we are pricing it at a higher level. When it comes to existing facilities or we are repricing -- selectively repricing some of them when we get the chance. So if they're working capital short-term facilities, during the annual reviews, that is when we are repricing. However, when it comes to committed lines, medium- and long-term loans, we're not repricing those given that they are committed lines, so we would not want to just turn to those loans.

Maybe I'll tackle the funding question on foreign funding. So as of today, we realize that we've been borrowing in the wholesale market, and a lot of this is being placed locally. However, if you look at the -- the nature of these liabilities, they're typically more stable, more diversified in the wholesale market, particularly when it comes to the [indiscernible] sukuk and the recent capital issuance that we have -- we have done, in addition to the private placements that we continue to engage with. On the CD program, the CD is quite diversified. In fact, it's a form of raising foreign deposits from various sources. And in terms of geography, it's quite diversified between Asia and Europe. And this basically tackles another investor base, particularly high net worth individuals, asset managers and money market funds. In terms of net foreign assets, which has been a focus of research recently, we currently running the balance sheet at around minus 6%. And we do have certain disciplines on how much we want to borrow externally and deploy locally when it comes to our programs or our funding accessibility vis-a-vis core customer deposits.

Thank you, management. With this, we will close the Q&A session as we have already crossed our designated time. I will hand it back now to the CEO for his closing remarks.

Thank you again for joining us today and for your continued engagement. Before signing off, I want to emphasize that these results, the progress we've made and the momentum we've built are a testament to the talent and commitment of our teams and the trust of our customers and stakeholders. Thank you very much again for your time, and we look forward to the next earnings call next quarter. Thank you.

SNB Capital would like to thank BSF management for taking the time to conduct this call. We would also like to thank all the participants for attending. We wish you all a very pleasant day. You may all disconnect now. Thank you.