The Saudi Investment Bank (1030) Earnings Call Transcript & Summary

Hello, everyone, and welcome to The Saudi Investment Bank Second Quarter Earnings Call. My name is Seb, and I'll be the operator for the call today. I will now hand the floor over to Siraj to begin. Please go ahead when you're ready.

Thank you, Seb. Good evening, everyone. We are pleased to welcome you to The Saudi Investment Bank's Earnings Call for the First Half of 2024. My name is Siraj Zakaria, I'm handling Investor Relations here at SAIB, and it's my great pleasure to welcome you all to the earnings call. Please note that our earnings disclosures are available for download from the IR section of our website. Please be aware that this webcast will be recorded, and a transcript of this call will be made available on our IR webpage. If there are any members of the media, please be reminded to share your questions separately with SAIB's Corporate Communications team. I'm joined today by Faisal Al-Omran, Chief Executive Officer; Ahmed Almohsen, Chief Financial Officer; and Shankar Chattanathan, advisor to the Chief Financial Officer. Moving on to the agenda for today's call. Our CEO, Faisal Al-Omran, will start with a brief overview and give the performance highlights for the first half of 2024 and will update you on the bank's strategy. Ahmed will then discuss the financial performance in more detail and present our updated guidance for the full year 2024. We will then open the floor to questions. With that, I will hand over to our CEO, Faisal Al-Omran, to begin the presentation. Over to you, Faisal.

Yes. Thank you, Siraj. [Foreign Language] Good evening, everyone. Thank you for attending our second quarter call. As usual, let's start with the highlights. We have seen a very good growth in our loan portfolio, growing 12% year-to-date, standing at about SAR 91 billion. That growth was driven by our Corporate segment. You'll also notice the growth in the deposits, about 15% year-to-date, standing at SAR 95 billion. And if you recall, before, we said that the growth in deposits, we believe, is attainable for us, and we will grow based on our balance sheet growth. And I think, today, the numbers shows that the ability of us growing our balance sheet, and we believe we continue to have that ability in terms of raising the funding at a relatively advantageous cost of funding. Also, you will see a growth in our operating income of about 3% year-on-year, closing at SAR 2 billion. Also, we have made sure that we continue our cost discipline. You'll see that our cost/income ratio stands at 42%. We have said before that during the transformation, we believe that this number could tick upward, but we are, so far, happy with the ability to manage that level. So we continue to implement our strategy while maintaining that cost/income ratio. Also, we were able to have an uptick in our return on equity. We have closed today at 11.9%, higher than our previously reported return on equity, and we believe that number will continue to grow. I believe, before, we have shared in previous calls that we were targeting 12%, and I think now we are hitting that level. But, however, we believe that, that number is still -- there is room to grow in our return on equity. Given also the growth in our assets, specifically our loan book, today, we stand at an NPL that is declining. It went down by 3 basis points. So our NPL stands at 1.47%, relatively lower than our peers, and with a coverage ratio of 151%. As we said, we are very rigorous about maintaining our asset quality and our credit criteria and growing our balance sheet. Also, we are happy where we stand today in terms of our strong capital ratios. It's about 18.2%. And we have also stressed before that, so far, we believe that our capital adequacy and capital standing today supports the envisaged growth for us as SAIB. Further, the liquidity ratios also stand at a healthy 175% in our LCR, which also gives us the room to grow our deposits comfortably in terms of managing our maturity profile. If we go to next page, if you allow me, this slide, which is #5, and the next slide, I will go through them fast. This is -- basically, gives our strategy framework. Our vision is to be the trusted bank for our clients. This is something that we have been thoughtful about, and we try to implement the concept, cascading it everywhere in the group. Why? Because we believe we want to build long-term relationships with our clients. We want to be able to win business and maintain business and relationship because of our quality of service, not to be driven by transaction, meaning, by price. So this is something we are very rigorous about. Same thing, our mission stands at 3 pillars. One, we want to maintain long-term relationships. When we start a relationship in Corporate or Private Banking, we are thinking 5, 7, 10 years ahead. We don't want to be a transactional bank. We want to be a relationship bank. Two, is the ability to create an excellent environment for our people. SAIB is known to have a good, healthy environment. We want to keep that, and we want to promote it because we believe that's one of the biggest factors when attracting talent to the organization. Three, everything we do has to be consistent with increasing our shareholder value. So everything we do, we have to measure what is the value creation of that activity to ensure that it goes to the right direction. We have 4 core segments: Corporate, Public Institutions, Consumer Banking and Private Banking. These 4 segments are the ones that we are operating under in the bank. And the enablers are at the bottom, and they are self-explanatory. If you go to the next slide, that gives a breakdown of each segment and what are we envisaging to do in each of them. I believe we have explained that in previous calls. It's just worth mentioning to bring it up again. So if you allow me, I'll move to the next slide, this is Slide #7, that gives an overview of the strategy progress. Today, our strategy, [Foreign Language], is going as we have planned. We are actually progressing faster than expected in some of the areas. Today, we have about more than 40 strategic initiatives. These initiatives are looked at, at first, a Strategy Execution Committee. That committee is a top management, led by the Chief Executive Officer. And there are 2 committees under them, which is the Strategy Performance Committee, ensuring that KPIs are met. And the other subcommittee is the Strategy Initiative Committee, ensuring that all initiatives are being done in a, I would say, cost-efficient manner and also in a value-creation manner. So these 2 committees are under the main committee. And then under them, we have work streams for each group and segment. So this is how we manage the project in the bank. So far, what we -- I think worth mentioning during the first half, first, is that we have launched our mortgage centers. As we said before, we, SAIB was not part of the mortgage market previously because we didn't feel that the pricing was advantageous to us. Now we believe we are in a good cycle. We have started our mortgage efforts. And we believe we can -- we believe that we have timed the cycle properly, and we want now to look at booking at the longer-duration assets. So this is one thing that we have started now. Two, we have already launched a Travel Account. We are trying to increase our customer acquisition and also increase the usage of our Travel App/Travel Card product. So far, we are the first bank to launch a Travel Account. Other banks have launched a travel-related credit card associations. However, we have linked it to the actual card account, which have given us also a nice NIBDs size in the bank, and we believe that also continues to grow. We have also launched a Corporate Contracting business. We have created a segment under Corporate. We have alluded to that last call, but I think it's worth mentioning that now it is up and running. We have created a group under our Corporate Banking that specifically looks at contracting. We believe that move will help us, first, to have better risk management oversight; two, understand better those businesses so that we can serve them well; three, we are able to have, I would say, more efficient and productive relationship by consolidating that knowledge all in one team. So this is something has been up and running. So far, we're happy with the progress, and we might replicate this to other sectors that we have higher exposure to. Also, we are looking at our affluent banking. This is a [ study ] that has started a few months ago. We believe that SAIB is properly situated to tackle -- to, I would say, serve the affluent banking in the market through more of a fine-tuning of products and services to ensure that there is a proper meeting of their needs and also a very smooth customer journey for them. That came also with the ability to have a better risk scoring, and this is something that we are working now on, along with other AI advanced analytics to ensure that we have a proper, I would say, insight on those activities. So this is on the achievement side. We have also, worth mentioning, which is #6 on the left box, where it says developing IT strategy and road map. We believe SAIB was in a good place in terms of our technology setup. However, given the ambitious goals that we have for 2027 strategy, we believe that we have to realign, again, our IT setup to ensure that we continue to have an advantage compared to our peers. So I would say that's, in general, where the strategy stands and the highlights, so far, for the first half. If I move to Slide #8, this is just one example that we -- when we launched Travel App, we have shared this before, but now we are sharing also some of the numbers. We're happy to report that there is more than 200,000 downloads for the app. The app has been launched recently. But I think given the leading position that SAIB has in this product category, I think we have seen a lot of migration, a lot of acquisition happening in our Travel App. Also, given our innovative marketing effort that has been done in London, in Paris and in Dubai, where we promote our products for our Saudi clients, I think that also have been very fruitful for us. If we go to Slide #9, and this is the last slide from my side. Commercial loan. If you see, we are maintaining our position in first quarter '27, although, we have seen, I would say, a notable growth in our Corporate, but it's important for two things. One, we are very aware of our market share, and we want to protect it. Number two, any business we want to do should be very profitable. We don't want to compromise our profitability for market share. We believe that, so far, we can align our efforts of protecting and increasing our market share while not compromising on our pricing of our assets. So this is, I would say, on the commercial loans. Retail. So far, it is same market share. We believe that number will start to see growth starting 2025 after we have reached, I would say, meaningful achievements in some of the tracks in our retail banking strategy transformation. We have also an improved funding costs so far, the reduction in our -- sorry, we have an improved efficiency cost in our cost/income ratio, where we see our ratio, before, standing at 44%. Today, it's at 42%; 44% was 2022; 42%, '23. And we have said that we believe that number would start ticking up maybe to 43%. But I think the controls that have been put in our cost expenditure, so far, has been very efficient. So we keep implementing the strategy, and we are trying to keep that number within the same range. Lastly is the return on equity. If you see, we continue to tick up. 2023 was 11.7%. First half, 11.9%. And we believe there is still room to grow, [Foreign Language], in this number as we continue implementing our strategy. With that, I think I will turn it over to my colleague, Mr. Ahmed, our CFO, to go over the financial performance.

Thank you, Faisal. Good afternoon, everyone. I would like also to extend my warm welcome to all of you joining us today, and I'm very pleased to report a strong set of results for the first 6 months of 2024. We have seen a solid improvement in most of our core KPIs. If we start from the balance sheet, from the top, our total assets have increased by SAR 13.3 billion during the first 6 months, which represents an increase of 10%. The increase was mainly seen in loans and advances, and then loans and investments, where we saw a growth of SAR 12.5 billion in those 2 items. Our loans have shown an increase of 12% year-to-date and stood at SAR 90.6 billion. On the liability side, we have seen a 15% growth in deposits, where it reached SAR 95.4 billion. Our profitability improved as well. Despite the NIM contraction by 36 bps, net income increased by 9%. And positive jaws contributing to improvement in cost of fund to reach 42.1%, and our return on equity registered 11.9%. At the same time, SAIB maintained a healthy assets quality, with NPL ratios improving comparing to the beginning of the year. And we also saw the reduction in cost of risk to reach around 33 bps. Equally, capitalization and liquidity were strong and remains supportive of future growth. If we turn to next slide, please. The balance sheet expanded 10%, as I mentioned, during the first 6 months, driven by 12% growth in loan and advances and 8% rise in investment. This was further supported by 6% increase in balances with SAMA, which was partially offset by a reduction in bank placements. This balance sheet growth was mostly funded by 15% expansion in customer deposits. We will be looking now more closely on each of these items in the balance sheet. If we move to Slide 13, please, and starting from financing and loans. Our loan book has shown a continued strength, with 12% growth for the first half of the year and 7% during the last 3 quarters -- sorry, during the last 3 months. Most of this growth came from corporate lending, which also grew by 13% during the first 6 months. What we've seen is active participation and financing large infrastructure projects, and the syndicated loans continuing to support the growth. As we can see in the waterfall chart, we witnessed widespread credit demand across key economic sectors. We've seen it in utilities, building and construction, commerce, manufacturing, as well as other services. On the Retail side, a growth of 9% was achieved, driven by a solid 21% growth in Private Banking. As we expect, strategic initiatives in the mass retail segment to further aid and enhance retail growth in the next 3 to 4 quarters. Moving to Slide 14. On the investment side, our investment portfolio increased by 8% year-to-date and reached around SAR 35 billion. Here, we continue to invest in fixed-rate debt security to manage our interest rate risk and lock it in higher rates. New investments were mainly in high-quality instruments, either sovereign or international financial institutions. The quality of our investment book remains strong, with 58% of securities being issued by government and 30% by banks and other financial institutions. Moving to the next slide on the deposit side. As I mentioned, customer deposits rose 15% during the first 6 months and reached SAR 95.4 billion. This was driven mainly by 25% growth in interest-bearing deposits, which is reflective of the current rate environment, while we saw noninterest-bearing deposits declining by 4%. Most of this growth came from corporate deposits, which has increased by over 31%, and probably, to a lesser extent, from retail deposits, where we saw around 20% increase. Treasury deposits, however, declined by 13%. And here, as a side note, I should mention that our Public Institution business, previously managed under Treasury, has now moved under Retail segment. We believe this would reflect better strategic alignment. Overall, this resulted in a further shift in our funding mix, with NIBDs now comprising 30.2% of the total deposits compared with 36% at the end of last year. And we anticipate this trend to start stabilizing moving forward once we gain further traction in our strategic initiatives, which are principally aimed at addressing this. Moving to Slide 16 on the income statement. As I mentioned, we saw an increase of 9% year-over-year in the net income, driven by 3% growth in operating income, and was further supported by improved operating efficiency and cost of risk. I will be expanding on the NIM items on the following slides. Starting from the net special commission income, our NSCI remains stable at SAR 1.7 billion. Despite the fact that we have seen an increase in average earning assets growth of 13%, the increase in assets was offset by 36 bps NIM contraction. And as you can see in the waterfall chart in the left of the slide, increased benchmark rates resulted in higher special commission income from lending and investment, but this was counterbalanced by higher funding costs. And on the other waterfall chart on the right side, we can see year-to-date NIM declined by 36 bps to 2.77%. This was due to a 90 bps rise in cost of funds as well as shift in deposit mix. Yes, this was partially offset by 55 bps assets yield expansion. On a quarterly comparison, the NIM also declined 30 bps compared with the same quarter of last year. But here, more importantly, we remain stable throughout the current year as we continue to mitigate funding cost pressure with improved assets yield on our new lending and investments. Our expectation for the NIM to be around 2.75% by the year-end. Now moving to the fees and other income, Slide 18. Fees and other income increased 22% during the first half of 2024. This was mainly driven by robust growth in investment-related income and fees from banking services. The investment-related income shown here, SAR 40 million, was largely due to mark-to-market fair value gains. And in banking services, fees increase was seen in capital market activities. We've seen it in brokerage and assets management fees and was also supported by higher trade finance income. These increases were partially offset by a modest decline in FX income. Moving to the next slide, where we'll be going over the operating expenses. Overall, operating expenses were quite stable, with 2% increase year-over-year and reached SAR 850 million. This increase was mainly due to increase in G&A cost, forecasting the overall inflationary environment. And we've seen higher expenses in professional services as well as advertising, which was aimed to support our strategic growth initiatives. Our employee-related costs increased by around SAR 8 million. However, the growth was contained at modest 2% increase. On the rents, we saw a reduction of SAR 10 million. This was mainly due to the previously leased facility, which was acquired during the first quarter of this year, and the subsequent charge is being under the depreciation. The cost-to-income ratio improved as well, 42% now -- booking 42.1% compared with 42.7% as of June last year, and we expect to remain between 41.5% and 42.5% during the year. Turning our attention to the credit quality, next slide, Slide 20. Impairment charges decreased by -- decreased to SAR 144 million, a reduction of 10% for the same period of last year. This reduced our cost of risk by a further 10 bps to reach 33 bps for the first half of the year, reflecting a better credit environment and healthy overall asset quality. Our NPL remain stable during the current year at 1.47%. And our NPLs are adequately covered with an overall coverage ratio of 151%, while Stage 3 coverage, as we can see in the chart on the right corner, has been an improving trend and reached 57.3%. Moving to capital and liquidity, Slide 21. Here, we say, SAIB continues to maintain a strong capitalization and liquidity positions. Liquidity coverage ratio stood at 174.6% and NSFR at 112.8%. SAMA LDR reached 77%, all at extremely comfortable levels, despite some moderation in the last quarter. And our regulatory capital was broadly flat at SAR 18 billion during the first half of the year, with the profit generation being offset by dividends payment and last phasing out of IFRS 9 transition arrangements. Our risk-weighted assets grew by 6% to around SAR 96 billion during this period, driven mainly by the growth in lending as well as in investments. And as a result, our capital adequacy ratio declined slightly to 18.8%, with Tier 1 capital ratio at 18.2%, and the CET1 at 15.6%. We believe this leaves us in a comfortable position to balance the growth expectation with the shareholders return, along with sufficient regulatory comfort levels. Now I'll be moving to the outlook and guidance for 2024. So generally, we expect the economic outlook for the Kingdom to remain positive and supportive to the banking sector. Project spending on giga-projects and other large infrastructure projects bodes well for the overall credit demand. And we are well positioned to capitalize on this demand through our large exposure to Corporate sector and active participation in the large projects financing or syndicated loans market. Now in terms of our 2024 guidance. On the balance sheet, and since we have already achieved massive 15% year-to-date loan growth, this has prompted us to revise our full year guidance. What we initially projected was 15% growth, but in light of the double-digit growth during the first 6 months of the year, now we are anticipating growth in the high teens range. In terms of profitability, the NIM was at 2.77%. And as I mentioned, we expect it to be at 2.75% during the year until the year-end. Our cost-to-income ratio improved to 42.1%, and we expect it to improve further during the second half to reach between 42.1 -- sorry, 41.5% and 42.5%. For our return on equity, we reported 11.9% during the first 6 months, and we expect to deliver above that 12% level for the full year. On our cost of risk, the positive credit experience seen in the first half has led us to revise our guidance range, down on grades by around 10 bps to a range from 35 to 40 bps -- to 50 bps -- to 35 bps from initially 40 bps. And on the capital, finally, our expectation for the Tier 1 capital remains unchanged and above 18.75% for the full year. With that, it concludes management's presentation, and we are now happy to answer any questions you may have. I will now hand it over to Seb and Hussein from Arqaam Capital. Over to you, Seb.

[Operator Instructions] Currently, no telephone questions. I will just hand over to Hussein for any written question.

Yes. So we have a question about the effect of 25 bps rate cut on Saudi Investment Bank NIMs.

Can you please repeat the question?

Yes. So we have a question about the effect or sensitivity -- NIM sensitivity for 25 bps rate cut.

So based on our projections, approximately 1% cut will translate to 3 to 5 bps, improving our NIM.

We have another question regarding the news about KFH investment in Saudi Investment Bank. I really want -- any further comment on this? You already, I think, announced on Tadawul. So just want to -- yes, that was the question.

I think the announcement was clear that the bank have announced about that rumor. No further comments. No further.

Yes, sir. [Operator Instructions] I think we've answered -- there's another question about the NIM sensitivity to rate cuts. I think that you answered this. Okay, we have this call. Can you please discuss competition in the different segments you operate in? And also, could you please comment on the liquidity situation in the system?

Okay. Maybe I will answer the first part of the question in light of our core segments. So we have 4 segments, 1 that pertains to Corporate, 1 pertains to Public Institutions and the others to Individuals. In terms of Individuals, we see competition very strong on the mass and maybe upper mass. We believe that's a market that SAIB, today, is not targeting as a core segment. We are tapping that through our Travel Card and travel product offerings. And from there, we are able to, I would say, attract and acquire the customers that would fit SAIB profile. In terms of that segment, if we go higher to the affluent, we don't believe it's served well in the markets, in general. We believe they are painted with the same brush as either upper mass or Private Banking, and I don't think that gives them justice. So we believe that's a segment that we can enter as SAIB. As for the Private Banking, we believe SAIB has a good standing here. We are able to understand client needs. We are able to move quicker than our competition. And we are able to have, I would say, more customized relationship with our customers, given that, that service model enables those kind of offering to the Private Banking. So that's, I would say, where do we sit on the Individual segment. As for Public Institution, we believe that competition is very high there between banks. And mostly, it's liability-driven and a bit also fees-driven. However, we are trying to differentiate ourself. We believe the cake is -- the market is very big, there is room. But we believe where we are positioning ourselves, we think competition is low. We haven't seen strong movers there. SAIB has been able to offer some solutions that are, I would say, exclusive and very niche as the -- compared to the offering in the market. SAIB was able to do the petty cash card, which is basically most -- we use most by -- most of the Public Institution use it today, and they bank with us. So this is something that we believe can attract DDAs -- NIBDs to the bank and also generate fees. Also, we have extended that as a Corporate card, so there's pre-paid, there's multicurrency. So we believe the Public Institution sector, this is how we want to approach it. As for the Corporate, we believe the target -- Corporate, as we said, we believe Corporate will grow, and we are seeing the growth now. And Corporate is a large segment. So SAIB is, I would say, on the mid- to large Corporate segments of the whole market. So we're talking about customers that would value relationship, that would value speed, that needs, I would say, more customized solution, would need a relationship-driven bank, rather than a transaction. We believe SAIB is well situated there. And if you see the growth that we have in Corporate, we were able to grow bigger, but we have to make sure that any growth has to be looked at, first, by the credit quality; two, by the pricing. It has to be value creation, rather than just chasing market value. So I'd say, these are the 3 segments where we operate today. As for the second question for the liquidity, I think liquidity, in general, in the system, I think it's clear, and we don't have to go to details there. But maybe I will answer it in -- under SAIB's umbrella. We believe that liquidity for SAIB is available. If we were to grow, we believe we can source the needed liquidity. We have been saying this before, for the last year, and we continue to say it so far. And we said, because we had some questions before about ability to grow our deposits, I think, today, it shows that we are able to grow our deposits. When we see a profitable growth in the balance sheet, we can source the funding. And we believe that continues to be the case.

Okay. And we have another question about how much does project finance represent from the total loan book.

I believe it's around -- the question about the projects from the total financing, I think it's around 18%. Correct me, Shankar?

Yes, it's around 18%.

18%.

Okay. And we have another question about, are you planning to issue debt soon to fund growth further?

I think that discussion is ongoing always. It's happening every day in treasury. It's happening every month in our ALCO. So I think that keeps to be assessed on a weekly basis. SAIB, previously, have issued Tier 2 and have issued -- it was one of the first bank -- I think, was the second bank to issue Tier 1. We had term loan financing before, which has matured, and we haven't renewed it. We don't see the need for it at that time. So I think these avenues are always available for SAIB. Today, also, we have, I would say, appetite for our -- if it's a bilateral loan or if it's a syndicated loan, or if it's a debt market issuance, I believe they're all available. So -- but that's left, depending on the need, our liquidity. Also, it's not only liquidity, it's also could be capital-driven. We have also to evaluate the growth that is happening and where do we stand in our capital adequacy. Because we want to maintain a very healthy cushion there. So if we believe growth continues, maybe we go to the Tier 1, rather than just going to a term loan or a senior unsecured.