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

Good afternoon, ladies and gentlemen. Welcome to the Saudi Investment Bank's H1 2026 Results Call hosted by Arqaam Capital. I am Hussein Safieddine and joining us from Saudi Investment Bank are Mr. Faisal Al-Omran, Chief Executive Officer; Mr. Ahmed Almohsen, Chief Financial Officer; and Ms. Najla AlMutairi, Executive Vice President of IR. I will now hand the call over to management. [Operator Instructions] Now Najla, over to you, please.

Thank you, Hussein. Good afternoon, everyone. We're pleased to welcome you all to the Saudi Investment Bank's Earnings Call for H1 2026. My name is Najla AlMutairi, Head of Investor Relations. Kindly note that our earnings release are available for download on the IR section of our website, and this webcast will be recorded. A transcript will be made available on our IR web page. If there are any members of the media, please be reminded to share your questions separately with the Corporate Communications team. We're joined today by Mr. Faisal Al-Omran, CEO; and Mr. Ahmed Almohsen, our CFO. Moving on to the agenda. CEO will cover the performance highlights for the period, then we'll update you on our strategy, and CFO will discuss the financial performance and guidance in more details, and then we'll open the floor for questions. With that, I'll hand over to our CEO to begin. Over to you.

[Foreign Language] and good evening, everyone. Give a warm welcome to this earnings call. I am very pleased to be speaking with you today and to report that SAIB delivered a good set of results in first half 2026, underpinned by healthy balance sheet growth, strong operational efficiency and high asset quality despite continued margin pressure that we have seen. If you look at the numbers, we have sustained good balance sheet growth momentum and quality. 5% loan expansion driven by growth in corporate and, I would say, mostly private banking, 11% deposit growth mainly on higher time deposits. We have strong credit quality overall and an encouraging direction in our NPLs. Also, we maintain healthy liquidity position and strengthen solid capitalization due to the recent Tier 1 Sukuk issuance in the amount of SAR 1.85 billion. Also profitability and improved efficiency, we have seen net income growth of 3% year-on-year to reach SAR 1.051 billion for the first half 2026, supported by an okay operating income growth and lower operating expenses. Our return on equity came in at 12.2%. Our net interest margin have compressed to 2.18%. We have also maintained a good low cost of risk at 22 basis points. We also maintained a good cost discipline that we have initiated last year and has improved our cost/income ratio to 39.5%. I would say overall balance sheet growth, operating efficiency, resilience, quality helped offset some of the margin pressure and supported the growth and profitability for the first half. If we go to the next slide, I will move quickly on them since I think they are -- have been discussed previously. For any new joiners, this slide as a reminder of our strategy 2027, including our vision, mission, strategic goal across business segments, key enablers and strategy, which include treasury, data and AI, HR, risk, marketing [indiscernible] on this slide [indiscernible]. If we go to the next slide, I would say the same story that we are proud of in terms of the strategy maybe mainly on the refreshed agenda centered on 2 key priorities: improving our funding efficiency and accelerating our net interest income growth, particularly which is a trade finance and stronger client engagement. Also these priority, I'd say they are strongly supported by our customer experience, rollout of our corporate Internet banking platform, which we are very proud of and [Foreign Language] will open it to our clients. Also, we have experienced an excellent use cases and some of the use of our data and AI. So I think these are [Foreign Language] things that were going to see in the second half of 2026. If we go to the slide. Same story. The transformation has really delivered a number of important capabilities across both business segments and the enabling functions in the bank. I would say overall focus is now on translating the capabilities we have built into measurable outcomes, which is basically better customer experience, stronger revenue generation, improved funding efficiency, better penetration, I would say, more scalable execution across the bank. So I would say that's in a nutshell, where our focus on [Foreign Language] and our strategy refresh that we have done. And we see most of the transformation [Foreign Language] have been completed and [Foreign Language] we are excited to see the results going forward. With that, I will hand over to Mr. Ahmed, the bank's CFO, to take us through the financial results.

Thank you, Abdulaziz. [Foreign Language], and good afternoon, everyone. I would like to welcome all of you joining us today. SAIB delivered a sound set of results in the first half of 2026, and I will now take you through the key financial developments. On the balance sheet, loan increased 5% year-to-date, reaching SAR 117.3 billion, supported primarily by growth in corporate and private banking. Customer deposits grew by 11% year-to-date, taking total deposits to SAR 121.6 billion. Net interest margin declined by 22 basis points year-on-year and reached 2.18%, reflecting lower asset yield and shift in the deposit mix, which limited the improvement in the funding cost. Improving the deposit mix and enhancing funding efficiency remain key priorities for the bank. The progress made in the first half reflected in a stronger CASA ratio, together with a more stable rate environment and broader funding base following our additional Tier 1 Sukuk issuance should support resilient NIM performance through the second half of the year. Operating income increased modestly by 2%, while continued cost discipline resulted in lower operating expenses. Consequently, the cost-to-income ratio improved by 146 basis points year-on-year to 39.5%. Our profitability continued to improve, driven by income growth and lower operating expenses. This resulted in a 3% increase in net income to SAR 1.05 billion. Our return on equity remained sound at 12.2%, slightly decreased by 59 basis points from last year on a higher equity base. SAIB also maintained a healthy asset quality with NPL ratio improving to 0.91%, while the cost of risk remains low at 22 basis points. This reflects our continued focus on controlled growth and prudent risk management. Our capitalization also strengthened with Tier 1 ratio reaching 19.7%, supported by profit generation and the additional Tier 1 Sukuk issuance in the amount of SAR 1.85 billion. Liquidity remained healthy and supportive of the bank growth plans. Turning to Slide 10 on the balance sheet. The balance sheet expanded 6%, driven by 5% higher loans together with higher cash and balances with SAMA and bank placements. The increase in liquidity balances at the end of the period largely reflects tactical and temporary balance sheet management positions. On the funding side, customer deposits increased by 11% year-to-date to SAR 121.6 billion and remains the primary source of balance sheet growth. Term funding also increased while interbank funding was 9% below year-end level. In the second quarter of 2026, the bank capital position also strengthened during the period, supported by the issuance of our latest additional Tier 1 Sukuk. Overall, the bank maintained a healthy liquidity and capital position with balance sheet growth continuing to be predominantly funded by customer deposits. Starting with loan and advances on Slide 11. Our loan book continued to demonstrate a solid momentum, recording 5% growth and reaching SAR 117.3 billion in the first half of the year 2026 with a 1% increase during the second quarter. Most of this growth came from corporate lending, which grew by 5% during the year. The expansion was broad-based across key economic sectors, including building and construction, services, transport and communication as well as commerce. We continue to manage the portfolio actively, prioritizing lending opportunities that offer attractive risk-adjusted returns while maintaining disciplined underwriting and a clear focus on margins. On the retail side, the loan portfolio grew by 2%, mainly supported by 3% growth in private banking, which grew by SAR 400 million and reached SAR 16.8 billion. The remaining consumer loan book grew by 2% year-to-date. Our guidance remains unchanged for now with 5% loan growth delivered in the first half. We remain comfortable with full year loan growth within the mid- to high single-digit range. Moving to the next slide on investments. Our investment portfolio remained broadly stable year-to-date at SAR 47.3 billion with increasing -- while increasing by approximately SAR 400 million during the second quarter. During the quarter, we continue to add investments selectively. Gross purchases were higher than the reported net increase as new investments were partly offset by scheduled repayment and maturities. The portfolio composition evolved modestly during the period. Fixed rate securities remains the majority of the portfolio at 86%, while the share of floating rate security increased to 12%. The portfolio remains high quality with majority of investments comprising government and quasi-government securities and exposures to banks and other financial institutions. Moving to next slide. Customer deposits rose 11% year-to-date to SAR 121.6 billion, although balances were 1% lower during the second quarter. Growth was primarily driven by 18% increase in interest-bearing deposits, including higher time and saving balances. By segment, retail deposits, which include public institutions increased by 15%, while treasury and investment deposits grew by 18%. Corporate deposits declined by 21%, largely reflecting our disciplined approach to deposit pricing rather than a material change in customer relationships. The deposit mix remained weighted towards interest-bearing balances with non-interest-bearing deposits accounting for 20.5% of the total. However, CASA ratio improved by 2.7% during the second quarter to 29.3%. This sequential improvement was supported by strong growth in saving balances and the migration of some public institutions balances from non interest bearing accounts into core accounts. Call and savings increased by SAR 4.4 billion during the quarter and by SAR 6.5 billion during the 6 months. More than half of this growth came from our Shariah-compliant, Zakat-exempt saving account product that we launched last year. Our focus remains on growing savings and core account balances while continuing to manage deposit pricing carefully and improving the overall cost and stability of funding over time. Now turning to a summary of our income statement on Slide 14. Net income increased by 3% year-on-year and reached SAR 1.05 billion in the first half of 2026. Total operating income grew by 2%, driven by 11% increase in fees and other income, while net commission income remained stable. Operating expenses declined by 2%, resulting in a positive jaws and a 5% increase in net operating income. Credit costs remained mostly stable. Provision increased modestly by 2%, while the cost of risk improved to 22 basis points from 24 basis points in the prior year period. These positive developments were partially offset by a 24% reduction in the share of earnings from associates, driven by one-off accounting adjustment in the first quarter and weaker earnings from an associate affected by softer international travel amid regional geopolitical tensions. Return on equity was 12.2%, 56 basis points lower year-on-year. I will take you now through the main income statement drivers, starting with net special commission income in Slide 16. Net commission income remained stable year-over-year, amounting to SAR 1.804 billion as average earning assets growth of 10% was offset by NIM contraction. And as shown in the waterfall chart at the upper middle section of the slide, higher income from corporate and other loans as well as investment was largely offset by higher funding expenses and lower income from SAMA and interbank placements. The net interest margin declined by 22 basis points year-on-year to 2.18%. Asset yield decreased by 32 basis points to 5.92%, primarily reflecting the lag impact of previous rate cuts on the loan portfolio. This was partially offset by a 43 basis point reduction in the cost of interest-bearing liabilities to 4.79%. On a sequential basis, NIM declined by 10 basis points to 2.13% in the second quarter. Asset yield decreased by 9 basis points to 5.88%, while the cost of bearing liabilities declined by 6 basis points to 4.76%. Our focus remains on improving the funding mix, managing funding costs and maintaining disciplined pricing across both lending and investment opportunities. At this stage, we are pricing within our full year 2026 NIM guidance range of 2.10% to 2.25%. Looking at the fees and other income on Slide 16. Fee and other income for the first half increased 11% year-over-year with momentum strengthened significantly during the second quarter. Second quarter fee and other income reached SAR 207 million, increasing by 26% year-on-year and 37% sequentially. Growth in the first half was broad-based. Business-related income increased by 67%, mainly reflecting unrealized gain on FVTPL and fair value through P&L, while foreign exchange income grew by 10% and fee income from banking services increased by 3%. Within banking services, trade finance income showed a strong recovery during the second quarter, increasing to SAR 46.6 million. This reflected the stronger activity in April and June and trade finance remains an important area of focus as we continue to deepen our corporate client relationships. Trading and fund management income also performed well, reaching SAR 54 million in the second quarter. The performance was largely driven by asset management activity and the new fund launches. Overall, the first half performance demonstrated the benefit of our diversified non-funded income streams. Fee income remains one of the bank's key area of focus and an important driver for improving return on equity. Moving to OpEx on Slide 17. In the first half, we delivered continued cost discipline with both absolute operating expenses and the cost-to-income ratio improving year-on-year. Operating expenses declined by 2% to SAR 0.9 billion. The improvement in operating expenses was driven mainly by lower general and administrative expenses and lower depreciation and amortization. This was partially offset by a normal increase in employee-related costs and modest rise in premises-related expenses. Second quarter operating expenses were SAR 442 million, mostly in line with the bank's normal quarterly run rate. The increase compared with the first quarter mainly reflected the unusually low expenses base in Q1 when costs had not been incurred rather than change in the underlying cost trends. Combined with 2% growth in operating income, the reduction in expenses delivered a positive operating leverage. As a result, the cost-to-income ratio improved by 1.5% year-over-year to 39.5%. We continue to focus on profitability and cost optimization, particularly across general and administrative expenses while absorbing normal inflationary increases in employee-related costs. The benefits of cost initiatives implemented last year remain visible in our year-end performance. At this stage, the cost-to-income ratio remains comfortably within our full year guidance of below 40.5%. Turning our attention to credit quality on Slide 18. Credit quality remained resilient throughout the first half with asset quality indicators continuing to improve. The impairment charge rose modestly by 2% year-on-year to SAR 128 million in the first half against loan growth of 5%. This translated into a 2 basis point improvement in cost of risk to 0.22%. Non-performing loan formation remained moderate and the NPL ratio improved to 91 basis points as of the end of the second quarter. NPL balances remained almost stable, while continued growth in performing loan portfolio supported the improvement in the ratio. Notably, there were no significant recoveries or write-offs during the second quarter. Our non-performing loan coverage ratio strengthened to an extremely comfortable level of 201.8%. This mainly reflected additional provisioning associated with growth in performing portfolio in Stage 1, together with higher provisioning on Stage 3 exposures. Stage 3 ECL coverage increased to 53.6%, while Stage 2 ECL coverage remained solid at 14.1%. We have not observed any material impact from the regional geopolitical volatility on asset quality or cost of risk, and we do not currently expect a notable deterioration over the remainder of the year. At 22 basis points, year-to-date cost of risk remains below our current full year guidance range of 25 to 35 basis points, and we continue to expect credit costs to remain well controlled. Moving on capital and liquidity. Saudi Investment Bank continued to maintain a strong capitalization and liquidity position. The liquidity coverage ratio, LCR, increased to 196.5%, NSFR at 111.5%, both at comfortable levels. The SAMA LDR reached 76.6%. Total regulatory capital increased 11% during the first half from Tier 1 Sukuk issuance and net income, which were partially offset by the dividend payment. In April, we successfully raised SAR 1.85 billion dated additional Tier 1 Sukuk issuance with a return of 6.5%. This further strengthened our capital base and provides additional flexibility to support future growth. Risk-weighted assets grew by 6% year-to-date to SAR 126.1 billion during the period, mainly reflecting balance sheet expansion. As a result, by the end of the first half, our CAR reached 20.2% with Tier 1 at 19.7% and CET1 stable at 14%. Moving on the outlook and guidance for the full year. Overall, we delivered a balanced set of results in the first half, combining healthy balance sheet growth, higher fee income, strong asset quality and improved operating efficiency. Despite continued pressure on margin, financial results were generally in line with the expectations. Based on our performance to date, the current business pipeline and our latest outlook, we are maintaining our full year guidance across all metrics at this stage. While the regional situation remains fluid, we have not seen a material impact on customer behavior, loan demand, asset quality or deposit trends so far. We continue monitoring developments closely, particularly in relation to loan growth, cost of risk, NIM and fee income. For financing, loan increased by 5% year-to-date, and we remain on track to deliver full year growth within the mid- to high, single-digit range. Our focus remains on corporate and private banking, supported by disciplined underwriting and a clear emphasis on attractive risk-adjusted returns. The underlying origination pipeline and our overall lending appetite remains unchanged. For NIM, we maintain our full year guidance range of 2.10% to 2.25%. First half NIM was 2.18% within this range. Our focus remains on strengthening the CASA mix, optimizing the overall funding profile and improving funding efficiency to support margins. We expect cost-to-income ratio to remain below 40.5%. At 39.5% for the first half, we are currently tracking comfortably within this guidance, supported by continued cost discipline and operating income growth. For return on equity, we continue to target at least 12.75% for the full year. First half ROE was 12.2%. Our focus in the second half will be improving fee and other income, maintaining cost discipline and protecting margin and asset quality. For cost of risk, we maintain our guidance range of 25 to 35 basis points. At 22 basis points in the first half, credit costs remain well controlled with no material impact from regional environment observed to date. While the current trend is favorable, we will continue to maintain a prudent approach to provisioning. Finally, our Tier 1 capital ratio guidance remains above 18%. The ratio stood at 19.7% at the end of June, supported by retained earnings and SAR 1.85 billion additional Tier 1 Sukuk issuance, providing a solid capital base for future growth. Overall, we remain focused on delivering disciplined balance sheet growth, strengthening funding efficiency, broadening our fee-based income and maintaining a prudent risk management. That concludes the management's presentation. As we wrap up, I want to extend my sincere gratitude for all for your continued attention and interest in Saudi Investment Bank. And now we are happy to answer any questions you may have.

[Operator Instructions] So our first question comes from Murad Ansari.

Congratulations on a good set of results. So a few questions. Starting from the NIMs. We saw some pickup in funding costs in this quarter. So just wanted to get a sense of how do you see that evolving into the second half? And was there anything particular in the second half that's driven up? Obviously, there's some change in mix and you did talk about change in composition with some growth in call and savings accounts, so that's led. But if you could -- if that's the only reason that's driving up the cost? Or are you seeing that cost of funding pressures are persisting? And how is the outlook for the second half? Then secondly, on loan growth, I mean, we've discussed this earlier, you said there's still appetite, but your willingness to grow is really driven by the pricing discipline. How are you seeing the pricing environment on lending now? And is there a repricing that is expected to kick in, in the second half of the year that could help margins? And then I think in the presentation, you talked about some accounting adjustments to associates and some decline on other associate income. If you could just explain that what's happened there? What happened in the first quarter on the associate side?

Thank you, Murad. For the first question on the NIM, as we stated before, as far as benchmark rates, we're not very sensitive to changing rates environment. What we are trying to do every period is even if there is a reduction in the asset yield, we should see further reduction in the liability and vice versa. What -- and if you want during the first quarter, we managed to improve our NIM on the exit NIM we have seen in Q4, 2.13% to 2.23%. What we have observed during the second quarter, however, 2 things that have affected the NIM. First, the repricing of assets, which happen after the repricing of liabilities have taken the majority of the effect mostly in the second quarter. And that's why we've seen the reduction in asset yield by 9 basis points during the first quarter was more than the reduction on the bearing liability of -- which has decreased by only 6 basis points. That's the first part. And more importantly, the reduction, which we always highlight the reduction in our DDAs, this also has pressured our NIM. Now if we're looking ahead, if we continue the growth in savings and the CASA balances and we were able to replace higher-cost deposits and maybe also further redeployment of excess liquidity, this would definitely improve our NIM, and this is what we are targeting to do. On the other side, any further reduction in the DDA balances could continue to create pressure on our NIM. However, at this stage, we're still keeping our guidance for the NIM from 2.10% to 2.25%, but most likely will be towards the end or the lower end of this range.

Sorry, just to confirm, you said your 2.10% to 2.25% is the NIM guidance, you expect to be closer to 2.10% or closer to 2.25%.

Toward the lower end, yes.

2.10%.

Your third question was on the associates. We have 3 associates, AMEX, YANAL and Amlak. One of the associates had accounting adjustments, and this has affected their profit during the second quarter.

Okay. And this accounting adjustment is a one-off?

Yes.

And on loan growth...

Can you repeat the question again?