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

Good evening, everyone. Hope you are doing well. My name is Shabbir Malik, and on behalf of EFG Hermes, I welcome you to Saudi Investment Bank's third quarter results call. Please note that this call is for analysts and investors only. If you are from the media, I will request you to please disconnect. I will now pass the call to Najla AlMutairi, Head of Market Intelligence and Investor Relations. Najla, the floor is yours.

Thank you, Shabbir. Good evening everyone. We're pleased to welcome you all to the Saudi Investment Bank's Earnings Call for Q3 2024. My name is Najla AlMutairi, I recently joined the bank where I'll be handling the Investor Relations department moving forward. It's my great pleasure to welcome you to our call today. Kindly note that the earnings material is live on the IR home page of our website. And also note that this webcast will be recorded, and a transcript of the call will be available on our IR web page. If there are any among us from the media, as Mr. Shabbir said, please be reminded to share your questions separately to our corporate communications team. I'm joined today by Mr. Faisal Al-Omran, our CEO; and Mr. Ahmed Almohsen, our CFO. Moving on to the agenda for the call. Our CEO will cover the performance highlights for the period, and we'll update you on our strategic progress. And then we'll discuss the -- CFO, will discuss the financial performance in more details and present our updated guidance for the full year of 2024. As per usual, we'll open the floor for questions. With that, I'll hand over to our CEO to begin the presentation. Over to you, Faisal.

Good afternoon, everyone. Welcome to our third quarter investor presentation. I will go through first the financial highlights. Alhamdulillah, we had a very solid growth in our Loan portfolio. Our year-to-date stood at 18% and our loans stood around SAR 95 billion by the close of the quarter. As we said, this is something that we have expected this year, and it's actually -- it's higher than our guidance, Alhamdulillah, the fruitful efforts of the strategy that we have done in corporate have been very, I would say, effective so that we were able to get the growth that we were hoping. Same thing for deposits. Our deposit increased by 18% year-to-date to today at -- at the end of the quarter at SAR 98 million. And this is also something that we have said before. We don't believe that liquidity for us is an issue on meeting our growth. We think that we can continue to source liquidity for our -- to finance our growth. And this is also our view going forward. Also, Alhamdulillah, our operating income stood at around SAR 3.1 billion. This is the highest operating income in the bank's history. It's up 4%. We believe that also growth will continue, inshallah, going into 2025, end of this year and also, inshallah, for '25, given the growth that we're seeing in the market and the corporate portfolio. Alhamdulillah, our liquidity ratio stood solid. Same thing for our capital ratio. And it will, inshallah, still support our growth going forward. Moving to the next slide, which is the strategy. I think the slide we have spoken to it before. Same thing, just to go over it very quickly. Our core segments are 4. We have Corporate, which is our main driver. And asset growth. Also, we have the Private Banking. It's an Asset Growth business, and Alhamdulillah, performing very well this year. We also have the Public Institution, which is more of a fee and liability play for the bank. And Consumer Banking, which is we have elaborated before, saying that this is something we are building for our affluent proposition. And we believe we'll see this, inshallah, within the next 6 to 9 or 12 months. So I will move to the next slide. This is basically a run down for the initiative themes for each function. I think we have explained that before. I'm happy to take any questions later on if there is any clarification required on that. If we move to the next slide, this is basically highlights the implementation of our strategy. So far, Alhamdulillah, things are moving in the right direction. As we said, our corporate has already been implemented in terms of the segmentation and focusing on the contracting sector with the right processes, and this is -- was one of the main major drivers for our growth. Same thing for our Travel Account. We're very happy with the growth that we are seeing. This is basically an idea that we came with the bank that could help us in attracting lower funding to our balance sheet. Numbers are going notable from our side, and we think that also will continue and we keep enhancing the product. Home Finance, this is something that we said that we believe that this is the right time now to look at real estate financing, Mortgage Financing. We are building the system now so that we want to look at it in a smooth digital manner rather than just to be manually driven. Inshallah, in the next 6 months, we'll see some effect in our loan portfolio. Also, we're very happy to have launched our Retail Banking as a pilot. Now we are onboarding on our beta testing, inviting clients, we'll be inviting up to 10,000 clients. We have already -- we have already been tested it internally with employees. We have invited 1,000 customers. We're going to add another 5, 000 and another 4,000 in the next couple of weeks. And inshallah, we believe that we launched this before the end of the year to the public. So this is generally, I would say, the highlights of the strategy for this quarter. If we move to the next slide, this is basically talks about our Travel App. We're very excited with this launch and keeps Alhamdulillah, getting momentum. And it's an excellent tool for us for a cheaper customer acquisition. This gives us a lot of insight on our customer behaviors and understanding affluent, upper affluent, private banking based on spend behaviors and hopefully, that we can have a better customization for their value position and offering. So we'll keep focusing on this channel as a main customer acquisition for the bank and also DDA driver for us, which is CASA and also fees starting next year, inshallah. If we move to the next slide, this is basically a highlight, and I will leave it also to our CFO, to go into further details. But I think the highlights is that we are happy that, Alhamdulillah, we are maintaining our market share. We had a good growth from 2022, '23, also '24. And given the growth in other banks also happening in the same sector, Alhamdulillah, we are holding our ground, and we are keeping our, I would say, asset yield at an attractive level. So this is something that we will keep focusing on. Growth market and retail, we're maintaining the 1%. I think that will start moving once we finish the home equity and also launch officially our app. Our aim is to have everything digital. We want to do the consumer loan digital, digital -- credit card digital, push as much digital we can on the home financing. So I think the pickup will happen, inshallah, after the official launch. We'll also keep keeping our focus on our improved efficiency cost-to-income ratio. It's coming down from '22, '23, also '24, any pickup there is because of the transformation that we are undergoing. And I think our target is to push that number down, inshallah, after we finished our transformation this year and most of next year. Inshallah, we'll see improvement there. With that, I will move to the financial performance sector with our CFO, Mr. Ahmed.

Thank you. Thank you, Faisal. Good afternoon, everyone. I would also like to welcome all of you joining us today. And I'm pleased to report a strong set of results for the first 9 months of 2024. As we can see, we have seen a solid improvement in most of our core KPIs. On the balance sheet, loans increased 18% year-to-date and reached SAR 95 billion, mirroring the 18% growth in deposits, which rose to SAR 98 billion. Our profitability improved as well with income growth and positive jaws contributing to a 10% increase in net income and our return on equity registered 12.5%. At the same time, SAIB maintained healthy asset quality with NPL ratio improving comparing to the beginning of the year, currently at 1.41%, while the cost of risk reduced to 31 basis points. Equally, capitalization and liquidity were strong and remains supportive of future growth. Now turning to Slide 12, please. The balance sheet expanded 16% during the first 9 months of the year, driven by 18% loan growth and 25% rise in investments. This balance sheet growth was mostly funded by an 18% expansion in customer deposits and 22% increase in interbank fundings. We will be looking more closely into each of these trends in the following slides, starting with loan and advances on Slide 13. Our loan book has shown a continuous strength. We are proud to report a massive 18% growth year-to-date, which puts our bank, the highest amongst Saudi banks in terms of financing growth in the 9 months. Most of this growth came from corporate lending, which grew by 19% during the first 9 months. And here, we say SAIB active participation in financing large infrastructure projects in the syndicated loan market continue to support the growth. This was further aided by wide split decreased demand across key economic sectors such as utilities, building and construction, commerce, manufacturing along with other sectors. On the retail side, it has witnessed 13% growth, which was driven by a notable 23% increase in our private banking. Moving to the next slide. On the investments, our investment portfolio increased 25% year-to-date and reached SAR 40.3 billion. And here, we continue to invest in fixed-rate debt securities 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 with an average yield of 5.4%. Equality of the investment book remains strong with 56% of securities issued by government and 33% by banks and other financial institutions. Moving to the next slide on deposits. Customer deposits rose 18% year-to-date and reached SAR 98.1 billion. This was driven mainly by 25% growth in interest-bearing deposits, while noninterest-bearing deposits increased by 6% year-to-date and increased 10% on a quarterly sequential basis. Most of this growth came from corporate deposits and to a lesser extent from retail deposits. And here, I would like to highlight the 10% quarter-on-quarter pickup in the noninterest-bearing deposits. This resulted from an inflow of demand deposits toward the end of September from Public Institutions and Travel Accounts, reflecting benefits from our strategic initiatives in these areas. Overall, this resulted in a shift of our funding mix with noninterest-bearing deposits now comprising 32.3% of the total deposits, compared with 30% at the end of the second quarter and 36% at the end of last year. Now turning to a summary of our income on Slide 16, please. Net income increased 10% year-over-year, driven by 4% growth in operating income and was further supported by improved cost of risk and stable operating efficiency. I will be expanding on these components in the following slides, starting with the net special commission income and the NIM on Slide 17. Net special commission income grew by 1% year-over-year and 4% on a sequential basis and reached SAR 2.6 billion at the end of September. While we have seen an average earning asset growth of 15% year-over-year, the increase was mostly offset by NIM contraction. And as you can see in the waterfall chart on the left of the slide, increased benchmark rates resulted in a higher special commission income from lending and investments, but this was counterbalanced by higher funding costs. The year-to-date NIM declined by 34 basis points year-over-year and reached 2.74%. This was due to a 77 bps rise in cost of funding resulted from increased benchmark rates and shift in deposit mix. And this was largely offset by 45 bps in asset yield expansion. On a quarterly basis, the NIM also declined 32 basis year-over-year and reached 2.66% in the third quarter, mainly due to funding cost pressure. We expect NIM to be between 2.7% to 2.75% by the year-end. Now let's look at the fees and other income, please, on the next slide. Fee and other income increased 29% during the first 9 months of 2024. This was mainly driven by a robust growth in investment-related income and fees from banking services. Investment-related income increased largely due to mark-to-market fair value gains. And fee income from banking service rose by 10% on higher fees from brokerage and fund management, as well as higher trade finance income. However, largely offsetting this was a modest 5% decline in FX income. Moving to the next slide. The operating expenses rose by a modest 4% year-over-year to around SAR 1.3 billion. The increase in OpEx can be attributed mainly to increase in G&A costs factoring in the overall inflationary environment and higher expenses on professional and consultation services as well as advertisement costs, which we, for the most part, support our strategic growth initiatives. Employee-related costs also increased the cost base, though growth was contained at more than 3% increase year-over-year. Premises costs declined, and as we have highlighted in our previous calls, due to an area rented facility, which was acquired in Q1 of this year with subsequent charges being depreciated. The cost-to-income ratio remained unchanged year-over-year at the level of 41.9%, and we expect to remain below 42% for the rest of the year. Turning our attention now to credit quality on next slide, Slide 20. The impairment charges decreased by 16% from the previous year to SAR 210 million for the first 9 months of the year. The reduced cost risk by 12 bps year-over-year to 31 bps for the 9 months, reflecting benign credit environment and healthy overall asset quality. NPL formation also remained moderate and the NPL ratio was further improved to 1.41 as the end of September 2024. Our NPLs are adequately covered with an overall coverage ratio now at around 155 and healthy Stage 3 coverage at 57%. Moving to capital and liquidity on Slide 21. This slide continues to maintain a strong capitalization and liquidity position. The liquidity capital ratio LCR stood at 168%, NSFR 110.5%. And SAMA LDR reached 79.1%. We believe all at extremely comfortable level despite some moderation in the last quarter. Total regulatory capital increased 2% during the first 9 months for the year, with the profit generation partially offset by the payment of the second half of 2023 and the first half of 2024 dividends during the year, along with the last phasing out of the IFRS 9 transition arrangements. Risk-weighted assets grew by 13% to SAR 102.3 billion on the back of the 16% expansion in the bank total assets. And as a result, our capital adequacy ratio declined to 18% with Tier 1 capital ratio at 17.4% at the CET1 at 15%. This still leaves us in a comfortable position to balance growth expectation with shareholders' returns and sufficient regulatory comfort levels. And now moving to the outlook and guidance for 2024. Overall, our financial performance for the period was mostly in line with our expectations, and we have made only minor refinement on our full year guidance. First, on the loan and advances, we are revising our guidance to above 20% from the previous high teens levels considering the impressive 18% growth achieved to date. We do, however, expect Q4 growth to be lower than the Q3 run rate due to higher anticipated repayment and maturities. In terms of profitability, the year-to-date NIM was 2.74%. And we expect it will settle between 2.7% to 2.75% for the full year. And this will be depending mostly on our cash and mix evolving during the last quarter. Our cost-to-income ratio stood at 41.9% in 9 months, and we anticipate maintaining this ratio 42% for the full year. For return on equity, we delivered 12.5% in 9 months, and we expect to deliver comfortably above 12% guidance level for the full year. On cost of risk, the benign credit risk experience so far this year has led us to further revise our guidance range downwards by around 5 basis points to be in the range of 30 to 35 basis points. Finally, our expectation for Tier 1 capital ratio remains unchanged at above 18.75% for the full year. With that, we conclude our management presentation to extend -- I like also to extend my sincere gratitude for your attention and interest in Saudi Investment Bank. And now we are happy to answer any questions you may have. Thank you.

[Operator Instructions] Our first question is from the line of Vikram.

So, my question is on the -- it's on the interest rate risk gap. So, when you publish the accounts in 2023, the -- you had a negative duration gap of about SAR 25 billion, which means more liabilities were repricing compared to our assets in the period, 3 months following the interest rate hike. So, what is this number as of September 2024? What's the gap between liabilities and assets for the 3 months following change in interest rate?

Thank you for the question, Vikram. You are referring to 2022, right?

I'm just referring to the special commission rate sensitivity on balance sheet, only the on balancing item, that gap was SAR 25 billion between liabilities and assets in the 3-month bucket. So I'm just asking for an update to this number. what is this number as of September 2024. The gap between liabilities and assets in the 3-month duration bucket -- only the on balance sheet.

Yes, I think we will be in a position to disclose all this by the year-end, inshallah, Q4.

But at least, can you provide us some direction? Has it increased, decreased? Any direction, can you provide?

Generally speaking, it's moving towards a positive direction. So this is the status as of now. And all the full details will be exposed by year end, inshallah.

It means this gap has gotten more negative?

It'd getting better.

It's getting better, okay. So more liabilities are repricing than assets, even more than what we had in the beginning of the year?

Yes, yes, you're right.

There are a few questions in the Q&A box. This one is from [ Ambrine Jabani ]. Can you please comment on the recent Ministry of Finance deal with Saudi Bin Laden and if you have any exposure to the group.

We've seen it as a positive development for the contracting sector and for the banking in general. SAIB is part of the syndicated loan. However, the bank did not have any significant impact prior to the deal, not it will have post the deal.

The next question is from Adnan Farooq. What were the main reasons for the sharp growth in the investment book in the third quarter? And can you please mention the yield on the investment book?

So the bank has been actively buying fixed rate instruments in the last couple of years to take benefits of the high yields. Investment book was roughly SAR 28 million by end of '22, and that has increased north of SAR 40 billion by Q3 '24. Investments have been largely been in banks and financial institutions. During the quarter, we grew around SAR 5.5 billion with an average yield to 5.4% for the new investments. We believe this will further enhance our yield, especially once we -- the rate cuts are effective.

A follow-up question from Adnan Farooq of Jadwa. In the past, management mentioned that every 100 basis points rate cut is expected to positively impact NIMs by 3 to 5 basis points. Does that relationship still hold?

Yes. Still true based on the Q3 balance sheet, still true for every 100 basis rate cut, we expect an enhancement of our NIM by 3 to 5 points.

Got it. While we wait for more questions to come, maybe one question from my side. If you look at banking sector in Saudi -- generally in Saudi Investment Bank, we've seen an increase in interbank borrowing. I just want to understand, is this mainly local interbank borrowing? Or is this also international banks that can potentially lend to Saudi banks?

So I'll be answering on SAIB in particular. This combination of both, local and international, and that's driven, obviously mainly by the growth of repurchasing agreement with other banks. And this is also following the 25% year-to-date growth in our investment portfolio.

Got it. And given that it's -- this is -- in terms of the funding of the book, a larger portion is coming from wholesale funding. Do you think this source of funding is sensitive to sentiment towards Saudi macro? Or do you think this kind of liquidity is sticky? And even when -- if there is, let's say, more challenging economic landscape like lower oil prices, you can still access funding from this -- from the interbank market?

Any interbank funding rates, first is stable in terms of split over index rate. And generally, expected to get lower with the anticipated interest rate cuts. And that's been always available. We didn't anticipate any change in the mechanism of interbank operations.

I'll move to the next question. This is a follow-up from Adnan Farooq of Jadwa, do demand deposits of the bank include any call deposits? If yes, what would be the portion of demand -- call deposits as a percentage of total deposits?

No, no. Demand deposits, it's all free interest-bearing deposits. There's no call deposits within the demand deposits.

In fact, if you look at our financial statements, we have total savings deposits, which is about SAR 3.1 billion, and that includes the savings as well as the call deposits. Demand deposits is fully noninterest-bearing deposits.

[Operator Instructions] Aditya, your line should be open. Please introduce yourself and your company name.

My question is regarding our NII and the impact from fair value, right? So as we are gaining on fair value gains on our investments. I just want to know how should I be able to model this for, like, say, every 100 bps of cut, how much should we be able to see it enhance our NII? Can you give us any sort of guide on that? That would be great.

So the question on the NIM of the investments?

No, no. I'm sorry if you didn't understand it. What I meant was for fair value gains that we see in our income statement, but every 100 bps of cuts in rates, how much can we see these gains go up by? Because I mean I believe this fair value gains from our investments is expected to drive our revenues, right? So can you just quantify how much we can expect from this?

Sure. First of all, if you see our investments, the majority of our investment, 96% of our business either OCI or amortized costs, so there will be no impact on the P&L. If you are referring to the mark-to-market income, which has been booked so far, this is pertaining to 2 items. First, the evaluation of our associates basically. Second is the evaluation of the derivatives, which is not on the investment income. But to answer your question, we will see that the impact of the increased fair value on the reserve on the equity or on the other comprehensive income.

But can you still quantify that so that we can have a broader idea of how much SAIB gains from falling rates?

And if you see during the Q3 only, the negative balance on the balance sheet has improved by SAR 300 million. I believe it was SAR 900 million by June, and it has increased during the 3 months to SAR 600 million, which means positive SAR 300 million. So comparing to our investment portfolio that can give you hint of the sensitivity to the market prices.

And I'm sorry to be persistent but -- so that value, I mean, the reversal is based on 75 bps of cuts -- no, it should be 50 bps of cuts?

I think it's difficult to quantify that as of now because some of the changes in market value either could be attributed to liquidity purposes. Maybe some bonds have improved. Some of them could have credit enhancements, their rating changes regardless of the interest rate. 3% is also the interest rate. So I think there are many variable. I don't think you will be able to see it like as a pure model there.