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

Good afternoon, and welcome to the Saudi Investment Bank Q4 Earnings Call. My name is Carla, and I will be coordinating your call today. On today's call, you will have some slides presented to you. To see the slides, please follow the link provided on your invitation. [Operator Instructions] I will now hand you over to Hussein Mahfouz to begin. Hussein, please go ahead when you're ready.

Thank you, Carla. Good afternoon, everyone, and thanks for joining us today. This is Hussein Mahfouz from Arqaam Capital. And I'm pleased to welcome you to The Saudi Investment Bank Fourth Quarter 2024 earnings webcast. I have with me here today from the Investment Bank management, Faisal Al-Omran, Chief Executive Officer; Ahmed Almohsen, Chief Financial Officer; Shankar Chattanathan, the adviser of the Chief Financial Officer; and Najla AlMutairi, Head of Market Intelligence and Investor Relations. [Operator Instructions] Without further ado, I will hand over the call to Najla. Over to you.

Thank you, Hussein. Good afternoon, everyone. We're pleased to welcome you all to The Saudi Investment Bank's earnings call for full year 2024. My name is Najla AlMutairi, the bank's Head of Investor Relations. Kindly note that our earnings material are available for download on the IR section of our website. Also, please be aware that the earnings call is recorded and a transcript will be also made available on our IR website. If there are any members of the media, please share your questions separately to SIBs Corporate Communications team. I'm joined today by Faisal Al-Omran, our CEO; and Ahmed Almohsen, our CFO. Let's move on to the agenda for today's call. Our CEO will cover the performance highlights for the period, and we'll update you on our strategies. CFO will then discuss the financial performance in more detail and present you our 2025 guidance. We will then open the floor for questions. With that, I'll hand over to our CEO to begin the presentation. Over to you, Faisal.

Assalamu alaikum and good evening, everyone. Happy today to go over our 2024 results. We are really happy and excited about the achievement that we have done and also we are gearing up, inshallah, for 2025 and we think inshallah, with the guidance that we'll communicate to you today, inshallah, that we're optimistic about the bank and the marketing intelligence. So on the slide in front of you, you will see that our loans have grown by 23%. I believe this is the highest growth on loans in the market in 2024. We are happy to report that growth. And we have also said before that if and when the corporate growth starts in the market, then SAIB will be one of the -- we believe one of the highest recipient of that growth. And we're happy to report today that, and most of the growth that we have seen was due mainly to the corporate banking portfolio and which includes also the syndication. You'll see also our deposits have increased by 13% to fund that growth. Most of the deposits have came from the interest-bearing deposits. We are still working on our initiatives to reduce our cost of funding and our CASA or NIMs in the market. NPL looks healthy from our side. It went down by 46 basis points, stand at 1%. Tier 1 ratio stands at 19.1%. We have seen a small reduction, the augmentation that have not reduced debt despite the large growth is the Sukuk issuance that we have done that which we will talk about in the presentation. Our net income stood at SAR 1.957 billion, a growth of 11%. We believe the trajectory, inshallah, will continue for 2025. Our NIMs, we have seen a slight reduction, about 30 basis points in our NIM at 2.68%, SAIB remains one of the highest bank in terms of the asset yield when compared to competitors. However, as I said, due to the funding structure that we have done and the increase in interest-bearing deposits. We have seen some contraction in the NIMs. Also, we have seen some competition of banks also entering the corporate banking market, whereby we have seen some price reduction, although what we try to say always is that we don't want to compete on price, SAIB has a clear competitive advantage that we want that advantage to drive our business. Our cost of risk also remained subdued at 0.32%, a reduction of 15 basis points from last year. And also cost income ratio, we have seen a small reduction of 26 basis points where it stood at 41.5% as we said before, that we are working on reducing that number due to most of the transformation has been done, and we believe that number should gradually start coming down. If we move to the next slide, which we'll talk about the strategy. And if you allow me because we have seen some of the participants, large number are new. So maybe I'll just go quickly over what we have recapped before on the strategy. SAIB's vision is that we want to be the trusted bank. This is something that we believe in. We want to be the trusted bank for our clients. Why? Because once you become the trusted bank, the relationship will not be transactionally driven, it will not be driven by pricing, it will not be driven by reduction of credit criteria. It will be driven by trust, by relationship ensuring that when we acquire a client, we want to have a long-term relationship with them. So this vision is something that is inprint in how we do the business and also properly cascaded to the business and support area in the bank. Our core segments are divided into four. We have Corporate Banking, Public Institution, Consumer Banking and Private Banking. In the Corporate Banking, this is the main driver of the bank. We believe that this will always be the main share of business and Saudi Investment Bank. We compete on our services, our ability to being fast or ability to be dynamic rather than trying to be the most cost-efficient provider of loans to our clients. We'll try to be competitive, but we believe we have a strong competitive advantage that can build close relationship with our clients. The Private Banking is the same story. SAIB has a strong franchise in private banking, has always being like this, and we believe also that we want to grow that portfolio. And our private banking, we keep growing the -- our client base and also the volume of our loans. And we believe also the trajectory is positive for 2025. For a public institution, we see this segment as mostly fee income driven and the source of cheaper liquidity for the bank. The way we will win there is that we want to be able to provide solutions for the public institutions, mainly government, semi-government, quasi government, they all do have ambitious KPIs on them, on the financial side of the Vision 2030. We believe SAIB is able to help them fulfill those KPIs. We have several milestones and accomplishments that we have done in that sector. And we believe this is something that we continue it. For consumer banking, SAIB is focusing on the affluent sector. We believe affluent sector is not very well served still in the market. We believe there is a unique value proposition that we can provide, whereby that this segment could be a driver of the asset side, but also mostly on the liability side of getting larger funding base with a relatively lower structure than the existing in The Saudi Investment Bank. So I would say these are the core segments. If I move to the next slide. This is basically stating the transformation and the initiatives that we have in SAIB, we have more than 40 initiatives. And we are happy that we are progressing well on our targets. Maybe I'll shed light of the focus areas. If you see on the left side, what is the strategic segmentation and depreciation for value proposition. This is basically has been already done on the corporate side. And now it's being finalized to the affluent sector or segment for Saudi Investment Bank. We believe that we can bring a unique proposition so that we can have a notable market share for us in that segment. Also, we are trying to have an end-to-end journey digital that is customer-friendly, that also employee-friendly that save the time, saves the process, ensures clarity of the employees' jobs so that we are able to fulfill our competitive advantage to our clients, which is being fast and being dynamic. If you allow to move to the next slide, that we can go more granular in some of the initiatives that we have done. Firstly, we are very happy that we have closed $750 million of sustainable Sukuk that has been launched in November 2024. We're very proud to say that this was one of the highly subscribed issuance of 2024 in the region, if not the highest. We have got a very diversified investor base in terms of the number and in terms of the country that they represent. We still have very high appetite from those investors and we're keeping the dialogue open to see when would be appropriate for SAIB to tap the market again. We have also launched our Venture Studio, which I would also add here that we have launched the venture capital fund under the name S60, this is a fund that is funded at under $100 million commitment. The idea is that SAIB has always been strongly digital, but we want to be able to translate that knowledge and expertise to a more focused profitable proposition through our fund. That fund will serve on having a higher return for us. And also building a stronger ecosystem for SAIB when aligning with those tactics. Also, we have launched the Travel App, it's fully launched in the market. We're very happy with the achievement that it has have done. It's more than 300,000 downloaded. We keep getting acquired -- we keep acquiring new customers under that application. And that has great insight and great tool to get affluent customers, which is our focus client segment by understanding the spend analysis, the transaction, the proper tiering of those clients. So this is something that we're very proud of. Also, we're happy to launch our new mobile app that's currently under the pilot phase. We keep onboarding clients every day. Total client, I think, onboard about 20,000 to 30,000 and keep adding that on phases. We're very happy with the efficiencies that we have achieved and it keeps emphasizing SAIB's drive of digital first. We want to be able to book loans to our app, our mortgages to our app, issuing card, managing car registration, being able to fix your deposits, liabilities, all under one application. So we'll keep having that as our main omnichannel for our clients. Another innovative account that we have set up was the Travel Account. We have seen in the market that's most of the competition is happening on the credit cards, in terms of getting the miles and association with the airlines. We opted to do a different product, which is based on your current account balance to calculate the my reward that you would get. We're very happy to report that we had a very high number of clients under that account and also have provided us with a very cheap funding for the bank. We expect to increase the proposition of that Travel Account to a second phase. And I think soon we'll be coming to the market with a more innovative, I would say, approach to that account. The last one, which is the strategic with Fintech, we're happy to report that we have done some partnerships, namely Merit, which is the leader in the loyalty program. We believe that will augment our segment -- focus segment, which is the affluent and also our Travel App proposition. If you go to the next slide, this basically also talks about some of the goals that we are looking forward to in 2025. And the Corporate Banking, we're doing a large revamped on our corporate internet banking platform, where we want to streamline all or most of our dealings with corporate. So that to give a better experience to our corporates and also better utilize our employees' time. So I think you will see us coming to the market with a proposition there. Also, there is a complete revamped of CRM, whereby our relationship managers are able to make better informed decisions on our clients, our corporate clients and also to be able to better cross-sell our products. In terms of the Consumer and Private Banking front, as I said, we were looking to launch officially our app in 2025 after we finish the pilot phase. So this is something that we're looking forward to. Also enhancing our lending product journey, this is under the app so that we want to make it a seamless journey for us and also to optimize our branches, which mostly target -- get targeting higher efficiencies for SAIB. For Public Institutions. Same thing that we have doing for the corporate is applying also for PI, which is enhancing our Internet proposition for them and also increasing the value proposition so that we are clear about our competitive advantage when we go and pitch SAIB's needs to them. So this is something also we are very keen on. It's worth noting that our app so far has a rating of 4.9 of the consumer side, I think it's one of the highest rated. But I think that rating also will be properly, I would say, augmented by having more client base onboarded. So we'll keep an eye. We want to be one of the top, if not the top rated app in the app store. I think on the support functions, mainly the most important one is starting to -- or launching our SAIB Academy, this is something that we feel very strongly about. We want to be able to equip our employees with a right skillsets to be able to fulfill our vision. We want to equip them with the right tools so that they are able to fulfill our vision, being the trusted bank. So I think this is something that we are working on, and we launched it this year. We have done a soft launch so far but I think we'll come with a great proposition to the -- to our employees. And also, we believe this will be an attractive proposition for attracting and acquiring talent for the bank. If I go to the next slide, this is -- has some very, I'd say, happy numbers for us, most notably is our return on equity. Today, we have closed 2024 at 13.1% return equity. This is a long way where we have started on our strategy. We have promised to be driven by our return of earning, return of equity enhancement. So what we are looking forward also is to increase that number. And to make very focused decisions on the initiatives that we have to take to make sure that anything we do increases our return equity. Another notable number is the commercial loan, which is the corporate. We keep getting market share. Our market share in the third quarter was 5.5%. We believe in the fourth quarter also, that number is close or higher than this. The idea is that we want to get market share without sacrificing either our credit criteria or our pricing. And this is something and we're happy that we are achieving and we will also keep growing that market share. I think with that, I've finished the present section and I'll give it back to Najla.

Passing the financial performance section, which is led by our CFO, Mr. Ahmed Almohsen. Go ahead.

Thank you, Najla. Assalamu alaikum and good evening, everyone. I would like to extend my warm welcome to all of you joining us today, and I'm pleased to report a strong set of results for the year 2024. We have seen solid improvements in most of our KPIs. We have delivered strong financial performance, it was largely in line with our expectation and guidance. On the balance sheet, loan increased 23% year-over-year and reached SAR 99.5 billion, supported by 13% growth in deposits, which rose to SAR 94 billion. Our profitability improved as well and income growth and positive deals contributing to 11% increase in net income, and our return on equity registered 13.1%. At the same time, SAIB maintained a healthy asset quality with NPL ratio improving to 1.04%, while cost of risk reduced to 32 basis points. Equally, capitalization and liquidity were strong and remain supportive of future growth. Turning to Slide 12, please. The balance sheet during the year 2024 expanded by 21%, driven by 23% loan growth and 25% rise in investment. This was partially offset by a 10% decrease in cash and SAMA balances and 11% reduction in bank and bank placements. This balance sheet growth was mostly funded by 13% expansion in customer deposits and increase interbank funding additionally, and as mentioned by the CEO, SAIB issued its first U.S. dollar dominated additional Tier 1 sustainable Sukuk, totaling $750 million. We will be looking more closely into each of these trends in the following slides, starting with loan and advances in Slide 13. Our loan book has shown continued strength with 20% -- with 23% growth for the year and 5% in the fourth quarter. We've seen most of this growth coming from corporate lending, which has grown by 25% during the year. Active participation and financing large infrastructure projects in the syndicated loans continue to support growth, and this was further aided by widespread credit across key economic sectors. We've seen it in utilities, consumer buildings, construction, commerce and manufacturing, along with other sectors. On the retail side, Private Banking grew by a notable 18% and reached SAR 2.2 billion -- sorry, increased by SAR 2.2 billion and reached SAR 14.3 billion. The remaining consumer loan book grew 14% year-over-year. Moving to the next slide. Our investment portfolio increased by 25% during the year 2024 and reached SAR 40.4 billion. And here, we continue to invest in fixed-rate debt securities to manage our interest rate risk and market in higher rates. New investments were mainly in high-quality instruments, either sovereign or international financial institutions. The quality of the investment book remains strong with 56% of securities issued by government and 30% and 31% buybacks and other financial institutions. Moving to the next slide on deposits. Customer deposits was 13% year-over-year and reached SAR 94 billion. This was driven mainly by 17% growth in interest-bearing deposits, while noninterest-bearing deposits increased by 6%. Corporate deposits increased by 41% while retail deposits seen 17% growth year-over-year. Overall, this growth has resulted in shift in our funding mix with noninterest-bearing deposits now comprising 53.7% of total deposits compared with 56% at the end of last year. On a quarterly basis, total deposits declined by 4%, reflecting our Tier 1 Sukuk issuance and our ongoing efforts to optimize the funding mix and cost. Additionally, the strong adoption of our product accounts contributed to a sequential improvement in the noninterest-bearing deposits over the last 2 consecutive quarters. Now turning to a summary of our income statement on Slide 16. [Foreign Language] net income increased by 11% year-over-year, driven by 5% growth in operating income and was further supported by improved cost of risk and operating efficiency. I will be expanding on this component in the following slides. On the net special income, we've seen a growth of 3% over the year and have reached SAR 3.5 billion and average earning assets grew 15%, which was partly offset by NIM contraction, And as you may see in the waterfall chart at the other middle section of the slide, increased benchmark rates resulted in higher special commission income from lending and investment but was largely counterbalanced by higher funding costs. The year-over-year NIM declined by 30 basis points and reached 2.68% due to 51 basis point rise in cost of funding from increased benchmark rates and shift in deposit mix, which was largely offset by 25 basis points asset yield expansion. On a quarterly basis, the NIM also declined 29 basis points and reached 2.5%, mainly due to funding cost pressure that has been witnessed during the last quarter. Now let's look at fee and other income on Slide 18. Fee and deal income increased 17% during the year. This was mainly driven by 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 services rose 13% year-over-year on higher fees from brokerage and fund management as well as higher trade finance income. This was largely offset by a modest decline in FX income. Moving to the next slide. This is an operating expense. Operating expense rose by a modest 5% year-over-year and reached SAR 1.73 billion. This was mainly due to increase in general and administrative costs factoring in the overall inflationary environment and higher expenses on professional services, along with advertising to support our strategic growth initiatives. Employee-related costs also increased the cost base, although growth was contained at 5% year-over-year, while the rent and premises related expenses as well as depreciation and amortization expense decline compared with last year. The cost-to-income ratio has the level of 41.5%, decreasing from 41.8% by '23 year-end. Now turning our attention to credit quality on slide, Slide 20. Impairment charges decreased by 19% from the previous year and registered SAR 290 million for the year 2024. This reduced our cost of risk by 15 basis points to 52 bps in 2024, reflecting a benign credit environment and healthy overall asset quality. NPL formation also remained moderate and the NPL ratio was further improved to 1.04, aided by write-off of almost 600 during the first quarter. Our NPLs remain adequately covered with an overall coverage ratio now at 156.7. In terms of stage wise coverage the Q-over-Q reduction in Stage 3 coverage resulted from a write-off during Q4, as I mentioned, which were fully provisioned and Stage 2 coverage improved due to a settlement of a single large exposure during the last quarter. Moving to capital and liquidity. SAIB continued to maintain a strong capitalization and liquidity position. Liquidity coverage ratio, LCR stood at 164.7%, NSFR at 108.7% and the SAMA LDR reached 83.3%, all at extremely comfortable level despite some moderation in the last quarter. Total regulatory capital increased 18% during the year with the profit generation and the new Tier 1 issuance partially offset by dividends payment. Risk-weighted assets grew by 20% and reached SAR 108.5 million during the period and growth in lending and investments. Our CAR declined modestly to 19.7% with Tier 1 capital ratio at 19.1%, blocked ratio blocked during Q4 by Tier 1 Sukuk issuance while CET1 stood at 14.2%. We believe this still leaves us in a comfortable position to balance the growth expectations and sufficient regulatory comfort levels. Now we will be moving to our outlook and guidance for the year 2025 overall. And as we mentioned and [Foreign Language] we have delivered strong financial performance in 2024, which was largely in line with our expectation and guidance. And now we are looking ahead to 2025. We anticipate maintaining the strong lending growth momentum with the projected increase of over 15% on the loan and advances. In terms of NIM, we are guiding 2.45% to 2.55%, which is broadly stable compared to Q4 exit NIM of 2.5. This assumes some NIM benefits from up to one rate cut during the year, offset by continued reliance on funding growth to our cost bearing deposits. I think it's important to highlight here that our NIM projection is also based on the current deposit mix. Any increase in DDA, which we are working on will definitely enhance our NIM. We'll be updating the NIM guidance during the year, inshallah. We expect our operating efficiency to grow to below 41.5% posed by a combination of growth in income and enhanced cost management. For return on equity, we delivered 13.1% in the year 2024, as we expect to continue strength performance to deliver above 13.25% in the year 2025. On cost of risk, the benign credit experience that we have seen has led us to maintain our guidance range for the upcoming year at the level of 30 to 35 basis points. And finally, our expectation for the Tier 1 capital ratio remains unchanged at about 18.75% for the full year. This concludes the management's presentation. Now we are happy to answer any question you may have.

[Operator Instructions] So our first question is, why do we not see benefit of scale and drop in cost/income ratio in the forecast horizon while you operate at higher cost levels compared to other Saudi banks?

Yes. I think this isn't the process, it's not something that happens in 2024. I think we have communicated this before in earlier call, saying that we believe that the benefits of the transformation that we are seeing, we start seeing in 2025. So we believe that the drop in cost/income ratio, we will witness it in the start, 2025 but we do have a cost optimization plan in the bank that we believe has an ambitious process to reduce the ratio. So I think you will start seeing in 2025.

We will now take audio question. Our first question comes from Shabbir Malik with EFG Hermes.

I have a question around your margins. So last year, your growth has been quite exceptional. But when I look at your margin, margin compression has been relatively high as well. So maybe if you can share some of your thoughts on the margin. And I think in the beginning, you've talked about how you're trying to be less transactional and more relationship oriented. While it seems like it is translating nicely on the loan growth side, how has been the experience on the deposit side? Is that also leading to good deposit inflows?

I think, as you mentioned, the growth is something that we were aiming for and pushing hard too. And that has been achieved in terms of the loan size. As for the margin, we expected that margin to go down for mainly 2 reasons: first, funding most of the loans are not happening under the new initiatives and the strategy where we said most of the funding we want to get it from the PI and from the affluence, where we believe there are lower structure in terms of the cost. So I think until that happens, in 2025, we might see some compression there. However, if you see the compression, it's not that big compared to how much market share we have got. So that we want to make sure that when we win business, it's not because prices are down. From what we have observed, we have seen some really low prices in the market. We believe if we were to book it at that prices, market compression will be much higher than where are there today, but we opted to keep our booking on the segment that we believe augments our income. As for the second question, in terms of where do we expect most of the funding. That's correct, Shabbir, That second part where...

Yes. So basically, what I wanted to understand was that it's -- since you're focusing on relationships and that seems to help drive your loan growth but also on the deposit side, is it translating into, let's say, relatively low-cost deposits compared to what you would pay, let's say, if you were trying to be competitive on pricing?

Yes, yes. I understand it now. I don't think it is the same strategy. The strategy for to get the loans, I think it's totally different in terms of the competitive advantage that we are pitching to our clients. And I think on the deposit side, we are targeting a different client base. And on the deposit side, we believe the competitive advantage is geared towards the PI and the affluent sector. We believe PI, we're seeing good movements there, and there are some pickup in the DDA in the bank and the NIMs in the bank. However, in the affluent segment, we have finished the segmentation, close to value proposition, retail operating model for them. We think we'll see some of the results this year, but late this year. I don't think it's in the first half. But the competitive will not be the same that we have used to get the loans.

Got it. If I may ask 1 or 2 other questions. In terms of -- I think there was a comment made about the settlement of an exposure. I think there has been news around Saudi Binladin. Did that have any material impact on your provisioning last year? And maybe another question on your cost of risk guidance. Do you see any risk for that to be higher than what we've kind of guided for? And maybe if you can outline any potential risk to that cost of risk guidance?

On Saudi Binladin, we were one of the banks which were in a unique position, where we had a significant amount of collateral. So the amount of provisioning that we carried in book was relatively insignificant. That's the reason you see Stage 2 numbers where the current coverage has significantly gone up because that exposure has smoothed out, whereas the overall provisioning for the other customers remains the same. As far as cost of risk guidance for this year is concerned, I think we will be able to comfortably meet the number. We do not see any challenges at this point in time. I think we are comfortably positioned in terms of cost of risk.

Our next question comes from [indiscernible].

I have a couple from my side. On your deposits, we saw a sequential decline. And looking at the percentage and looks like it came from your retail deposits. So could you shed some color as to what caused this decline in deposits? And also going into next year, what sort of trend should we expect, especially with regards to CASA? Now I remember during the previous calls, you have mentioned that part of your strategy is to grow your CASA through -- by tapping the government and quasi government institutions. So how is that strategy working out? And can we expect some material improvements of CASA going into this year, 2025?

Generally speaking, our deposit growth will mirror the loan growth. I think the reduction that we have seen in the fourth quarter was mostly cost optimization, I would say. We have issued our Sukuk issuance during the fourth quarter, and we were able to reduce some bearing liabilities that has enhanced our NIM. So I don't think it was -- the reduction was to competition, although I would admit there was -- we have seen a huge competition in the banking sector in general in deposits, but this was mostly cost optimization.

And then my second question is on CASA. That is what sort of trends that we can expect going to next year. Sorry, this year, 2025.