Well, greetings everyone. This is Nauman Khan. On behalf of SNB Capital, I would like to welcome you to a conference call with BSF management regarding the Q3 2025 earnings results of the bank. I will hand over to Yasminah Abbas, Head of Investor Relations at BSF, to introduce the speakers and take the presentation forward. Yasmin, if you can take the presentation forward. BSF management, if you can unmute yourself.
Hello, can you hear us now?
Yes, Yasmin, we can hear now. If you can start off. Yeah, please. Thank you.
Okay. Good afternoon, everyone, and welcome to BSF's Q3 2025 earnings call. Let me start by thanking you, Nauman, and the SNB Capital team for hosting us today. Kicking off the session will be BSF CEO, Bader AlSalloom, who will walk us through the earnings summary and give a strategy update. He is then followed by CSFO Ramzy Darwish, who will offer a deeper dive into the financial performance. We are also joined by Zuhair Mardam, our CTIO, who will be available to answer questions once we open the floor for Q&A. I'll hand over the mic to you, Bader. Thank you.
Thank you, Yasmin. Good afternoon, everyone. It's a pleasure to have you with us today, and I'm pleased to present our results for the first nine months of 2025. BSF's performance for the first nine months of the year has been strong, reflecting the continued strength of our strategy and the resilience of our operating model. Despite the challenging and competitive environment, the bank's strategy continues to deliver a solid financial performance characterized by solid revenue generation, improved operational efficiency, and healthy asset quality. Let me start by walking you through the key financial highlights for the quarter. We saw loan growth of 7% year-on-year. The commercial portfolio grew by 5%, reflecting our selective and disciplined approach to credit underwriting in an increasingly competitive lending market. The consumer loan portfolio grew by 19%, reflecting sustained demand and our continued strategic focus on retail and affluent lending.
On the funding side, customer deposits declined 4% year-on-year, largely due to a 6% reduction in interest-bearing balances, a result of our deliberate efforts to optimize our funding mix. We have also proactively diversified our funding base through active debt capital market issuances across tenors and seniority. This has reduced our dependency on traditional deposit funding while strengthening the bank's long-term funding profile. On the investment front, we delivered 13% year-on-year growth, successfully capturing attractive yields while actively managing interest rate risk. Our prudent asset allocation and effective hedging strategies contributed to a 2 basis point year-on-year improvement in net interest margin, bringing it to 3.06%. While there was a decline of 17 basis points in NIM, this was primarily driven by rising costs of funds in line with broader market trends.
Overall, the strong top-line performance, along with positive jaws and improved cost of risk, translated into a 19% year-on-year growth in net income. Our disciplined approach to credit risk management continues to pay off, with the cost of risk improving by 12 basis points year-on-year to 0.44%, while the NPL ratio edged up by 17 basis points to 0.99%, below 1%. Our strong coverage levels of 174.5% demonstrate the prudent provisioning we maintain. Capital strength remains a cornerstone of our balance sheets, with a tier one ratio at a healthy 19.6%. Liquidity also remains solid, as our liquidity coverage ratio stood at 160%, comfortably above regulatory thresholds. With that, let me give you an update on our strategy. As we near the completion of our 2021 - 2025 strategy cycle, I'm pleased to report that we've successfully completed nearly 90% of our strategic initiatives.
Over these years, BSF has truly transformed. As today, we have a solid foundation, modern infrastructure, a digital first model, and improved operations. These efforts have enabled us to improve profitability since 2021, as our ROE increased by over 200 basis points to 10.9%; m aintained resilience in NIM, which has gone up by 2 basis points to 3.1%; e nhanced efficiency as our cost to income ratio improved by 1.6% to 32.8%; o f course, strengthening our loan book quality as our NPL declined by over 150 basis points to below 1% at 0.99%; and u pholding healthy capital levels and diversifying our funding resources. With the successful conclusion of the five-year strategic journey at the end of this year, the bank is now ready to enter into the next phase of our strategic journey towards 2030.
While the full details of our 2030 strategy will be unveiled in the first half of 2026, the overarching focus will be clear: sustainable and profitable growth that drives stronger return on equity and creates long-term shareholder value. Until then, you can expect to see continued momentum as we leverage technology to increase efficiency and agility, deepen client engagement, and maintain balance sheet strength. With that, I'll now hand it over to Ramzy, who will take you through the financial performance in more detail. Over to you, Ramzy.
Thank you, Bader, and good day to all. I really appreciate you joining us today. As we wrap up the third quarter of 2025, I'm genuinely pleased with the progress we're making. It's been a year of navigating shifting economic conditions, staying disciplined on execution, and also pushing forward on our long-term strategy. That's exactly what you see in the results. Net income grew 19% year-over-year. That performance didn't come from just one area. It reflects really healthy operating income across businesses, tighter cost management, and a continued improvement on the risk side. In short, we're seeing the benefits of the decisions we've been making quarter after quarter. What I'm especially proud of is what we're doing all of this while continuing the technology transformation and while keeping our eyes on the future.
We're laying the foundation for the next phase of our journey towards 2030, focusing on higher returns on equity, building leadership in our priority growth areas, and creating sustainable value for our customers, our people, and of course, our shareholders. With that big picture in mind, let's dive into the details, opening with slide seven. We'll start with the balance sheet. Our total assets increased by 7% year-to-date, a clear sign that business activity continues to expand. That growth has been driven primarily by a 6% growth in loans, supported by an 8% uplift in our investment portfolio as we continue to deploy capital in a balanced and disciplined manner. On the funding side, total liabilities increased 7% year-to-date, reflecting the steps we've taken to support growth while strengthening our funding mix.
This was primarily from a SAR 20.6 billion increase in debt instruments and term loans following successful issuances throughout the year. Notably, we raised a $1 billion tier two capital in the third quarter as part of our medium-term notes program, alongside placements of certificates of deposit and bonds. This reflects our ongoing efforts to diversify funding sources, optimize the maturity profile, and maintain our presence as a regular issuer in the market. Shareholders' equity also rose 10% year-to-date. This was supported by retained earnings generation and the restatement of an equity position through reserves. This was further supported by the issuance of $650 million in additional tier one capital during the previous quarters, partly offset by dividend payments. This positions us for growth and to account for additional capital requirements going into next year. On the next slide eight, we turn to the loan book.
We continue to see healthy and well-balanced growth. Year-to-date, total loans are up by 6%, with both our consumer and commercial portfolios contributing roughly SAR 6 billion each to that expansion. That balanced performance tells us we're supporting economic activity across key areas while continuing to deepen relationships with individual customers. Starting on the commercial side, lending grew 3% year-to-date and 2% on a sequential basis. Part of the changes in the sectors reflect genuine business momentum, where we've seen good demand, for example, in areas like services or utilities, while others have moderated a bit as projects mature or as payments come through. That said, a portion of the shifts is also due to updating the categorization. For example, when a contracting project reaches completion, its exposure naturally transitions into a different category.
What might look like a decline in one area and a jump in another is, in certain cases, just a reclassification in line with internal and external mapping. Overall, the underlying portfolio dynamics remain quite stable and there's no structural change in our risk appetite or sector focus. Really more a reflection of the timing and reclassification effects rather than any fundamental shifts. We did see some contraction in contracting and commerce during this period. We believe this is largely tied to shifts in business sentiment and timing of project execution. We will continue to monitor these trends closely. On the consumer side, performance was even stronger as total consumer lending delivered a robust 17% growth or 7% on a sequential basis.
Mortgages grew 20% and personal loans were up 14%, highlighting our increased focus on retail, particularly in the affluent and JV. The impact of our earlier strategic investments in the omni-channel platform, digital capabilities, and the Saudi Pro League sponsorship. Also worth noting, we had a significant pickup of 33% in credit card loans fueled by targeted marketing initiatives that brought new customers to the bank and deepened wallet share with existing clients. Overall, this quarter really shows the payoff from our continued investment in digital capabilities, improved customer experience, critical marketing, and a sharper focus on the consumer. On the next slide nine for deposits. Overall, deposits have remained broadly stable year-to-date and in fact increased by 2% on a sequential basis.
What we're seeing is a shift in mix, healthy inflows from retail and the consumer, offsetting softer corporate balances during that period. That reflects both seasonality and the natural ebb and flow of business liquidity needs. One bright spot is non-interest bearing deposits, which grew 3% year-to-date, supported by strong inflows late in the third quarter. On a spot basis, these balances now represent 47.8% of total deposits, a level that contributes positively to funding resilience. That said, the average balances were lower through much of the quarter, which did weigh on net interest margin during the third quarter. Interest-bearing deposits declined 2% year-to-date and were stable quarter-on-quarter. This is very much aligned with how we're managing the balance sheet. Our focus has been on optimizing funding costs, given a lower need for incremental liquidity as we pursue selective, disciplined asset growth.
We've also taken advantage of alternative funding channels, including term borrowing and capital market issuances, to extend and diversify the maturity profile, providing flexibility and efficiency to support the business. In short, we are proactively managing deposits to support performance today while preserving headroom to continue funding growth as opportunities accelerate. With a balanced balance sheet and strong foundations in place, let's move into the P&L to look at how this translated into earnings in the third quarter, where net income for the nine months of 2025 rose 19% year-on-year, that was really supported by higher operating income, positive operating leverage, and reduced impairments. Good momentum overall on that front. If we look at the quarter-on-quarter, we did see a decline of 4%.
That's mainly due to some margin pressure due to higher cost of funds and lower fee and commission income during the period. I'll unpack both of those in a bit more detail later. On the top line, operating income was up 12% year-on-year during the first nine months. That's double-digit growth in both our net interest income and non-interest income, which is encouraging and shows the strength of our diversified revenue base. In terms of returns, the return on equity improved by 39 basis points year-on-year to 10.9%, reflecting the stronger underlying profitability even after absorbing a higher equity base, which was impacted by our additional tier one issuance earlier and the revaluation of FVOCI investments. If we strip out the revaluation impact, ROE would have been even stronger at 11.03% and better than what the reported numbers suggest.
Let's turn next to the slide on net interest income, which was up by 11% year-on-year, mainly supported by an 11% increase in average interest earning assets and a 1 basis point margin expansion. If we look at the nine-month period as a whole, interest income rose by 7%, whereas funding costs saw only a modest 3% increase. We continue to see positive leverage there, reflecting a good balance between asset growth and cost discipline. Focusing on the quarter itself, interest income increased 4% QoQ, whereas interest expense starting at a smaller base rose by about 11%. That's largely driven by higher average interest bearing balances during the quarter, which resulted in a slight decline in net interest income sequentially. On the next slide, for net interest margin, NIM improved by 1 basis point year-on-year, which reflects good balance overall.
The improvement came mainly from lower deposit funding costs and the benefit of our cash flow hedges, though this was partly offset by lower loan yields and higher funding costs on debt securities as well as term loans. On a quarterly basis, the net interest margin declined by 17 basis points, primarily from higher funding costs both for deposits and debt securities as we witnessed a shift in the mix in terms of average balances. On slide 13, with regards to rate sensitivity, our interest rate sensitivity remains limited with a 100 basis point rate shift estimated to impact NIMs by approximately 4 basis points, slightly down from the last quarter. The notional value of cash flow hedge swaps also decreased 10% year-to-date as we continue to manage interest rate sensitivity via the cash flow hedge and alternative, such as the investment book and retail lending.
On the next slide 14, for non-interest income, this was up 16% year-on-year. This was mainly driven by strong investment income, where we took advantage of market volatility to capture gains while also working to improve overall yield. This growth was supported by strong FX income and the one-off gain on sale of an asset in the previous quarter for around SAR 30 million. This is included in the other non-interest income in the top right of the charts. Finally, fee and commission incomes saw steady growth of 3% year-on-year on account of improved trade finance and asset management fees. These were partly offset by a dip in other fees because of an accounting reclassification of penalty fees to net interest income compared to the prior year.
On a quarterly basis, non-interest income declined 9% quarter-over-quarter, mainly from higher card expenses on new campaign launches and seasonally lower trade finance activities. Moving on to operating expenses on slide 15. For the nine months of 2025, operating expenses increased 6% year-over-year, mainly from increased G&A expenses. This was mostly for IT maintenance, professional services, as well as residual branding expenses. Depreciation also contributed to cost growth, increasing by 16% during the period as many projects and initiatives came online. On a quarterly basis, OpEx declined by 2% QoQ, mainly due to increased cost discipline along with a one-off staff-related provision reversal during the quarter. On the next slide. Sorry.
Also, in terms of overall cost growth, which was contained below revenue growth, the cost-to-income ratio improved 165 basis points year-on-year to reach 32.8% for the nine months of the year. The cost to average interest earning assets fell to 1.22%, supported by a 10% expansion in average interest earning assets compared with a 6% increase in expenses. Now to the next slide. On the risk side, specifically for impairment charges, impairments decreased by 9% year-on-year for the nine months of 2025, primarily due to lower commercial charges, which benefited from a net recovery in the third quarter, along with two exposures that migrated to NPL during the quarter. This improvement outweighed higher consumer impairments linked to recent loan growth and additional provisions for off-balance sheet exposures classified under investments and other, that arose due to business-as-usual variability in trade finance facility utilization.
Consequently, the cost of risk narrowed to 44 basis points for the nine months, marking a 12 basis point improvement from the previous year. This highlights the selective origination strategy that balances volume and risk-adjusted returns and ensures portfolio quality remains within the bank's overall risk appetite. Moving to slide 17. The NPL ratio increased to 99 basis points in the third quarter due to an uptick in commercial NPL balances. However, it remains within our expectations. For NPL coverage, this is at 174.5%, remaining healthy with the sequential drop arising from the write-offs as well as the NPLs movement we highlighted. This also impacted stage two provisioning, which slightly decreased QoQ to 9.1%, while stage one and stage three provision coverage remained broadly stable. Moving next to liquidity on slide 18.
Liquidity is remaining robust with the liquidity coverage ratio at 160% and the net stable funding ratio at 120%. You will see the regulatory loan-to-deposit ratio has improved to 77.5%, primarily due to issuance of longer dated debt securities, and this provides a substantial cushion for future growth. The simple loan-to-deposit ratio remains in the 115% range. Moving next to capital. Our capital position remains strong, with the capital adequacy ratio rising to 21.9% following the recent tier two issuance. The tier one ratio and CET1 ratio stood at 19.6% and 15.7%, respectively, reflecting healthy levels despite a sequential decline driven by risk-weighted asset growth and dividend distributions.
It is also worth highlighting that we recently announced a riyal-denominated AT1 Sukuk issuance to offer existing investors the opportunity to maintain their current positions as we prepare for the upcoming call of SAR 5 billion additional tier one capital in November. It is expected to be at a smaller scale than the existing SAR 5 billion. Finally, moving on to guidance on slide 20. As we look ahead, we are making a few adjustments to our full- year 2025 outlook. First, we are revising our loan growth guidance from high- single digits to mid- single digits. This reflects our more selective approach to lending, as well as the elevated repayment levels anticipated towards the year-end. Second, we are adjusting our net interest income margin guidance to a range of 3%-3.05%, down around 10 basis points from our earlier range of 3.05%-3.15%.
This adjustment reflects higher than anticipated pressures on funding costs amid tightened liquidity conditions and broader market trends. We are also revising our cost of risk down by 5 basis points-10 basis points, currently at 45 basis points or going to a 45 basis points-50 basis points range. All other guidance remains unchanged. To conclude, as we reflect on our performance over the past nine months, the results demonstrate strong growth and profitability, operational efficiencies, and strategic execution. We remain focused on sustaining this momentum through the remainder of the year and going into 2026. We now will move on and welcome your questions. Thank you.
Thank you, management, for the detailed feedback. We now open the floor for the Q&A session. If you wish to ask a question, please click on the Raise Hand icon on your webcast or alternatively, you can type in your questions on the Q&A chat box as well. We will wait for a moment for the questions to line up. Our first question is coming from the line of Mr. Chiro Ghosh. Chiro, if you can unmute yourself locally and introduce the company.
Questions. A couple of questions from my side. First one is from the margin perspective. I see that the sensitivity has significantly come off, basically 1 basis point for roughly a 25 basis point cut. I want to get a sense that why did the NIM contract so much in this quarter, and just quarter-on- quarter side of it. I understand the funding cost went up, but if you can give some more color on that and in the same line, how is the hedging product helping you in that context? That's the first one. The second question is, sorry, I think I've missed a little bit. When I see the numbers, your coverage, the stage three coverage has broadly remained flattish and overall has slightly come off, and NPL ratio has also gone up a little bit.
In that backdrop, if your cost of risk is coming down as well as your guidance for cost of risk is coming down, if you can give some more clarity on that side of it? Yeah, these are my two questions.
Yeah, hi. I'll probably take the first couple of questions on NIM and margin. We have revised our NIM guidance to a range of 3%-3.05%, 10 basis points lower. This is basically a reflection of tighter liquidity and higher funding cost across the sector. The change reflects the tighter liquidity and higher funding cost that we have witnessed recently. Our margin defense will be around the CASA ratio, trying to maintain a 45%-50% CASA ratio. Should this maintain, we expect that to be well achieved throughout the quarter. On the sensitivity to interest rates, we maintain neutrality.
We are 4 basis points sensitive to 100 basis point shock to interest rate, driven by several tools, mainly on balance sheet and off balance sheet items, which is this natural on balance sheet coming from retail, personal finance, and mortgages, of which it continues to grow. The cash flow hedge program outstanding, as well as the investment book, of which we have maintained an increase in duration to slightly above four years in terms of interest rate risk. This should really contribute to protecting our books from a drop in interest rates.
Maybe, I'll add to that point. Maybe more direct to the question. When we look at the interest rate sensitivity from a market perspective, it is still relatively insensitive. We've been highlighting throughout the course of the last year that it's also dependent on the balance sheet mix.
As you're looking at the deposit mix for Q3, it may not give the complete picture because it's a spot-to-spot. There it looks like there's an increase in the CASA ratio. When we look at the average balance during the third quarter, it was actually a slight decline.
Okay.
This is really what led to, I'd say, the balance sheet mix impacting the net interest margin. We did see it recover since then, so the balance has shifted again in favor of non-interest-bearing deposits toward the end of September. It would not be factored in the average, and thus impacting the profitability as a result. Since then, in October, as an example, we've seen it stabilize at a level similar to what it was in the second quarter.
Okay.
For the cost of risk side, maybe I misunderstood the question, but I think it's several moving factors that contribute to this. We did have movement in terms of staging towards stage three, but it would be dependent on the provisions for those names. On top of this, there would be write-offs and recoveries that we would have to be including. For that reason, it looks like, again, nothing significant in terms of change. There was some transition and there would be additional provisions that would've been taken, offset against recoveries, during the quarter.
Clear. That's all from my side.
Thank you.
Thank you.
We'll now be moving on to our next set of questions, which is coming from the line of Mr. Rahul Bajaj. Rahul, if you can unmute yourself locally and introduce your company.
Rahul from Citi. I have few quick questions, actually. The first one is on OpEx. We've seen 6% almost growth, year-over-year for the nine-month period, which is a considerable improvement in terms of growth run rate, which we've seen in 2023, 2024. How should we think about the growth going forward? Is this the mid-single- digit to slightly higher than mid-single- digit run rate something that we should expect BSF to maintain in the near future, or the next few years? Or, you expect cost escalations and cost growth to go back to the double-digit run rate? That's my first question. My second question is on the fee income line. 3Q has seen a sizable drop in the fee and commission income line. I think you mentioned, Ramzy, it was something around lower trade finance fees and some extra card campaigns.
Is it fair to assume that fee income in 4Q and going forward, will return back to the quarterly run rate that we've seen in the first half of the year? The first half of the year average was around SAR 270 million every quarter. This quarter, 3Q was around SAR 212 million, c onsiderably lower than that first half run rate. Is it fair to assume that we go back to that run rate in 4Q and going forward? Or, you think there are areas where there could be further pressure on fee income? That's my second question. My third and final question, if I may please, is on the CASA balances that you mentioned, which came in towards the end of 3Q. How sticky are these balances? Have they since been around, and they've stayed around within the BSF system?
They have gone out in the month of October? Those are my three questions. Thank you.
Thank you, Rahul. I'll go through these one by one. On the OpEx side, I think we've been highlighting for some time that we've been really trying to be more vigilant on the cost side, making sure that it is worthwhile in terms of the investment. In particular, I think the areas on people and technology, we still want to continue to invest in. At the same time, starting to reap some of the benefits from the previous investments we've done, which were quite heavy over the last few years, in particular on the technology transformation. The intention is to continue to be vigilant on that front, focus on positive jaws, and maintain something alongside what we've done in the last quarter. Noting though, that the quarter did have a one-off adjustment to staff expenses, roughly about SAR 20 million.
It's not significant in terms of its overall impact, but we do expect to see this come back in the fourth quarter, as it goes through. We would be targeting somewhere around mid-single digits for cost growth, given what we're targeting on the revenue side. For the fee income in terms of decline, we highlighted on the trade side some seasonality that was witnessed. I think cards was one element that was more an expense than anything else, as we activated quite a few campaigns to attract new business on the card side, where we have been successful in increasing the loan balance amongst other things. We would not expect to see the same sort of investment for fee expense in the fourth quarter. We would see that come back quarter- on- quarter. Just for context, the second quarter card fees was SAR -3 million.
For the third quarter, it was SAR -33 million. This was primarily a result of these campaigns that we had activated. They're now complete, and we don't foresee any significant amount in the fourth quarter. Lastly, I would just highlight on the investment banking side, this would be volatile throughout the year, and we've had good success from BSF Capital t hroughout the year in terms of IPOs and different advisory items.
There was an expectation that we had for some elements to be in the third quarter. These would be pushed into the fourth quarter. We do expect an uplift there as well. Lastly, on the CASA, just to highlight, we did have a decline in the average CASA throughout the quarter. On a spot basis, it did recover very close to the end of the month in September. Since then, we see it having stabilized at that position. It is very similar to what it was towards the end of the second quarter.
Thank you, management. What we will do is we will move on to our next set of questions, which is coming from the line of Ms. Olga. Ms. Olga, if you can unmute yourself locally and introduce the company as well.
I have several. One is again on fee income. You mentioned during your presentation there was some reclassification of fees into net interest income, if I understood it correctly. What was the amount of this reclassification, and do I get it right that without it, net interest margin would fall even more quarter-over-quarter? That is question number one. Second, on your capital, can I ask if you faced an increase in Pillar 2 requirements, and when do they come in force? Generally, zooming out, why do you have to face these increases despite having a very moderate loan growth? Which rationale SAMA provides to you when they communicate to you Pillar 2? Third question is on, again, on net interest margin. I hear your arguments about the cost of funding pressure. Still, can I check?
The cost of funding went up so much quarter-over-quarter. The change in cost ratio was relatively moderate. Average SAIBOR was flattish quarter-over-quarter. What else was happening there? Did you have an increase in interest rates on deposits? Maybe certificates of deposit were expensive for you? Any other factors which were driving cost of funds in the third quarter. Thank you.
Thanks, Olga. Maybe I'll start with the last question on the expensive deposits. The system continues to witness pressure on deposit competition. We have seen an increase in customer deposit. This is reflective, rightly as you mentioned, in the SAIBOR rates, whereby we haven't seen the SAIBOR rates mimicking Fed funds rates as the cutting rate cycle continue. On the other hand, what we've been doing in order to protect marginally our net interest margin is our continuous effort on repricing our loan book. This is an ongoing exercise, but it will take time to fully feed in as we go by through the current cycle.
Hi, Olga. I'll tackle the other two questions. On the reclassification of fees, maybe just to highlight, this wasn't done just in this quarter, so it should not have an impact quarter-on-quarter. It was done from the beginning of the year. We want to make sure we highlight it. This would be something on the penalty fees that would apply now on the net interest income. We moved it towards the earlier part of this year, to accurately reflect within the accounting standards. That total was about SAR 50 million year-to-date for the nine months. On the second question on capital requirements, we recognize, I think we're well capitalized at the current position. Again, the tier one call will adjust that total position, but still give us quite a lot of breathing room in terms of looking forward.
Nevertheless, there are changes this year that have already occurred across the banks, I would assume, particularly on the bilateral capital ratio as a result of the Pillar 2 risks. There has been an increase there. Separately, there will be a countercyclical buffer increase starting in May of next year, and I'd say a smaller, interest rate risk in the banking book adjustment, in January of next year. All these together, alongside with the loan growth aspirations that we have, we do agree it is moderate right now. We don't suspect that this will continue to be the same position going forward. To have that dry powder is an area that we want to focus on instead of having to chase the capital once the opportunity is there. We want to have a bit more dry powder to be able to effectively execute and grow.
Thank you. If I can squeeze in a small additional question. In which sectors did you have an increase in NPL?
Pardon?
In which sectors did you face increase in NPLs?
It was in the contracting sector. There were two names that had transitioned during the quarter.
Thank you.
Thank you, Olga. We'll be moving on to our next set of questions, which is coming from the line of Mr. Rahul Rajan. Rahul, if you can unmute yourself locally and introduce the company before asking the questions. Thank you.
Questions from my end. Firstly, on the deposit side. You do mention that you have invested pretty significantly on the tech side of things, which enables you to get loan growth from retail. Just wondering what's not, or why is that not helping you generate deposits among retail investors? Especially given that in Saudi, probably people are tech-enabled. Why is it that you're getting loan growth from technology related investments but not your deposit growths? That's number one. Secondly, considering from a SAMA LDR perspective, it's probably now amongst the lowest in Saudi, if not the lowest. That should give you sufficient cushion to grow faster. You might want to protect margins, that could be a reason for not growing loans.
Apart from that, is there any other reasons why despite having low SAMA LDRs, you choose to not grow as much, even as much as the market? Thank you.
Okay. I'll start with the first one. Thank you for the question. You're right, there has been a lot of investment on the technology side. Quite a lot on the foundation, and then more recently on the channels and the customer-facing operation side. In terms of the loan growth, I think that has been an area of strength so far this year, albeit coming from a lower base. Nevertheless, I think when we look at deposits, it's not really specific to any one bank but at a sector level, it has been a challenge to see the non-interest bearing deposits in terms of growth. The interest bearing deposits have become quite expensive. I think from that perspective, we've tried to shy away from that competition given the potential impact it has on not only net interest margin, but profitability overall.
We have tried to counter this with repricing on the asset side, starting from last year. Maybe a bit early compared to some of what we hear in the sector. As these cost of funds increase, we do expect other banks to also look at the profitability angle and start to reprice. Opening up at least the avenue or the opportunity to grow at the same pace as others. I'll pass on to my colleague for the loan-to-deposit question.
Yeah, sure. We continue to see some divergence between the SAMA LDR, which basically includes a waiting for longer term liability in the denominator of the loans-to-deposit ratio. If you look at the simple loans-to-deposit ratio, we stood at 116%, which is basically quite diverse from the regulatory one. We have been quite active in raising medium-term liability, and which is reflective in our healthy NSFR ratio at 120%. We expect to remain within these ranges with not much divergence specifically on the simple loans-to-deposit ratio.
Thank you, management. We will now be moving on to our next set of questions, which is coming from the line of Mr. Murad Ansari. Murad, if you can unmute yourself locally, introduce the company. Murad, if you can speak up.
At the same time, we've seen some improvement in asset yields also coming through. BSF has been indicating that they've been a lot more selective, and that kind of explains some of this. But it's also visible across the sector as well. Just wanted to get a sense of, it seems that the push towards better pricing seems to be getting some traction for you and for the rest of the sector as well, if these asset numbers, if we look at that. And I'm just wondering whether this increasing demand on capital, the countercyclical buffers plus the interest rate and banking book stress testing of 275 basis points, the demand that's making on the capital ratios. Is that going to fast-track this push towards better loan pricing? That's one. The second question is, your guidance on loan growth that you provide is down.
Essentially, just a rough calculation suggests that you're expecting sequentially book to be roughly flat in the fourth quarter. How much of that is driven by expectations of corporate repayments, versus the bank becoming a lot more selective in terms of lending? And when you suggest that you're getting selective on lending I also want to maybe add a question on this IRRBB regulations where it adds more pressure or adds more sensitivity when it comes to the mortgage book. Going forward, with these regulations, does that temper with your preference in terms of where you want to grow? In your case, you have decent buffer, but does it influence your decision in terms of preference for growth in mortgages versus corporate? Thank you.
Thank you for your question. I'll actually take the first two questions, then I'll hand it over to my colleague for the third question. Your first question was on asset yields. This is an exercise that we actually started implementing the second half of last year, when it came to repricing our assets. Going into this year, the focus was on origination, shifting towards mid-markets to maintain our portfolio margin and for a more diversified exposure, to capture higher yield opportunities while maintaining relationships, of course, with our larger corporates. There is where the improvement in asset yields is coming from. In addition to the repricing exercise that we started the second half of last year, which continued throughout the year and will continue throughout this year and going into 2026. The origination is also shifting towards mid-market for better quality and to capture higher yields.
That's for the first question. The second question on loan growth guidance and our loan growth guidance and expectations for Q4. We do expect it to be, as you highlighted, to be flattish. To answer your question, it's going to be coming from both. We do expect end of year repayments, especially on the corporate side, in our larger corporates, while at the same time we will continue to originate and selectively new assets. They will offset each other, and we expect them to offset each other, to arrive at a flattish loan growth mainly on the corporate side.
I'll take the interest rate risk in the banking book question with regards to sensitivity. We do realize that the fast growth in mortgages do add on to the interest rate risk. However, we have ample room to grow. The nature of the book is that we're mostly skewed towards corporate or floating rates environment. The fact is that today we are quite neutral or actually 4 basis point benefit in case of 100 basis point drop in rates. We're well set up in terms of hedging capabilities. We can always flip partially some of our fixed rate investments or hedge some of the fixed rate assets or float it, let's say, convert it into floating. We're not too concerned from that respect. Yeah.
I would just add to that in terms of preference on the asset side. We take note of the interest rate risk in the banking book at the portfolio level, so more holistic. We would need to make sure that we allocate capital accordingly or liquidity, the mortgage would demand a higher cost of funding, based on an internal basis. This would potentially limit the margin, as opposed to corporate lending or personal finance. It does vary depending on the timing, depending on the liquidity situation. We would not be looking at the preference coming as a result of interest rate risk in the banking book on a solo basis.
All right. Thank you so much.
Thank you, Murad. We will now be moving on to our next set of question, which is coming from Edmond. Edmond, if you can unmute yourself locally and introduce the company before speaking. Thank you. Edmond, if you can speak up. I guess we have some problem listening to Edmond. For the sake of time, we will be moving on to our next set of questions, which is coming from Mr. Abdullah Alburaidi. Abdullah, if you can unmute yourself locally. Abdullah?
Hello, am I audible?
Yes, Abdullah, we can hear you. Please go ahead.
Just a small follow-up on the guidance. Basically, it's almost a flat for the fourth quarter, and you're talking about pricing better, whatever that will get prepaid. Given the flat guidance, there is no pressure from extra financing and paying on deposit because of the extra financing and expanding the loan book growth. Why the guiding for lower NIM compared to the 3.06% that we are standing at currently? This is for the guidance. A second question, one of the competitors have mentioned that there was further clarification from SAMA regarding the calculation of the operational risk-weighted assets, which reduce the risk-weighted asset density on the operational calculation and enhance their capital ratios. Have you noticed any of such or is it some company specific to that bank? That's it from my side.
Okay, Abdullah, I'll handle the last question first. On the operational risk, we believe this would be specific to the bank. From our side, we can confirm that there is no change, and we're already applying the regulation as had been requested previously. No change since the implementation, I think it was 2023. On the first question, in terms of the net interest margin with flat growth expectation, what we did see is that the quarter net interest margin was at 296 basis points, slightly lower for this specific quarter. It was mainly driven, again, by the balance sheet mix between non-interest-bearing and interest-bearing deposits. Assuming no significant change there, we would be at a similar level. That's why we wanted to at least build out this range that would give us opportunity to grow.
We are cognizant that it is highly dependent on that CASA mix. We want to put this range that we feel comfortable with for that fourth quarter, recognizing that the current position is relatively strong.
Yeah. Pretty informative. Thank you very much, and wishing you all the best.
Thank you, Abdullah.
Thank you. As we approaching our time, the regular time for the call. We'll just be taking the last question, which is coming from the line of [Archan Ariji]. I hope I pronounced your name correctly. Please go ahead. [Aranjan], please if you can go ahead.
Hello? Hello.
Yes, you're audible. Please go ahead.
Yeah. This is [Aranjan] from Derayah . Thank you for the presentation and taking our questions. A couple of questions from my side. The first one is on the repricing. I just want to know whether this repricing that you have been doing, is it only for the new originations or is it being done for the existing balances as well? Also, it will be good to know how much headroom do you see in your clients' cash flows to absorb these higher interest costs that you are trying to pass down to them. Across all your sort of the client tiers, perhaps, maybe it's easier to pass down on the high -net- worth and the top -tier, and whether it's more difficult when it comes to the SME and the lower -tier clients, lower -credit- quality clients. That's the question on the repricing side.
The other question is on the funding. How much of your funding is coming from foreign sources? How much more headroom do you see where you can increase the offshore funding and perhaps whether that could help in bringing down your funding cost? Just also wondering whether by borrowing from abroad, whether you can capture that difference between SOFR and SAIBOR? Also, it will be good to know if you can tell us what sort of the, for your CDs, how cheaper or expensive are these compared with your other sources of borrowing? Those are my questions. Thank you.
Thank you for the questions. I just want maybe before tackling the ones you had highlighted, we did have questions in the chat box, so I want to make sure we tackle that as well. On the first one, in terms of the penalty fees or the reclassification of fees, these had been implemented at the beginning of the year. These would be penalty fees on retail loans that were in the past taken into the fee line. Given it is related to the interest rate loan, we have moved them into net interest income, so they would be on the interest income side of the P&L. The second question, just in terms of interest rate cuts, the forecast that we have from the treasury group is around two cuts for the remainder of the year.
With that, I'll pass it on to tackle your questions to the CEO.
Thank you for your question. Regarding the question on repricing and is it being exercised and is it being implemented on existing or new, it's actually being implemented on new originations. As I mentioned before, with our focus on mid-market, it does allow us for higher pricing. That being said, even on the larger corporates, when it comes to new origination, we are pricing it at a higher level. When it comes to existing facilities, we are selectively repricing some of them when we get the chance. If they're working capital short-term facilities, during annual reviews, that is when we are repricing. However, when it comes to committed lines, medium and long-term loans, we're not repricing those. Given that they are committed lines, and we would not want to disturb those loans.
Maybe I'll tackle the question on foreign funding. As of today, we realize that we've been borrowing in the wholesale market and a lot of this is being placed locally. However, if you look at the nature of these liabilities, they're typically more stable, more diversified in the wholesale market, particularly when it comes to the EMTN Sukuk and the recent capital issuance that we have done, in addition to the private placements that we continue to engage with. On the CD program, the CD is quite diversified. In fact, it's a form of raising foreign deposits from various sources. In terms of geography, it's quite diversified between Asia and Europe. This basically tackles another investor base, particularly high-net-worth individuals, asset managers, and money market funds.
In terms of net foreign assets, which has been a focus of research recently, we currently running the balance sheet at around - 6%. We do have certain disciplines on how much we want to borrow externally and deploy locally when it comes to our programs or our funding accessibility vis-à-vis core customer deposits.
Thank you, management. With this, we will close the Q&A session as we have already crossed our designated time. I will hand it back now to the CEO for his closing remarks.
Thank you again for joining us today and for your continued engagement. Before signing off, I want to emphasize that these results, the progress we've made and the momentum we've built are a testament to the talent and commitment of our teams and the trust of our customers and stakeholders. Thank you very much again for your time, and we look forward to the next earnings call. Thank you.
SNB Capital would like to thank BSF management for taking the time to conduct this call. We would also like to thank all the participants for attending. We wish you all a very pleasant day. You may all disconnect now. Thank you.