Good afternoon and good morning, good evening, everyone. I hope everyone is doing well. My name is Shabbir Malik. On behalf of EFG Hermes, I welcome you to BSF's first quarter results call. The management will do a presentation. Then we'll open the floor for question- and- answers. I will now hand it over to Yasminah Abbas, the Head of Investor Relations. Yasminah, over to you.
Thank you. Good afternoon and welcome to BSF Q1 2024 earnings call. I would like to thank you, Shabbir and team, for hosting this call. Speaking first is BSF CEO, Bader Alsalloom. He will go over the earnings summary for the quarter, as well as an overview of the strategy execution, and share with us a couple of exciting updates. He then is followed by the CFO, Ramzy Darwish, for a more detailed walkthrough of the financial performance. With that, I'll hand over to Bader.
Thank you, Yasminah. Good afternoon and greetings to all for joining us on this call. We appreciate your time as we discuss our Q1 2024 performance over the next hour. I'm pleased to share this quarter's results with you, which reflect a return back to normal following one-off impacts last quarter. Our results are also in line with our expectations and guidance. We're especially excited by two strategic milestones, which we have achieved year- to- date. The completion of phase II of our new core banking system, which happened in the first quarter. Most recently, albeit not in the first quarter, important to highlight the launch of our new brand. We'll delve into them shortly. First, let me take you through highlights of our financial performance.
Our net income for the first quarter of 2024 saw a notable increase of 7% to SAR 1.15 billion, with return on equity reaching 11.1%. This growth was primarily driven by a decrease in our cost of risk, while operating income grew 1% from non-funded income growth. Growth in our loan book was also strong, up by 13% year- on- year, supported by both commercial and consumer sectors. Customer deposits increased by 4% year- on- year, reaching SAR 174.8 billion, driven by increased interest-bearing deposits, although non-interest-bearing deposits increased on a substantial basis. Regarding asset quality, we saw significant improvements with our NPL ratio decreasing to 0.94%, reflecting write-offs in our commercial book. The NPL coverage increased to 155%.
Our capital position remains robust, with 18.4% Tier 1 ratio. Our liquidity metrics are comfortably within regulatory limits, further strengthening our financial resilience. Let's move on to our strategic updates. Overall, our strategy execution continues to show rapid enhancement with an overall progress rate now at 66% compared to 62% last quarter. In wholesale banking, we've taken significant steps, achieving a completion rate of 78%. We've expanded onboarding and lending to government entities, established a tracker for multinational corporate referrals, launched three supply chain financing products, and activated government agreements. Moving to personal banking, progress stands at 46% compared to 40% last quarter. Notable achievements include the pilot launch of Lombard lending to our upper affluent segment and its leads management dashboard.
We've also piloted Elite Plus, our new upper affluent segment, and further progressed the partnership with wholesale banking, enhancing cross-sell opportunities and customer relationships. Private banking has seen impressive progress, reaching 86% completion rate. This includes, among others, finalizing a proposal for the advisory development program. We posted several VIP experience events to enhance client engagement. Moving on to the next slide. JB, previously Saudi Fransi Leasing, has also made significant achievements with an 86% completion rate. We've introduced JB's new digital personal loan offering and achieved encouraging growth in this product. We've also defined a new credit card proposition and further refined JB's strategy and focus areas for this year and beyond. At BSF Capital, progress stands at 43%.
Key highlights include identifying their wealthtech partner, redesigning the onboarding and KYC process, automating internal reporting, and starting the repositioning of the real estate advisory unit. We're also optimistic about the pipeline and real estate funds. Let's talk about key enablers on our next slide. Looking at our technology infrastructure upgrade. Starting with ICP, our new integrated corporate portal. Phase I backend testing is in progress and is scheduled for rollout during this year. For phase II, functional specifications are signed off and technical specifications are in progress. With omnichannel, our new retail and private banking platform, we concluded several rounds of testing and piloting in 2023 and early 2024 and are expecting to go to market in mid-May. On core banking system and rebranding efforts. I'll cover these in more detail in the following slides.
When it comes to CBS, our core banking system, this is a significant project replacing 30 fragmented systems and consolidating them into one unified system. Over the past few years, we have worked on deploying various releases of CBS, each more complex than the earlier one. Our first release was issued in December 2020, followed by subsequent releases. Major progress was made in 2023. We saw the completion of phase II testing for user acceptance, rolled out a family and friends technical pilot program, and completed design, user training, and change management activities. The hard work of 2023 enabled CBS Release 2 to go live in February 2024. This marked a pivotal milestone as we introduced critical functionalities such as corporate and retail accounts, Islamic and conventional recurring deposits, and a comprehensive overhaul of our branch channel.
Looking ahead, we expect the rollout of Release 3 during 2025, which will further enhance our capabilities. Our CBS project journey is testament to the dedication and hard work of our team, and I'm very happy and proud that the majority of the journey has already been completed successfully. Moving on to the next slide. CBS is not just a technical upgrade. It's a strategic initiative that underpins our digital transformation that will help us realize our ambitions. CBS enables us to enhance our product offering and services, predict client needs, and streamline our operations using the latest innovations and advanced analytics. The benefits of CBS are many. From an enhanced customer experience with full digitalization and 24/7 self-service capabilities to improved efficiency and reduced IT workload, CBS is revolutionizing how we serve our customers and manage our operations.
CBS also serves as a key enabler for our strategic ambition to position ourselves as a leader in customer experience. Already, we've realized significant benefits from CBS implementation, including future-proofing our tech landscape and improving efficiency. Just one of many examples, we've witnessed an impressive 80% increase in straight-through processing rates for SADAD transactions. This is one of many examples. CBS has also streamlined our credit card and personal loan processes, making them one to two times faster and more efficient than before. Now let's switch to another important achievement, our new branding, which came to life recently, a few days ago. Albeit that this is more of a most recent development, lots of work was actually done in Q1 and worth mentioning here. As part of our strategic evolution, Banque Saudi Fransi has undergone a rebranding, emerging as BSF.
The new brand was officially launched on the 2nd of May for BSF employees and senior management. We have also completed rebranding physical and digital assets, including over 70 branches, 300 ATMs, six offices, and several e-channels and applications. With our heritage, BSF inherited equitable values, trust, and sophistication in our DNA. Our acronym, BSF, symbolizes the next generation of banking, making a pivotal shift in our industry positioning. Our brand strategy is founded on shared beliefs and active purpose and a compelling value proposition. Why the change to the rebranding of BSF? It's not just about refreshing our image. It's about strategic enablement for future growth. We aim for leadership and profitability within focus market segments, our new brand gives us a competitive advantage in achieving this goal.
We've responded to external changes by adapting to shifts in the economic landscape and the evolution of the banking sector. Increasing customer expectations and technical advancements have also influenced our decision to rebrand, ensuring we remain relevant and competitive in a rapidly changing environment. Overall, our new brand embodies our commitment to innovation, customers, and sustainability. It's a symbol of our readiness to embrace change and drive a positive impact in the banking industry and beyond. Finally, I'd like to touch upon our ESG developments and some achievements in that area. ESG is part of BSF's DNA. It's deeply rooted in our bank strategy and processes. Allow me to remind you of our five key pillars. First, exemplifying the highest ethical and governance standards. Second, accelerating sustainable economic growth. Third, creating a thriving workplace. Fourth, serving our clients. Last but not least, protecting our communities.
Moving on to the next slide, I'd like to highlight the progress BSF has made in boosting our ESG ratings. In 2023, our ESG risk rating score from Sustainalytics stood at 28.4. In the first quarter of 2024, we've significantly improved, achieving a score of 20.9, surpassing all Saudi banks as of March 2024. Additionally, I'm pleased to announce that BSF has attained the highest score in the S&P Global ESG rating among Saudi banks for 2023. This achievement underscores our dedication to sustainable and responsible practices. We acknowledge that sustainability is a journey, and this success motivates us to enhance our ESG practices further. In conclusion, BSF is now well-positioned to achieve its three core strategic goals: to become a top player in our target segments, focus on profitability and returns, and last but not least, deliver outstanding customer experience.
These goals will drive our progress towards becoming one of the top three Saudi banks in our chosen market segments by 2025, and with aspirations to lead in private banking. Now I'll hand it over to our CFO, Ramzy Darwish, who will delve into the financial performance. Ramzy, the floor is yours.
Thank you, Bader. Good afternoon, everyone. Thank you for joining us today. Overall, we are pleased to report that our financial performance in the first quarter is back to normal. Free from the one-offs that we discussed in Q4 of last year. Our net income for the quarter increased due to the normalization of cost of risk. The decline in margin year-on-year was counterbalanced by continued asset growth sustained in the first quarter this year as well. Additionally, asset quality metrics are also showing improvement. We'll delve into the details as we progress through the presentation, starting with an overview of the balance sheet on slide 14. Total assets increased by 6% during the first quarter, primarily fueled by growth in lending and investments.
The investment book itself increased by 9% year- to- date from high quality liquid assets to manage interest rate risk, while also capturing higher yields. You'll note on the right-hand top part of the slide, a chart that indicates the constituents of this change, and the majority coming from the loans and advances with SAR 6 billion growth or 3% contributing the majority of the growth. On the bottom right-hand part of the slide, the liabilities overall had indicated a 7% growth, with deposits growing 2%, mainly from non-interest bearing deposits and increased wholesale funding, both short-term through the interbank and FI market, and also from the long-term senior debt with debt securities and term loans. On the next slide, we highlight loans and advances, which grew 3% year- to- date or 13% year-on-year.
This is coming from both commercial, which grew 3%, as well as consumer growth of 5%. The commercial activity highlighted in the bottom left part of the slide reflects healthy corporate activity as commerce, contracting, and services showed growth. On the bottom right-hand part of the slide with consumer loans, we indicate faster than market growth with particular strength in auto loans at 14%, personal finance at 6%, and mortgages at 3% growth. It also be noted that a significant portion of this growth in auto loans and personal financing, more specifically, comes from JB, where early success of the rebrand and strategy is gaining momentum. On the next slide, in terms of deposits, we had shown 2% year-to-date growth in deposits, primarily coming from the corporate segment. We had non-interest bearing deposit growth of 3% for the quarter, again, mainly coming from the corporate segment.
Interest bearing deposits had a growth of 1% as we continue to try and optimize cost and efficiency. As a result, in the bottom left-hand part of the slide, this dynamic resulted in stabilization and slight improvement in the share of non-interest bearing deposits to total deposits, which now stand at 47.6%. On the next slide, we discuss net income, which grew 7% year-on-year from lower impairment charges and increased 39% relative to the fourth quarter of last year. The bottom table and chart provide color on where the main drivers were as net interest income was stable. A significant normalization and impairment more than offset the increase in operating expenses. You will note normalization to the trend on non-interest income and operating expenses from the one-offs highlighted in the previous quarter.
Let's dive deeper into the composition of P&L, starting with net interest income on page 18. Net interest income was broadly stable, as highlighted in the top right part of the slide, where expansion on interest earning assets was offset by rising interest expense from hedging and cost of funds. The bottom two charts indicate this in a different light, with 9% quarter-on-quarter growth in interest income offset by 16% growth in interest expense. As a result, on slide 19, we highlight the net interest margin, which trended lower compared to last year, mainly on the back of rising cost of funds, as shown in the top charts. Nevertheless, this has broadly stabilized with net interest margins at 319 basis points versus 322 basis points last quarter.
There's also shown a different light in the bottom left chart, where in the customer deposit cost more than offsets increasing trends on the asset side. It's also worth noting that interest rate hedging had a relatively minor impact on margin with a 13 basis points impact year-over-year, and one basis point on a sequential basis. Let's delve into NIM sensitivity. As mentioned last quarter, the bank sensitivity significantly declined during 2023, and now all else equal is quite limited and is assessed at ±3 basis points for every 100 basis points change in benchmark rates.
It could be noted that this is calculated based on balance sheet and off balance sheet items. We provide more color on both of these on the right-hand side of the charts, where although cash flow hedges remain at the same notional amount, when added to the on balance sheet sensitivity, again, provides a view on more limited net interest margin sensitivity. On the next slide, we highlight non-interest income, where we had a 5% year-over-year growth and 28% growth compared to last quarter, given one-offs discussed in the trading line in Q4. On the top right chart, you will note the main driver coming from trading income, reflecting more BAU volatility and market opportunities.
The bottom right chart also shows the improvement driven by brokerage, asset management, and increased trade finance income, with cards fees lower, mainly due to the Al Fursan campaign, which provided a boost in the first quarter of last year. On the next slide, in terms of operating expenses, we had an increase of 9% year-on-year, mainly on the back of employee-related costs, reflecting increased headcount and the correlated pay to profitability. As a result, at the bottom left parts of the slide, the charts show cost to income rising slightly to 33.2%. However, we maintain a positive outlook on this, with the strategic investments expected to reap benefits in operational efficiency as well as frontline benefits such as customer experience, time to market, and others. Additionally, cost to average interest earning assets declined to 1.28% due to faster growth of earning assets.
Sequentially, you will note a 9% drop in expenses, again attributed to one-offs and non-recurring transformation related expenses that had occurred in the fourth quarter last year, which we had discussed. On the next slide, when we dive into the cost of risk, the quality of the portfolio remains healthy, with cost of risk normalizing to 60 basis points from higher levels last year. The impairment charge highlighted in the bottom charts show a significant 32% reduction from last year and 33% reduction from the last quarter, reflecting normalization absent the legacy account that was dealt with over the last two years. The quality is further reflected on page 24 in the non-performing loan ratio and the coverage ratios, with NPLs coming down below 1% and coverage ratios improving to 155%. This is due to many factors, including growth in lending, conservative provisioning, and write-offs over the past 12 months.
You'll note stage-wise, coverage improved on stage 3 loans specifically, whereas coverage for stage 1 and stage 2 loans remained broadly the same. On slide 25, we highlight the liquidity position, which continues to remain robust and comfortably meeting regulatory requirements. The bank continues to opportunistically tap the debt capital markets to diversify and extend the liability profile. We executed a $700 million public Sukuk in the first quarter, in addition to a $250 million term loan facility reflecting the solid appetite available for the bank. The two charts reflect the still robust position with LCR at 166% and the net stable funding ratio at 116%. Lastly, on capital, we experienced a slight reduction driven by RWA growth, but still reflecting more than adequate capital ratios with the CET1 ratio at 16.2%, the Tier 1 ratio at 18.4%, and overall total CAR at 19%.
To conclude, a solid start to the year, which brings us to the guidance, where on loans and advances, we experienced 3.4% growth year- to- date, and the guidance having been at low double digits remains unchanged. We continue to view that the robust activity in the corporate segment will drive the majority of this loan growth for the year. On net interest margin at 319 basis points remains in line with the guidance between 310 and 330 basis points. This is again subject to a change in deposit mix, but also the growth in margins overall. On cost of risk at 60 basis points remains within guidance at the lower end of 60- 70 basis points, and we continue to believe that the bank will be able to achieve these levels or even better. On cost to income, the ratio at 33.2% versus 32%.
Again, expectations for limited cost growth with enhanced income growth expected to drive this below 32% by the close of the year. On return on equity at 11.1%, again, within guidance of 11%-13%, and we expect to continue to remain within these levels. Finally, on the core equity Tier 1 ratio, 16.2%, slightly below the 17%-18% guidance. We will continue to monitor and manage this throughout the course of the year, but expectations as of now remain unchanged for the full year. With that, we bring a close to the financial highlights section. We will pass it on to the operator for Q&A.
Thank you very much, Ramzy, for the presentation. Also, Bader, thank you very much for your comments. We now open the floor for Q&A. If you would like to ask a question, please raise your hand, or you can also post your question in the Q&A box. We have a couple of hands raised. I will start off with Nida Iqbal. Nida, your line should be open. Please go ahead.
Please go ahead.
Thank you very much for the presentation. I have two questions. Firstly, on the cost of funding, and the funding dynamics this quarter. I saw that term deposit shares were down quarter-on-quarter. Do you think we're at the peak in terms of term deposit share, and where do you see cost of funding evolving from here? My second question is on the asset growth and the loan growth this quarter. I think the consumer loan growth outperformed corporate loan growth this quarter, is really interesting. If you can get some color around that in terms of what your expectations are for the next few quarters.
I'm sorry, can you repeat the second question? It wasn't very clear.
My second question is about growth. Consumer loans outperformed corporate loan growth this quarter. I just wanted to get color around your expectations about the remaining quarters. Do you expect consumer loan growth to remain strong the way we've seen in the quarters? The cost of funds. Thank you.
I wasn't able to get the second one, but maybe you can start with this first one, and then maybe she can try again. The first one was around cost of funds.
Thanks, Shabbir. Hi, this is Zuhair. I'm the treasurer. With regards to our cost of funding, it reflects the strategic positioning for the anticipated growth in credit. We have recently onboarded a relatively more substantial medium-term liability through DCM and loan borrowing compared to our peers. This proactive approach would ensure that our funding mix is optimized for upcoming credit growth opportunities. Obviously, this will allow us to capture a significant portion of asset growth going forward. We've also implemented several liability-focused initiatives aimed to optimize costs. As of today, we stood at 47% NIBs. However, we remain focusing on other borrowings, specifically in wholesale funding, and this will continue putting some pressure on cost of funding. On the next question.
We were able to gather that it's about loan growth. Maybe, Nida, you want to just go over the question one more time?
Nida, your line is open. Please go ahead.
Hi. Thank you very much. I hope you can hear me very well now. My second question, like you said.
Sorry, Nida. I think your voice is still breaking.
Can you type your question in the Q&A box?
In the question box.
Sure. Thank you.
Thank you. We'll move to our next question. This is from Rahul. Rahul, your line should be open. Please go ahead.
Hello?
Yes, please go ahead.
Hi. Thanks for the presentation and taking my questions. I have three questions basically. The first one is on NPL and cost of risk. We've seen some decent decline in absolute level of NPLs for Banque Saudi Fransi over the last several quarters now. Would you say that the majority of the legacy account cleanup that you've been doing now done, or you think there is more to come? Just building on that, how do you see the normalized cost of risk level for the bank has changed, through this cleanup? Is 60 basis points the new normal for the bank now after all the cleanup, or you think it can go lower or probably higher? That's my first question. The second one is on the margin trajectory. We did see cost of funds go up and a slight pressure on margins sequentially, in 1Q .
How should we think about margin, over the next couple of quarters as interest rates remain high for longer and there's no new cut? I'm assuming the hedges will continue to be slightly negative, as we head into the next few quarters. Overall it would be great to understand how you're thinking about margins over the next couple of quarters. My last and final question is on lending volume, lending growth. We saw pretty decent loan growth coming in the first Q. If you could please help us understand how your pipeline looks for 2Q and 3Q . That would be very useful. Thank you.
Thank you, Rahul, for the question. To begin with the first on the NPL and cost of risk. I think the first part of that question is whether the majority of the legacy positions are done and dusted with. I think the short answer is yes, the majority would be completed. I think when we look at the cost of risk through the cycle for corporate lending in general, we do expect somewhere between 60- 70 basis points, sort of in line with our guidance.
Again, through the cycle. In any given year, it could range slightly higher or slightly lower than that, depending on recoveries. I think that's an area where we continue to focus on, not only this year, but in general, to make sure that for the loans that have d efaulted in the past, that there is some level of recovery that we can exercise and gather from that.
I would say compared to last year, when we had budgeted for some significant recoveries, this year, we had not done the same. The cost of risk is excluding a lot of these potential positive surprises. Then on the margin question, just to highlight, I think the impact that we had seen last quarter, given some of the deposit mix shift, a lot of that still does impact into the first quarter. I would say going forward, we would expect more normalization and stabilization there. I would not suspect cost of funding to see a significant increase, compared to what we saw in Q4 or Q1 of this year, without a requisite change on the asset side.
Given where we stand now in terms of interest rate risk positioning, we would view it as being, again, broadly stable, and agnostic to where rates move going forward. Subject to the growth of the balance sheet overall, depending on where it's coming from, whether it's interest-bearing or non-interest-bearing deposits, this does play a role. I would suspect, again, if we continue to maintain the current level of deposit mix, we should not see a significant shift on the overall net interest margin.
I'll take the third question, regarding the lending growth for the remainder of the year. Our pipeline continues to expand and is a robust pipeline. Key drivers when it comes to the pipeline, for the remainder of the year, when it comes to achieving our guidance, when it comes to loan growth, includes the conversion of our existing business pipeline, to actual exposures. We are also leveraging on existing clients when it comes to trade and supply chain financing. We continue to increase our participation on giga and mega projects. We continue to increase our focus when it comes to multinational corporates, MSMEs, and also FIs to expand our corporate lending business.
To answer your question, we continue to have a robust pipeline for the remainder of the year, and we do expect the loan growth, more specifically when it comes to our corporate book, to continue throughout the year.
Thank you. I'll now move to the next question. Naresh, your line is open. Please go ahead. Yes, go ahead.
Okay, perfect. Thank you very much. It's Naresh Bilandani from JP Morgan. Just two questions, please. Please bear with me, these might be a bit broad-based, so any insights there would be helpful. First, we've recently seen an improvement in the mix of funding between non-interest bearing and time deposits at the system level, as we can deduce from the SAMA data. While the results of BSF, and probably for the other banks, don't show that any of these benefits translated positively on the funding costs, can you please throw some light if you have seen any structural change in the liquidity dynamics at the system level in the recent months? If you can expect that some of these benefits of the shifts in the funding that we've seen in the first quarter eventually trickle down as benefits in Q2 for the funding costs?
Any thoughts from you there would be super helpful. That's the first question. My second question is that the credit volumes for BSF and all the other peer banks in the system have been quite strong in Q1. Would you please be able to throw some light on the underlying driver for the same? I know you did throw some light on the previous question whether the momentum could continue at the same pace. I just want to get some firm clarification from you if the momentum continues at the same robust pace as we go into the second quarter also. I think more generally, the recent media headlines have been indicating rationalization of some of the large projects that are ongoing in the country. Do you reckon this affects the medium-term growth plans for the bank too in any form? Thank you.
I'll take the first question. With regards to the mix of funding components, we have seen an improvement across the sector. However, some of which of the demand deposit can really come from call accounts, which are remunerated demand deposits. It's not necessarily coming at free money, but could be coming at a cost. In our instance, we did see an improvement in our current account to total deposits. However, we have seen also substantial increase in our wholesale funding, which had contributed to our cost of funding. We expect this to be maintained at current levels, as the CFO had mentioned that our NIM guidelines have not changed. We've also seen quite some pressure on corporate margins, which had contributed towards that slight slump in our NIM. Going forward, we do not expect any major substantial change in costs.
I'll take the second question, regarding loan growth, credit volumes, and mainly when it comes to the momentum for the remainder of the year. We do see that the momentum is increasing when it comes to credit demand, especially on the corporate side, on the back of what I just previously mentioned, mainly on these giga and mega projects. When it comes to The publicly announced re-rationalization that the government is currently conducting. We, at BSF at least, do not expect this to dampen any of our growth plans for the remainder of the year, given, of course, the massive investment required for this and banking, or more specifically, local banking, will play a smaller role in this.
We do not actually expect this to impact it, nor have we seen it actually impact or dampen any of the credit demand, especially on the back of these giga and mega projects. On that, we do expect the momentum to continue throughout the year, even with this re-rationalization of projects.
Thank you, Bader. That's clear. Zuhair, if I can please just have one follow-up question. You mentioned that some of the current accounts at the system level are not necessarily free, and there's an element of remuneration on those accounts. Would you please be able to clarify that comment? Because that was not very clear, if I understood that right.
Demand deposit does consist of several categories, including saving accounts and call accounts, and these are remunerated based on an agreement or bilateral agreement with certain customers. These are not necessarily coming basically at free money. Those are demand deposits but could potentially be remunerated, and those can incur costs on banks. They are categorized as demand deposits. However, they're actually part of the interest paid liabilities of banks.
Okay. Zuhair, maybe I'll just send you an email on this one for some follow-up questions on this one. Thank you very much for your responses. I appreciate it.
Thank you. We'll now move to the next question. Aibek, your line should be open. Aibek, can you hear us?
Yes, I can.
Please go ahead.
Can you hear me?
Yes, we can.
Excellent. Thank you. Well, thank you for the conference call, and all your answers so far. I had, I would say, three questions. The first one is your NIM sensitivity. You showed one slide where you discussed the margin sensitivity to 100 basis points change in interest rates. Can you also comment on what happens to the margin if rates fall by between 25- 75 basis points? I know we have a lot of hedges, but do these hedges kick in as early as we have a 25 basis points rate cut, or do they actually become effective from the time when cumulative rate cuts 100 basis points and above? That's my first question. Second, can you talk about the liquidity release through potential mortgage securitization? I think quite a few banks are now considering securitizing mortgages with the international investors rather than with the Saudi Refinance Company.
How important is that liquidity release through mortgage securitization for Banque Saudi Fransi? That's my second question. Thirdly, regulatory credit risk reserve. We know that Central Bank was planning to introduce this regulatory credit risk reserve ahead of the pandemic, the plans were delayed. Where are we now in terms of the introduction of this regulatory risk reserves, and can you give us some color? Is there any particular formulaic approach as to how these reserves would be calculated?
Thank you, Aibek, for the questions. Maybe I'll begin with the NIM sensitivity. I think the question was specific on the interest rate hedges that we do put on. Typically, this would follow whatever the market standard is, and typically in Saudi, it would be against the three or six-month SAIBOR. It would not kick in immediately as soon as there is a cut. It would kick in in line with either three or six months, depending on when the reset date is there. These would typically also be trying to match as best as possible the loan repricing as well. It would, I think, in terms of impact, be the same, whether it's 25 basis points or 100 basis points in how much it feeds through. If there's 25 basis points, it would automatically go through.
It's not a knock-in type level where you have to reach 100 basis points for it to start changing the rate that's received. On the second question, in terms of securitization, I think in general, when we look at this, there's two obvious benefits from a liquidity and capital perspective. Given our position, especially on the mortgage side, is still relatively low compared to other banks, albeit growing, I think, positively so far this quarter. It's not an immediate concern from our perspective, given a very healthy liquidity and capital position to look at that. We may entertain the idea subject to sort of the profitability on the back of it, whether we can generate a higher ROE. At the current stance, there's no immediate need to look at this. Finally, on the question on the regulatory risk reserve. You're right.
There was some discussion on this in the past with the regulator. I don't think we're in a position to indicate w here this is right now, it's been discussed amongst the banks in draft form, the implementation date and when and how it's executed, we don't have color that we can share.
Thank you, Ramzy. I'll now move to the next question. Olga, your line should be open now.
First question is on your ROE targets for this year, 11%, 13%. If we look beyond this year, which instruments do you see to unlock extra profitability? I hear that you work hard on digitalization and your products. Maybe can we translate these initiatives into financials, how this can play out for you in the next several years? This is my first question. My second question is again, about liquidity. We noticed this pickup of deposits from GRE source in March. Can you comment on GRE deposits in March for the banking sector, this is judged by some numbers. Can you make any comments on this? Have you seen anything unusual in the banking sector in March, why this did not impact you as a bank?
Third, can we maybe compare the cost of wholesale funding with the cost of demand deposits now for Banque Saudi Fransi? Thank you.
Thank you for the questions. I'll begin with the first one just on return on equity. I think there's many items that we're trying to target to work on ROE improvement overall. Part of it is, I think, the cost side. This includes cost optimization and efficiency. When we look at the cost of risk, overall, this has been an area where we've tried as much as possible to clean up over the last few years so that it's no longer a weight on the bank going forward. I'd say from the revenue side of the equation, we're really trying to target non-interest income, and all the constituents really that feed into that from fees across the entire business segment.
Asset management and brokerage with the investment banking arm, looking at fees overall in terms of cross-sell with the different areas between wholesale banking, treasury, and the products that are provided there to enhance the ROE on existing business as much as possible. I think the funded side of the business is fairly clear in terms of the RWA allocation. Unless margins change substantially, it's really not going to make a significant difference. Lastly, I would say the cost of funding overall, we've seen it already on the non-interest bearing deposits, plays quite a big impact and role in ROE, not only on a client basis, but all the way through to the bank level. On the liquidity front, yes, sure, we have seen some increase on demand deposits.
Again, back to the previous question, we've also seen significant increase in time deposits across the banking sector. This obviously continues to put some pressure on costs. For BSF, again, we have increased our wholesale funding. Our wholesale funding is typically where our bonds are trading within the market in terms of costs. Just to maybe shed light, we have printed a $700 million in Q1 at U.S. Treasuries plus 105 basis points. We've also printed a few private placements, a private placement in the seven-year, which comes at around the 155 against SOFR. These are typically cost of medium-term liability being raised on the books. There are another component on margins, again, is the compression in credit spreads as we continue seeing competition when it comes to our lending activity.
Fantastic. Thank you. Can I check on the last one? When you receive wholesale funding in dollars, do you lend out in dollars or do you make cross-currency swap? If you make a cross-currency swap, what's the cost of swap for you now?
Generating dollars is typically as part of our diversifying our sources of funding. We are SAR funded mainly in terms of liability. On the dollar front, in terms of deployment, it is quite limited on the lending side. We are quite active on the cross-currency or the FX swap market, converting dollars into Saudi Riyal, and we do utilize those Saudi Riyal generated from FX activity into lending our corporate customer. At the moment, the costs are exactly similar to spreads between the SAIBOR and the SOFR curve. There is no arbitrage. Generating Saudi Riyal using FX market is quite efficient and would generate similar economics.
Perfect. Thank you so much.
Thank you. We have a couple of questions in the text box. This one is from Eranjen. What sort of asset yields are you generating from auto loans? Does it improve the average loan book yield?
Okay. For that one, without giving specifics on the exact yields, I think it is important to differentiate between floating rate and fixed rate loans. Fixed rate typically is going to be these personal finance loans, including auto. Auto loan yields would be in the range of 5 %+, and in terms of net interest margin, would be somewhere around 200-250 basis points. It does improve, but when you aggregate it in the context of the entire bank's gross yield and net interest margins, it would have a negative impact on margin, but a positive impact on net income.
Another question from Ibrahim. What's the impact of launching the identity with the new logo on the profits of BSF in the future?
The question was on the future potential benefits?
Yes. I guess maybe you can also touch on the cost if you can disclose the cost of this marketing spend or the cost of the launching of the new BSF logo.
Well, on the cost of the relaunching, it's worth mentioning that this is two years in the making. Investment or cost was actually spread out throughout the last two years or so. There will be a cost impact for this year, I could say that most of it was actually impacted 2023 and 2022 number, financials. When it comes to the benefit, of course, the impact of this and the benefit of this, as I mentioned, we are investing in our brand. We are repositioning ourselves in specific market segments, we see that this investment in our brand is more of a long-term investment in line with our strategy.
Thank you. Maybe one question from my side. If I look at the SAIBOR in first quarter versus the fourth quarter, they're pretty similar. Has there been any changes in loan spreads this quarter versus the previous one? Because in the results of some of the other banks we've seen, I've seen at least, a decrease in asset yield quarter-on-quarter. Any thoughts on loan spreads? Have they tightened as the competition increased, which led to this tightness of spreads?
Well, when it comes to the rate environment, it has prompted BSF to take more of a selective and cautious stand in lending, which has entailed preference to more, of course, lucrative deals and more financially sound corporate customers. This stance has been at the cost of offering reduced spreads due to stiff competition and taking into consideration, of course, the credit profile of these clients.
Got it. Maybe one more question. In terms of comprehensive income, it's a bit lower compared to your overall net profit. Anything worth highlighting on that front?
The part of this, I think that would be most impacted in the first quarter is rising interest rates and the resulting mark to market that it would have on anything that is fair valued. That would include the investments that are fair valued throughout the comprehensive income and also the hedges that are in place. These would not hit income at any one point in time unless sold. It would be going through the P&L over time until the maturity of either the investment or the interest rate hedge and would get to zero by the end of its life.
The investment book, which is classified as OCI, is there any hedging in place for market changes in interest rates or maybe changes in credit spreads? Maybe there have been increase in credit spreads in the first quarter.
We do have some of our, let's say, AFS book are hedged against interest rates, and this is part of our interest rate risk management. However, when you look at credit spreads, we actually have seen some tightening in credit spreads in global markets in Q1. I would say this is more attributed towards a higher interest rate environment in end of March, and this is basically reflecting that.
Thanks very much. We have one more question. We read about foreign banks. This is from Aditya Modi. We read about foreign banks increasing their presence in the Kingdom. Would you like to comment on any material impact on competition from them, particularly in project financing? Which sector do you reckon would they focus on? Any color on that would be useful. Very helpful. Thank you.
Maybe I can begin with that one. I think we're welcome to have additional counterparts, A, to be dealing with, but also I think, when they do enter any new market, typically it has been at the higher quality, high-end part of the segment, which may have to start lower spreads. At that level of the market, maybe we're not as keen on getting too involved. I don't see it as necessarily direct competition with BSF specifically. At the same time, if it does introduce additional liquidity into the system, we are all for it. I think that's it from our side.
Thank you, Ramzy. We don't have any further questions in the chat box. I don't see any further hand raised as well. Would you like to make any concluding remarks before we close the call? Yasminah, any concluding remarks or should I end the call now?
No, thank you very much. Just like to thank everyone again for your time today, and we look forward to the next earning comments quarter. Thank you very much.
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Okay.
Bye for now.