Good morning or good afternoon, all, and welcome to today's Riyad Bank second quarter earnings call. My name is Adam, and I will be your operator for today. If you would like to ask a question during the Q&A portion of today's call, please use the raise hand icon towards the bottom of your Webex window. I will now hand the floor to Muhammad Faisal Potrik to begin.
Many thanks, operator. Riyad Capital is pleased to host the management team for Riyad Bank's second quarter 2026 earnings call. Today's call is being recorded. Please note that this call is open for analysts, investors, and shareholders only. Media, including social media, are requested to disconnect at this point. With that, I would like to hand over the call to Mr. Ryan Als huaibi, Head of Investor Relations. Please go ahead, Ryan.
Thank you, Potrik. Good day, everyone, and thank you for joining the call. We would like also to thank Riyad Capital for hosting the call today. With us today, our CEO, Nadir Al-Koraya and CFO, Abdullah Al-Oraini. As always, CEO will start with the performance highlight and strategy update, followed by CFO to cover the financial performance in more details. Then, we will open the floor for your questions. Before we begin, a quick reminder that today's call includes forward-looking statements and discussion on financial performance, so I would like to remind everyone to refer to page two of the earning presentation for the disclaimer notice. Also including on this page, a clarification around reproduction of any of Riyad Bank's material and today's discussion in line with applicable laws and regulation. With that, I will hand it over to our CEO, Nadir. Over to you.
Thank you, Ryan. Good afternoon, everyone, and thank you for joining us today. I am pleased to walk you through the key highlights of our performance for the first half of 2026. Before I turn to our performance, just a quick word on the regional environment. Clearly, it remains dynamic and we continue to monitor the developments closely. But from our perspective, our priorities have not changed. We are focused on supporting our clients, maintaining the resilience of our operation, and managing the business with discipline. We are not seeing any material deterioration in our business. While we remain vigilant, we believe we are well-positioned to navigate the current environment and the opportunities ahead. We come into this period from a position of strength. Our balance sheet is strong, our risk approach remains disciplined, and our business model is well-diversified.
Asset quality remains solid, customer behavior is stable, and liquidity remains strong. This confidence was also reflected in the successful completion of our public AT1 perpetual Sukuk issuance yesterday with a landmark coverage where order reached almost three times coverage of the initial size. This great coverage is a testimony of the investors' trust in Riyad Bank as the leading financial institution in the kingdom. On the back of this significant demand from a diverse base of institutional, private, and retail investors, we upsized the issuance to SAR 10 billion to cater for the strong interest. The issuance will strengthen our capital and liquidity position, improve our funding profile, and further optimize our capital structure. Based on our position in June, this issuance will add roughly 200 basis points to our Tier 1 capital adequacy ratio, and that additional capacity is important.
It puts us in an even stronger position to capture these opportunities we see ahead, particularly as we execute our 2030 strategy and participate in the significant pipeline projects and investment across the kingdom. So, we enter the second half of the year, I feel very confident about our position. We have a resilient balance sheet, sound risk management, and great financial flexibility, and w e remain focused on delivering sustainable growth and the long-term value for our shareholders. With that, let me now take you through the key highlights of our performance. Starting with the balance sheet, our total assets reached SAR 534 billion. That's up 3% since the beginning of the year. What's important here is not just the growth, but the mix. We have been quite deliberate in shifting toward higher quality, more capital- efficient opportunities.
Our investment portfolio grew strongly, up 16% year-to-date, while loan growth was more moderated at around 1.2%. Credit demand remains healthy, so, t his is not really about lack of opportunity, it's more about being selective. We continue to prioritize returns and the quality over simply chasing growth. On the funding side, we also made good progress. Liabilities increased by 2% over the same period to SAR 453 billion, supported by 5% growth in customer deposits. What's important here is that the deposits grew faster than loans, which further strengthen our funding base and gives us a very comfortable liquidity position. Overall, I'm pleased with the balance sheet. We are growing selectively, maintaining discipline, and preserving the capacity to take advantage of the right opportunities as they come. Turning to profitability, the picture is also solid. Despite the more moderate loan growth, revenue remained resilient.
Total operating income increased by 4% year-on-year on the back of 4% growth in net interest income and 2% growth in fees and other income. At the same time, we continue to see the benefit of our focus on efficiency. Our cost-to-income ratio improved to 29.2%, around 70 basis points better than last year. So, we are not only growing revenues, but we are also continuing to improve the efficiency of the bank. As a result, net income for the period reached SAR 5.3 billion, up around 4% year-on-year, while return on equity remained strong at 16%, reflecting the resilience of our earnings. Finally, let me touch on the strength of our financial position.
Asset quality remains strong, with NPL ratio improved to 88 basis points, down 25 basis points from a year ago, while the coverage remains robust at 149%, which reflects the quality of our underwriting and the disciplined approach we continue to take toward risk. Our capital position also remains strong, with total capital adequacy ratio of 19.4%. This was supported by ongoing capital planning and strong internal capital generation. Liquidity also remains very comfortable as well. Our SAMA-weighted LDR stood at 81%, and we continue to maintain stronger buffer of high-quality assets. Overall, our financial position remains strong, supported by prudent risk management, a solid capital base, and a continued focus on stability and long-term value creation. Let me now turn to our 2030 strategy and give you a sense of where we are.
As you know, we have introduced our new strategic direction earlier this year, and we have been building momentum in its execution, with good progress made during the first half. The environment around us is changing rapidly. Customer expectations are evolving, digital and AI are accelerating, and the banking sector itself is becoming increasingly competitive. Our strategy is designed to respond directly to that. At a high level, we are focused on scaling retail, strengthening wholesale, embedding AI, and modernizing our technology platform. Our ambition is to become the most innovative bank in the kingdom, and everything we do is anchored around our five strategic pillars, which provides the foundation for how we execute our strategy. The first half of 2026 has demonstrated the strength of Riyad Bank's strategy and our focused execution against it.
We remain confident in delivering our 2030 strategy ambitions and creating sustainable long-term value for our shareholders. With that, I will now hand over to my colleague, Abdullah Al-Oraini, our CFO, to walk you through the financial performance in more details. Abdullah?
Thank you, Nadir. On slide seven, as you can see, the expansions on the balance sheet was driven by increased investments. These investments has been consistently growing in Q1 and Q2, opportunistically building up our investments portfolio in a more appropriate from a balanced reward risk perspective. Loans expanded by 1.2% on a year-to-date basis, or 7% on a year-on-year basis. Those were funded by deposits, customer deposits, which grew by 5% on a year-to-date basis and around 9% on a year-on-year basis. Our non-interest-bearing deposit shares of the total deposits has declined to reach 43.7% as of end of June this year. I think this is also we have seen on the system as a whole, a continued migrations towards interest-bearing deposits.
The operating income growth, as well as continued to derive efficiencies, have sustained our profitability metrics, reflected by a 4% or 3.5% growth in the net income for the period, while return on average equity has recorded 16%, coming from 16.9% similar period of last year. I think it is worth highlighting that there is also a continued growth on the equity capital, which has slightly impacted the return on average equity. Cost-to-income ratio, with our remained focused drive on efficiencies as well as on the expense productivity, has reached to the historical level low of 29.2%. Cost base has grown by 1.1% compared to the similar period of last year. Both cost of risk, as well as the NPL ratios registered 0.4%, as well as 0.88%, respectively.
As highlighted by Nadir, funding and capital and liquidity ratios remains very strong at 16.7% Tier 1 ratio and total CAR of 19.4%. Both LDR, SAMA-weighted LDR and LCR remains at very comfortable level. This is to highlight that the incremental investments of SAR 13 billion, as well as SAR 4.3 billion of loans, has driven the registered assets growth. The loans portfolio, primarily the most of the growth coming or predominantly by the MSME segments, where we are strategically focused on expanding that. The loan mix, in terms of compositions, has remained stable by having 26% SMEs portfolio, 48% the corporate, while mortgages registered 18% and retail non-mortgages 8%, respectively. On slide number nine, this is to show the key movements of the customer deposits. I think it continued to derive the funding for the incremental growth that we have witnessed during the period of the last six months.
Clearly here, the SAR 16.5 billion, which represents 5% growth on a year-to-date basis, were primarily driven by interest-bearing deposits. Both NSFR and the headline LDR have shown improvement. The NSFR recorded 112%, which is 2.8% year-to-date growth, while the headline LDR reached to 108.4%, just slightly below the system level of 109%. As highlighted before, the SAR 21 billion increase in NIBs represents 12% year-to-date growth, while we have witnessed reductions on NIBs on a year-to-date basis by 3%. The net special commission income has witnessed a modest increase, probably by volume growth as well as the repricing activities that we have been embarking on since the second half of last year. But that was partially offset by an increased cost of funding, which has increased on a year-on-year basis by 9%.
I think we remain focused on enhancing our funding mix and further optimize, where possible, all the key components of the funding structure that we have, in line with our funding plan. But more importantly, also, we are continuing to increase our corporate spreads progressively, and this will remain towards the end of the year. This has resulted by 4% increase on net special commission income. I think the lower part of the page reflects the movements of the net special commission income margins, which is relatively stable. We have witnessed a 7- basis- point reduction on our quarterly margin for the second quarter, and that was primarily driven by the cost of fund, including all the Tier 2 Sukuks that we have issued during the second half of the year and the beginning of the year. So, it is all reflected on that one.
So, it has partially diluted our assets yield stabilizations that we reached. I think it is worth noting here that the earning assets as well as the bearing liabilities have been growing on 11%, respectively. We continue to focus on our cross-sell activities as well as the cross products between segments. I think this was very important for us to cater for the reductions of the credit facilities, as well as some other fee incomes that were impacted by: A, the volume reductions compared to the previous period in terms of loan growth; s econd is by the regional situations where we have seen some investment banking activities as well as the brokerage still is lagging behind on a year-to-date basis compared to the previous period. This has resulted in a 2% increase in fee and other income.
I think the key message here that I would like to reiterate that we continue to be focused on the non-funded income in general. We see more stabilizations and decent growth compared to the previous quarters, with the exceptions of Q3, as it was one of the strongest record NFI that we have recorded. I think it is also worth highlighting that we have seen restorations of the trade finance on the second quarter, and particularly in the month of May and June, where we see that has come back to the pre-regional conflict levels. I think we continue to be focused around generations of these kinds of fees on the coming periods, as it is one of the key components and metrics that we look at it in comparison to our operating expenses.
As I highlighted, and Nadir as well, at the beginning of the call, the cost discipline that we have been embarking on over the last two years, we further introduced a few initiatives at the beginning of the year. We will continue to derive a more cost discipline, monitoring very closely our expense productivity while we continue to execute our strategic initiatives that is emanating from our 2030 strategy. Having said that, this, on a year-on-year basis, we have seen a growth of 1% on our cost base, and it is worth highlighting that the main driver of that cost is related to the depreciation, which is linked to our CapEx depreciations plan, as well as the significant investments that we have made in our infrastructures, as well as on other fixed assets.
Quarterly expense, as you can see, from the second quarter of last year, has shown a very stable trend over periods. If we measure it on a quarter-to-quarter of similar quarter last year, it translates to a 3% as a growth rate. Cost-to-income ratios continue to be trending in the right directions, and I think this is something that we continue to work on. Our proactive risk management as well as the assets quality resulted in a continued healthy NPLs in terms of stock as well as in terms of coverage, while we see more stabilization as well on the cost of risk. NPL ratio registered 0.88% for the second quarter. While it is worth highlighting that there has been a movement on the NPL, and these were primarily from the commercial book, and this is scattered around many customers as well.
Impairments for credit losses, it grew 22% year-on-year for the first half. I think it is worth highlighting that the recoveries that we have seen at the first half is relatively lower than what we have recorded last year, but w e are expecting that recovery to gain more tractions in the second half, in line with our practice as well as the progress that we have made in a few accounts. NPL coverage ratio stood at 149% for the period. Putting all of these together, I think the quality earnings that we have registered for the first six months reflects our focus on the quality revenue generations, as well as more optimizing our assets and capital allocations towards our businesses while we continue to focus on our efficiencies during the whole six months of the year.
This has resulted in a year-on-year growth of net operating income before impairments by 5%, which has supported our profitability of 16% of return on average equity and 2% in terms of return on average assets. Capitalizations remains very healthy, and I think, as highlighted by and mentioned by my colleague, Nadir, that the landmark transactions of our public AT1 Sukuk that we have issued yesterday and successfully completed across a wide range of investors will boost our Tier 1 capital ratios in the second half, which is already at the 16.7% level. The capital formations is trending in the right directions.
We see that the movements in terms of regulatory capital registered 8% growth in year-to-date basis, while capital demand or capital consumptions in the form of risk-weighted assets has grown by 6% on a year-on-year basis, while regulatory capital has grown by 22% on a year-to-year basis, r eflecting near-term market dynamics while we stay and remain on track for our long-term goals. As we mentioned in our last earnings call, that we are due to revise our guidance after we reflected on the Q2 and we see some restorations in terms of operating environment conditions, in terms of also some credit demand on our pipeline as well. So, we are revising our loans to be mid to high single digit for the remaining part of the year. Net special commission income, also in the same tandem, mid to high single digit. Cost-to-income ratios is unchanged, below 30%, and we are tracking very well against that.
Our return on equity, we have slightly revised that guidance on the back of our capital formations in the form of equity to be above 15.75%. Our cost of risk has slightly been increased by 5 basis points in terms of both ranges, and this is just the reflections of some micro- model- related components that we expect that will drive some additional expected credit losses as per our estimations. Tier 1 capital ratios has been revised up on the back of the successful Sukuk of SAR 10 billion to be above 17.5%. I think it is very important to reiterate that our 2030 medium-term strategic aspirations in terms of ROE remains to be unchanged at high teens. With that, I will hand back to my colleague, Ryan.
Back to you operator to open the Q&A session.
Thank you. As a reminder, if you would like to ask a question on today's call, please use the raise hand icon towards the bottom of your WebEx window. We will take our first question from Naresh Bilandani from Jefferies. Naresh, please unmute and ask your question.
Yes. Hi, thank you very much. Hi Nadir, and Abdul, a nd Ryan. Thank you for the presentation. Two questions, please. The first one was on the new sizable AT1 issuance that you have done. Would you please be able to share some thoughts on the deployment of this new SAR 10 billion that you have raised? If you can please share what are the immediate opportunities where we can see this being deployed, that would be helpful. Also, while we are on AT1, there is about SAR 9.4 billion of perps that are up for a call next year. Do you intend to replace those with perps or other structures? Because including this new AT1 costs, this new AT1 costs are starting to now weigh quite a lot on the EPS.
So, any color there on how you are thinking about the perps that are up for the call next year, that would be super helpful. The second one is on Stage 2 loans. Could you please share the source of the 38% increase that we have seen in the Stage 2 loans in the first half of this year, and how do you see the movements as we go into the second half? Do you anticipate seeing some of these go into Stage 3? Is that the reason why, if I saw right, you have increased your cost of risk guidance for the year, or if you can please offer some more color there, that would be extremely helpful. Thank you so much.
Thank you so much. Regarding the Sukuk issuance, first of all, we are very proud of the successful reception of the Sukuk. It was one of the largest ever in the Saudi market. The demand was huge and the original plan was to issue around SAR 5 billion. But given the demand, we increased SAR 10 billion to support not just our short term, but the midterm growth plan on loan, whether it is corporate loan or on retail. Obviously, given all the major projects, and the pipeline that we have, I think it will be deployed over the next five years. I do not know if you want to add anything on that.
Yes, absolutely. That's where we will put, Nadir. Also, Naresh, I think, maybe you have mentioned this in the past, it might be worth mentioning it again. When we developed our 2030 strategy, as an integral part of that strategy was the business plan. The capital and funding plan is an integral part of that business plan. Yes, I think the deployments will be done over time. I think this is something that strengthen the capital structure and the bank position. I think we have a three-year rolling capital plan, always being updated consistently. I think any due, or a call dates, et cetera, it is an integral part of that plan. I think we will continue to optimize our balance sheet structure. We will continue to optimize our capital structure. Is this upsizing is for a specific person?
No, I think it's very clearly, my colleague Nadir has clearly mentioned that due to the strong demand as well as due to the successful perceptions of the instruments, I think we would like to position the bank more in the medium term. This is to answer the first part of the question. The second question is on staging. If you recall in the last earnings call, I did mention that the migrations took place of two to three customers. One of them is something that we have done on a proactive basis. We will deal with these accounts, and we are on top of it. I think the right level of seniority from both the risk and the business are on a consistent and regular basis in terms of the update.
In Q2, there were few accounts also have been migrated, and I think I wouldn't extrapolate asides from an ordinary course of business activities at this stage. Would that be translating into a higher cost of risk in the future? I think, not necessarily, but we will continue on a quarterly basis, look through the whole portfolio and what are the progress made on these accounts. I think everything that has been done so far during the course of the year is in line and as per our internal risk policies. I hope I answered your questions.
Yeah. Abdullah, thank you very much, and also thanks Nadir. Just a very quick follow-up on the new liquidity. Clearly, I'm also focusing a lot more on how should we think of 2026. Is it fair to think that you will use the new liquidity that has been garnered to replace some of the expensive time deposits, so we could see the headline LD ratio move up from your current level in the second half of this year? And, probably, because you've cut your loan guidance, we could see this liquidity continue to be placed in the investment book, which clearly, I see you are adding quite a lot in the first half of this year, especially on the fixed rate side. Is that a fair way to think how we should model the balance sheet for the rest of this year?
To a high extent, yes. We are letting expensive deposits go. Actually, we are not planning, in the future, to issue new bonds. I don't think with this big size, and it's perpetual, don't forget, it has a huge impact on the liquidity and on the capital. So, your assumption is correct.
Okay. Thank you so much. That's clear.
The next question comes from Abdullah Al Buraidi from Emirates. Abdullah, please go ahead. Unmute and ask your question.
Hello, am I audible?
Yes. Hello.
Yeah. This is Abdullah Al Buraidi from Emirates NBD Capital. Thank you very much for the presentation. Congrats for the very great results. Maybe, just a follow-up on the Tier 1 Sukuk. If we look at the capital Tier 1 ratio, as you've mentioned, it is healthy at 16.7% and way above the needed level. If we look at the liquidity situation of the bank, the financing book hasn't grown that much yet. I see that the investment book has grown, but do you see all that Tier 1 mandatory at the current situation for the upcoming five years? I mean, we are raising this amount before the deployment by many years. Do you see that necessary?
Thank you. Let me clarify a few components of the questions. One is, the size of the issuances caters also on the maturities as well as the anticipated calls that we have. It is in line with our expectations. I think we opted to upsize it because of the strong performance of the issuance, as well as, also, in order to anticipate that the financial markets might not be at the best access points in the second half. I think what we have done is basically we've front-loaded some additional issuances that we wanted to do through that issuance, which is, I think, the right thing to do because first, this is the first public debt for us. Second, it's a SAR, so we are not subject to the international market conditions. The third one is the deployments one.
The deployments is a progressive deployment, so that does not mean that we will go aggressive on underwriting. I think the value assets preferences, as well as the quality of businesses that we are anticipating to put in the second half, are already preloaded in the banks in terms of the pipeline. So, we do understand that certain drawdowns is taking place. We do understand in that one. I think the marginal opportunity or the cost here is how we are continuously managing our funding structure. This has been a business as usual for us. We continue to optimize our balance sheet, we continue to optimize our funding mix, as well as the components or the sources of funds. While doing that, that will continue to progress and absorb that issuance.
Absolutely, Abdullah. As you know, we are aligning very closely to the government Vision 2030 project. We have a strong pipeline of major government project in the next five years. So, this is also to support our funding needs.
And maybe one point, we mentioned this in the last call as well as in Q4 call or year-end call, that the operating environment has changed since the last 18 months. We are operating in a high capital demand environment. You are very well aware that the countercyclical buffer of 1% has kicked in in May this year, and that needs to be taken to considerations. So, perhaps, this also has encouraged us to cater for our ambition in terms of how we are growing in the medium term.
Yeah. Thank you very much. That is quite informative. Just a small added question. You have mentioned that the cost of risk guidance has been revised up due to macro variables in the model. Does that mean you do not see any material deterioration on the loan book or even slight deterioration? It is all just because of macro variables, right?
I think material deteriorations, no, we have not seen yet. I think a slight, it depends how we are reading it, but we are reading it more towards it is an ordinary course of business. There is no systematic signals or evidence that there is a formations of problem credit on a specific sector yet.
Just to add, we haven't observed any material impact from a portfolio perspective. Our corporate book is well-diversified and conservatively underwritten. We are always focused on high quality and also sector aligned with the, as I said, national priorities. So, asset quality remains very strong, n o sign of deterioration.
[Non-English content]
The next question comes from Rahul Rajan from Bank of America. Rahul, please go ahead, unmute and ask your question.
Hi. Good evening. A few questions from my side, please. Firstly, is on the deposit side. If you can help us understand the dynamics behind the outflow of non-interest-bearing deposits year-to-date. I mean, we did see an inflow in at the end of first quarter, but I think second quarter has seen a lot more outflow. So, how or what's driven this, number one, and how should we see non-interest-bearing deposits from here? That's one. Secondly, is on the non-funded income side of things. Within that, we have seen that the fee income remains lower than, say, the quarterly run rate of 2025. How should we see fee evolution from here to the rest of 2026, as well as into 2027?
Within that, I think in the non-funded income, there has been a substantial trading gains, both in 1 Q as well as 2 Q, which is much higher than the historical run rate. So, how should we see trading gains from here? That's number two. Finally, is on the entire liquidity front. I think in third quarter so far, the SAIBOR rates have probably trended a bit up compared to the average levels of 2 Q. Is this something that you're seeing even at Riyad Bank in terms of liquidity? Does this mean that, as credit growth comes back to the system, we might actually see an environment where the liquidity pressures start coming back up on deposits? Thank you.
Thank you. I will start with your final question regarding liquidity. We are actually, in the second quarter, we are seeing a gradual improvement on liquidity condition the system. You can see it on the funding cost over the benchmark. It has moderated a lot. Deposit in the system grew around 7%, while loan growth is around 3.7%. So, it is actually doubled for the first time in many quarters. The average weekly reverse repo with SAMA in Q2 has increased SAR 59 billion, which a number that we haven't seen for a while. Overall, however, liquidity conditions remain tighter, if you look at from a historical average. It is improving, and we expect liquidity to basically normalize through the second half of 2026. Obviously, provided that market condition remain broadly unchanged.
Thank you. Thank you, Rahul. With respect to the first questions on deposits, in particular, and how we are seeing this. If you recall, we clearly highlighted that in Q1 we had transitory deposits in the form of NIBs, and that has diluted the position of the bank. I think carving out that impact in Q2, we saw some marginal decrease on our NIBs. But the growth was mainly in the IBs. I think this is consistent also on the system-wide measure. If you look into the year-to-date basis, time deposits has grown by 17% for the first half. Non-interest-bearing deposits or demand deposits only grew by 1%. So, that continued to put a consistent pressures on the systems and in the cost of funding for us as well.
However, I think the thing that I would like to reiterate that we are, as a bank, focused on growing our cheaper funding sources. This includes NIBs, this includes also saving deposits. We are introducing also in the short term, some few products. So that is the aim, but it is an area of focus and, hopefully, in the second half we would see some positive progress. On the second question, the non-funded income or as we explain it as fee and other income. I think Riyad Bank has been consistently, over the past years, showing a very strong generations of this kind of non-interest income. I think this reflects our business model, our focus on cross-sell, and I think if we recall back in Q1 or in year-end 2023, I think that was part of the strategic priorities that we have focused on in increasing the cross-sells within businesses as well as our intersegments.
What you see is a reflection of that. Yes, our strong loan growth in the first half of 2025 has enabled us to register a very strong fee income generations related to that one. But we were able to offset that through the treasury solutions, and particularly on offering to our customers and new-to-bank customers, hedging solutions for their exposures. I think we have captured very decent transactions on that one, and this was a result of a very close collaborations and coordinations between treasury and the corporate and the SME segments in particular. I think that's what you see in here, the increase of SAR 309 million investments- related income. It is purely customer business. This is not a capital gain, and it is not a.
Mainly coming from derivatives and the cross-sell.
And the cross-sell. Exactly. I think the key message here that I wanted to highlight, we remained focused on our financial performance measurements around the non-funded income in a very big way. Hopefully, this answers your question.
Yes, absolutely. Thank you.
You're welcome.
The next question comes from Murad Ansari from GTN Middle East. Murad, please go ahead. Your line can be opened.
Yes. [Non-English content] Thank you for the presentation and the opportunity to ask a question. Firstly, on circling back on capital now. So, SAR 10 billion, that roughly adds about, if I'm not wrong, about close to about 200 basis points to your Tier 1 capital. I'm just trying to connect it with your loan growth guidance and first half delivery. It's not a huge number to achieve to get to the mid-single digit growth for the year, but it's almost like three times the rate at which you've expanded the book in the first half. So, does that increase in capital, even the mid-single digit guidance, kind of suggest that you're seeing a pickup in growth for the second half?
Does that, I mean, that 100 basis points that you've kind of increased in Tier 1 capital, are you seeing a strong pickup starting from second half going into next year as well? I understand that this is more of a five-year kind of strategy on the capital side, but there's 100 basis points of extra Tier 1 capital that you've added on. Just wanted to get a sense and also tying it up with the off-balance sheet commitments. I mean, those at least show that they've declined on LGs, LCs, commitment to extend credit. All those numbers have come off from year-end base. That's kind of suggesting a slowdown in the first half. Just wanted to get how to connect all of these together in terms of growth over the next, let's say, second half and also into 2027. The second question I had was on the deposit mix.
Yes, those transitory deposits have kind of left, and we are seeing system-wide kind of shift in CASA and term deposits. Is this more driven by the banks trying to lock in liquidity over the next, let us say, six months? Or is it more a customer preference to lock in higher rates at this point in time that is driving that shift from CASA to term deposits? Yeah, that is it. Thank you.
Thank you, Murad. I will try to decompose your questions into a flow of responses that connects with each other. First, I think in the last earning call, we clearly highlighted that we do expect second half to be in a better way, because I think a lot of more clearer path post on the regional conflict is expected, and we are started to see that as well. Also, more importantly, as I mentioned before, that we are seeing healthy credit demands as well. The pipelines that we have been consistently focusing on is also telling us the same. So, we do expect a pickup in the second half. I think this is something that we anticipated, and we have also been prepared for. The 1% increase on your rough estimates, I think whatever the percentage is, I think this is not only for 2026.
We are not rushing to deploy that capital. I think we will deploy it in a very efficient as well as in a profitable manner. I think this is also we are in the third quarter now, and we will start the budgeting process that for 2027, and we are starting to our building towards that one. So, I think the deployment comes in a very timely manner. Also, the growth, the revisions of the loans, is based on our anticipation of drawdowns as well as the underwriting that is going to happen during the course of the second half of the year. So, putting all of these together, okay, it is very important that we do have the right capacity and capabilities that we capitalize on.
I would like also to bring your attentions that the first half and the second half, or the full 2025 year, was one of the strongest growth that we registered in terms of our loan book, where we grew the book by 16.5%. So, we are talking from a higher base effect here. So, I think this is something that is useful to consider. In terms of the deposits and the migrations, et cetera, I think if we look into the data on the statistical bulletin that is being published on a monthly basis, that you see that the non-private sector consolidated deposits continue to shift towards the time deposits. Also, I think the elevated level of the SAIBOR compared to the 18 months ago, I think this has also gone.
I think, also, some other factors that impacting, I am talking about Riyad Bank here, we consider we do have our ALM metrics, we do have our regulatory metrics, we do have our key ratios that we need to maintain at all times. I think adding all of that resulted into that situations. I think we are not seeing significant shift from the beginning of the year of the customers, but I think you will always have customers' preferences changes over time. I think we have seen that in our order book of our perpetual Sukuk, where we have seen a very diverse range of investors, whether this is a retail or a private or institutional investors or funds. I think that tells us that they are trying to lock in some interest for quite a period of time.
Thank you. Just a follow-up on dividends. Your interim dividend for the first half is roughly in line with what your regular run rate on dividends has been. Last year, we did see a slight reduction in your payout ratio for the second half. With these capital actions that you have taken, improvement in capital ratios that have come across over the last six, 12 months, are we comfortable on the capital ratio? How should we think about now the dividend policy going into the second half of the year?
I think it is very important to reiterate that our dividend guiding principles have not changed. I think for the interim dividend of 2026 has been, in terms of amount, in line with what we have paid last year for the similar period. I think the payout ratio is slightly below, so it translated to around 48% compared to a 50% or 51% compared to the similar period of last year. I think we have not changed any components of our dividend guiding principles that we have communicated to the market. I think what we have done in the first half is a clear reflections of our restorations from the second half of last year. I think it is very important to reiterate the message that we have been consistently giving to the market participants after the year-end 2025.
We, the board of directors, as well as the general assembly, has approved the bonus shares transactions that the board of directors recommended to it. I think that has resulted in inching up our common equity Tier 1 to a 14% level, as it is clearly mentioned. I think aside from that, we have been consistent in terms of our focus on our business growth and the originations on the assets allocations, on the capital efficient allocations as well, in a more balanced way on a risk-adjusted basis.
Our final question today comes from Chiro Ghosh from SICO. Chiro, please go ahead. Over to you to ask a question.
Yeah. Hi. Hello. First, this is Chiro Ghosh from SICO, Bahrain. Yeah. Most of the questions have been answered, I mean, quite comprehensibly. Just one sense I want to get is that most banks are looking to get into the SME sector, which used to be the forte of Riyad Bank. I mean, they're quite strong there. Are you witnessing additional competition there and margin pressure on that aspect? Yeah.
Thank you very much. Competition has increased, particularly from large banks, which obviously, reflects the attractiveness and the growth potential of the SME segment. But despite that, Riyad Bank continues to maintain its leadership position. Our market share is around 25% of the market based on the latest disclosed data for Q1. So, our competitive advantage is supported by our longstanding experience in the segment dedicated to the SME centers, a broad distribution network, continuing investment in digital origination, trying to always improve the customer experience, and faster turnaround times. I believe the market is large enough for all the banks, but I think, we will continue our leadership position.
Okay. That's all from my side. Thank you.
Thank you.
This concludes today's Q&A session. If you do have any further questions, please direct them to the Riyad Bank investor relations team. I'll now hand back to the CEO for closing remarks.
Thank you. Thank you all for taking the time to join us today. We appreciate your continued interest in Riyad Bank and looking forward to updating you in the coming quarters. Goodbye.
This concludes today's call. Thank you very much for your attendance. You may now disconnect.