Good afternoon, everyone, and good morning to those joining us from the U.S. This is Mehmet Sevim from JP Morgan. Thank you for being with us. It's our pleasure to host Alinma Bank management this quarter as they walk through their second quarter results and take your questions. With that, I'll hand over to Arwa Alshehri, Head of Investor Relations, to start us off. Arwa, please go ahead.
Thank you, Mehmet, and thank you JP Morgan for hosting this call. Hello, everyone. Good day and thank you for joining us today for Alinma's earnings call for the second quarter of 2026. We will begin today with our MD and CEO, Abdullah AlKhalifa, who will be providing an overview of the bank's financial highlights, followed by the 2030 strategy recap and key achievements, including with the initiatives that have been progressed for this year. After that, our CFO will give you a detailed presentation for the financial performance and ending with the guidance for the year. We will make sure to have proper time for Q&A with our Deputy CEO covering retail, digital, and private, Saleh AlZumaie, and our Chief Corporate Officer, Jameel AlHamdan, will be answering your questions along with our CFO and CEO. I'll hand it over to you, Professor, to begin.
Thank you, Arwa. Welcome, everyone. Thank you for allocating the time for our earnings call. I'll start my presentation from slide six, high level financial performance. In Q2, our financing increased by 6% year-to-date. That's in line with our current guidance. Total assets also increased by 6% year-to-date. Our operating income increased by 7%, while our net income increased by 6%. Our NPL is 96 basis points, and our coverage ratio is 176%. Customer deposits have increased faster than loans, 8%. More importantly, CASA increased by 6% year-to-date as a result of faster increase in total assets compared to growth in CASA. Our CASA as percentage of deposit is 47.3%. Cost to income improved to 31.5%. This is the half year, compared to first quarter, Q2 was much better.
Net profit margin decreased by six basis points compared to the same period last year. Our ROE reached 17.8%. On slide eight, a quick reminder of our current 2030 strategy. The main headlines is basically the most customer-centric, most innovative bank underpinned by laser focus on profitability, followed by next page, which is more detailed by business. In retail, one of the pillars we aspire to for primacy for all our customer segments, also innovate with segment specific offering. Delight our customer with memorable customer journey across all channels. In private banking, we want to set up market differentiating value proposition for our customers, offer world-class global and exclusive investment opportunities. In corporate banking, again, the word primacy comes back because that's our target for all our customers. As well as upgrade transaction banking and build best-in-class scalable operating model, leveraging obviously the cutting-edge technologies and AI.
We want to develop intelligent banking platform to drive primacy. We launched beyond banking digital offering through more strategic partnership and enhanced operating model, including monetization, improvements, and same like collaboration with other business units. Treasury wants to expand the options of funding, local and international, as well as grow our FX and other derivatives and shift investments towards better yield income for the bank. The next slide shows you more inspiration, our current strategy. We want to be similar to what we had in our previous strategy. We want to be a leading employer of choice. Number one, basically, and establish the bank as a digital leader by driving innovation, technology, and data. Leading also risk adjustment decisions and pricing, as well as being among the top 5 brands in the country. A market leader in operational excellence driven by digitalization and heavy use of AI.
On next slide 11, shows you some of the achievements so far in Q2. We've completed two AI use cases. One is proactive customer engagement and credit underwriting for retail. We also entered into financing guarantees program under the Environmental Fund. We launched Alinma ALFursan around the recent FIFA World Cup, results in over 100,000 new bank customers being onboarded. We also introduced tailor lending and mortgage program for affluent expats. We also, as maybe mentioned before, we're the third largest in terms of asset under management by fully owned subsidiary. They've experienced significant growth year-on-year, 39% year-on-year as of half year. We also have experienced 28% increase in SME, as well as 23% increase in mid-corporates. We issued SAR 3 billion as well as $500 million AT1 Sukuk.
This is to refinance our current or the previous issuance that we did in 2021, SAR 5 billion that was paid at the beginning of July. We had also 24% year-on-year growth on Treasury swaps, 106% year-on-year growth in the FX forwards. Some of the things that we'll be continuously working on this year, we want to build obviously R&D and innovation hub to drive innovation in the bank. As you know, innovation is one of the main headlines in our current strategy. We want to advance comprehensive customer engagement, develop customer focus use cases, additional use cases, driving hyper-personalized journeys.
We want to continue to build more strategic partnerships with global asset management to develop the region-specific investment opportunity for our customers. We want to develop and roll out client-centric privacy model for target customers. We want to strengthen trade finance through partnership with global corporate banks. We want to develop GenAI and AI-powered app companions to drive more usage of our customers, more engagement by our customers, and more hyper-personalized journeys. With that, I give the floor to the CFO, [audio distortion] for details on the financial performance.
Thank you. A very good afternoon to you all and welcome again to our annual call for the first half this year. As said, they'll be walking you through the details on the financial performance for the first half, then that will be followed by our outlook and the guidance for the remaining of the year. Starting from slide number 14 on the balance sheet trend, we have seen growth of 6% of the total assets. Clearly, this was driven by the financing growth, SAR 14.2 billion for the first half from December, which represents 6%. On the total liabilities, total movement, we have seen a 6% growth, primarily driven by 8% growth in customer deposits.
Also we have seen SAR 2.2 billion growth on our other than customer deposits funding, which is the Sukuk and the certificates of deposit, which we have been active in issuing during the first half of this year. Moving to second slide number 15 on the P&L trend. The overall growth in the net income year-on-year is at 6%. This was driven primarily by 7% growth in total operating income, 6% growth that was offset by 6% growth in operating expenses. We have 9% year-on-year growth on the increase on the impairment. We'll have more details on the expenses and also the income side. The overall operating income composition at the end of June, 82% is in the funded income, 12% is the fees from banking services, and 3% each for investment and dividends and gains on FX income.
On the following slide number 16 on the financing. 2% growth on a sequential basis from Q1. We have seen from December, 4% growth in corporate financing Also 14% growth on the retail financing from December. The lending book composition by end of June. Large corporate and project financing represents 61%. 7% is mid-corporate. We're seeing mid-corporate has taken more size on the pie from the base of SAR 248 billion overall lending book. SME remains 5%. Mortgage book represents 13% Also 14% for other retail products for consumer financing, which includes Also the credit cards Also auto lease. On the following slide, which is slide 17 on the deposits. The overall growth in customers deposits is 8% from December. This was driven by time deposits growth of 10%. We have seen CASA growth 6%.
In fact, the growth in time deposits being higher than the growth that we have seen in CASA in the first six months as diluted the CASA as a percentage of total deposits, as you can see in the graph in the center page, CASA's percentage total deposits in Q1 was 49.5%, got diluted by end of June being 47.3%. On the following slide, which is slide number 18 on the funded income from investments and financing. We have seen a growth in sequential basis from Q1 is 4%. The growth year- on- year is 7% from financing, Also the funded income from investments is 9% growth year- on- year. In the bottom of the slide, you can see the movements on the net profit margin.
3 basis points contraction on investment yield. Also financing yield contracted 25 basis points, which was offset by the reduction in cost of funding rate by 20-21 basis points. The overall contraction for the six months year-on-year is 6 basis points. Moving from where we were in Q1, 3.47%, only 1 basis point by end of June, where the net profit margin is 3.46%. On the next slide number 19 on the non-funded income. From what we have seen in the first quarter where there was a drop, 26% on the non-yield, we started to see slight improvement on a sequential basis where the growth from Q1 was 8%. If we look at the movement of non-funded income year-on-year, fees from banking services is lower by 14%, exchange income is lower by 9%. This was partially offset by SAR 44 million increase on the investment gains and dividends.
Also there was a SAR 5 million reduction in other income. The overall fees from banking services, 50% is in fund management, 4% the card services with a reduction we are seeing in card services, where it used to be 7% from the overall fees from banking services. We have 12% related to trade fees and 8% on the brokerage and 26% on the others. On the following slide, which is slide 20, in the operating expenses, there is a reduction in the expenses on a sequential basis from Q1 by 3%. As you can see from the slide, there is a 3% sequential in the G&A. There was a reduction there and also 14% from the depreciation. So this reflects a 6% growth year-on-year on the overall expenses.
The positive choice that we have seen during the quarter by end of June has positively impacted the cost to income ratio, where it was by end of the Q1, 32.6%. If we look at the cost income ratio for Q2 alone, is 30.36%. On the following slide number 21, which is on the impairment. Just maybe to remind you that last quarter, which is the Q1, the charge was SAR 154 million. There was a total recovery, sizable recovery during Q1 which was totaling SAR 472 million. This quarter alone, the impairment charge for financing is SAR 388. Of course, you will see in the P&L a total of SAR 400 because there is a SAR 12 million related to investment, related provisions. So the growth on the provision year-on-year is 8%.
This increase that we have seen in the second quarter of this year on the overall impairment has increased the cost of risk from clearly from where we were in Q1, 26 basis points. We are standing by end of June at 45 basis points cost of risk. In the following slide, which is slide number 22 on the NPL and the NPL coverage ratio. We have seen an 11% growth on the NPL only for if you look at the sequential basis, almost the NPLs are flat, and this is also a reflection of where we were in Q1, 93 basis points on the NPL ratio. We are at 96. We have seen a slight improvement on the NPL coverage ratio as well, standing at end of June at 175.9%.
On the Stage-wise coverage, as you can see in the bottom of the slide, we are seeing a reduction on the Stage 2 coverage. Stage 1 remains at 40 basis points flat. Stage 2 reduced to 9.8% from 11.6%. We are able, part of the provision that was taken to build up also Stage 3 coverage that is increasing from Q1 standing at 73.5%, almost 74%. On the following slide 23 on the capitalization and liquidity. On the capitalization, Tier 1 and Tier 2 capital for pillar 1 risk is around 20%. We have seen a drop on the ROE. Q1, we are at 18.4%. Now ROE is standing at 17.8%. We have seen 10 basis points reduction on return on assets. As far as the liquidity and prudential ratios all remain healthy.
LCR is at 139%. LDR is around 80%, which is well below the regulatory maximum. We have the NSFR is at 111.3%, almost flat from where we were in Q1. In the following section on the outlook and the guidance for the remaining of the year, we have achieved the growth of 6% on the financing YTD. We are keeping the guidance as low teens for the full- year of 2026. The 6 basis points contraction on the NIMs year-on-year where we are at 3.46%. We are keeping the guidance also unchanged from -5 to -10 basis points.
Also, the guidance for cost to income remains unchanged below 30.5%. The two guidance that we have changed, as you can see, it's the cost of risk. Cost of risk is revised from being 45- 55, with the new trend that we are seeing on that, especially the provision that has been taken during Q2. We are revising the guidance from 55%- 45%. As a result of that, we're revising the return on equity guidance from previously being above 19%, to the new guidance, which is 18%-19%.
Capital at 1 for Tier 1 and Tier 2 capital remains around 19%. Just a reminder, maybe in the long-term guidance that we give for 2030, the assets growth low double digits remain as a CAGR. Return on equity above 22%. Cost to income is below 29%. We're still keeping the long-term guidance for capital at 1 for Tier 1 and Tier 2 capital for below that above 18%. With that, I'll hand it back to the operator for the questions and answers.
Hello. If you would like to ask a question, please use the raise hand feature at the bottom of your screen. If you're dialed in by phone, please use number nine to raise your hand and number six to unmute your line. I'll pause now for a moment to allow the queue to form.
Can I check back with the operator? Are we all audible?
Yes, you are audible. Hi. Operator, can you start the Q&A session, please? Thank you.
Absolutely. Our first question comes from Naresh Bilandani. I do not have his company. Sorry. This is our first question. If you would like to unmute yourself, please.
Hi, can you hear me? Hello.
Yes, we can. Go ahead.
Excellent. Hi, Abdullah and Adel. It's Naresh Bilandani from Jefferies. Thank you so much for the presentation. Really useful. Two questions, please. Just keen to hear more color into the notable pickup that we've had in the impairment charges, which I think have taken the sheen off what is a good set of numbers actually in the second quarter. Just keen to understand what led to this pickup. I know you had a big recovery in Q1, but I think the Q2 charge still seems to be elevated. Is it linked to the projects that were canceled, and you have previously highlighted that there have been some exposures into projects that were canceled. Is this what is causing pressures? If yes, do you feel that the second quarter impairment charges, the risk of elevation is behind us?
Do you feel that conservatism is sort of justified as we go into the second half of this year? Just keen to understand the pickup behind the impairment charge. That's one. My second question is on the fee incomes, and this is more of an industry-wide question also as much as for Alinma. Do you feel the industry at this stage has fully borne the pressure of the fee income from regulatory changes that were implemented in the previous quarters and the worst is behind us, and we could see a recovery on the fee income line, especially for the industry as a whole as we go into the second half of this year?
Maybe one final question, if I could please just add. I think if I take a look at slide 18, if I take a look at the Net Interest Margin, clearly, I think the NIM has held up very well in the interim periods. Do you see the case for getting a better-than-expected NIM than what is baked into your guidance by the year-end, or you are just being more conservative in your guidance? I am just keen to hear some thoughts on the NIM line. Thank you very much.
Thank you, Naresh. Let us cover the first point about the impairment charge. Yes, there was a large project that we financed a contractor and has mutually agreed to suspend or cancel that project. We understand that there should be some amount, some compensation paid to the contractor. However, being prudent and being conservative, we felt that this may call for obviously set up some provision against that. That is why our change in cost of risk from 35- 45 basis points previous guidance, now to 45, 55. So another effectively 10 basis point increase in that guidance. Difference between obviously Q1 and Q2, as you mentioned, Naresh, is because we have sizable recovery in Q1, and that is what led to big variance between Q1 and Q2. It is better to be prudent and build enough provision.
We do not know at this moment, we do not know how much compensation will be paid to the contractors that will allow them to pay back our exposure, and that will take time. That is obviously not something that can be found out quickly. On the fee income. Naresh, look, the fee income story this year has been impacted by multiple factors. One, as you mentioned, the regulatory changes in terms of pricing on the cards business as well as instant remittance fees, as well as the upfront management fee that we collect on consumer and mortgage fees. That has been reflected in our results this year. We understand that we have already taken half the impact, roughly, of that already. There are other stories within fees or fee income also. Maybe it is a chance to expand on that.
One of the factors, obviously, international spends, I guess the number of travelers overseas has reduced, so we see lower international spend that affected our fee on cards. Another important factor is we have done a new arrangement with a major supplier or a vendor of point-of-sale machines, that has changed the business model to include profit sharing there. Unfortunately, you see half the story, because the point-of-sale business previously had the fee, which obviously on the transaction, but there is also a lease, the leasing expenses that shows in G&A. What you saw, you saw the impact on the fee. However, it does not show the impact on the saving on the leasing of these machines. Net-net impact is actually positive with this new deal that we have done. Unfortunately, because they are must-splits, half goes into other operating expenses, or the revenue on the top.
That's another factor to consider. We've seen trade finance. We lost some market share in trade finance. However, overall, probably saw from statistics from SAMA, the level of imports in the first six months compared to the same period last year has reduced by 5%, and that obviously has an impact on the whole fees business specifically. We've also seen an overall reduction in brokerage income because of the overall traded volume was lower in the first half this year versus last year. I think that, in a way, summarizes the impact that we had on fee income.
Thank you very much.
Maybe on the NIMs, Naresh can take this. As you rightly said, if you look at the NIMs following the Q2 numbers, it still looks like it's holding up. We're giving the guidance, the contraction, 5%-10%. Could we end up with a base development at the end of the guidance? We'll definitely keep on reviewing the same, and of course, following Q4, based on any development that would be communicated on time. However, you rightly said the NIMs that we are seeing is holding up so far. The range, as you said, from 5%-10%, could this be the end of the range of the 5%? We'll definitely re-update that whenever any change is needed following Q4, but this is the way we see it as of Q2.
Got it. Thank you very much.
Hello. We now have a question from Shabbir Malik, who is from Morgan Stanley. Shabbir, if you could just unmute yourself and ask your question. Thanks so much.
Sorry about that. Can you hear me now?
Yes, that's perfect.
Thank you very much for the presentation. I have a question around your margin expectations. There is an increasing chance of a rate hike this year. I was just curious in this assumption of NIMs that you've or the guidance for NIM, what kind of rate expectation have you built in? And if you can also please remind us what's your sensitivity to a 25 basis points increase in interest rates. That would be pretty useful as well. Thank you.
Thanks, Shabbir. When we do our rolling out of our forecast, we really take the latest yields corporate market sees. As you can appreciate, the volatility was huge really recently, and also the probabilities for the rates that we've seen. That's what reflected the yield scope that was applied in our forecasting as far as the guidance is concerned. The guidance, there are probabilities of a rate hike, but this probability, as I said, it's really volatile. Hence the discourse that we have taken probably did not reflect that.
As I mentioned, maybe to Naresh in the previous question, it's actually, as we see it in Q2, is holding up. Along with the repricing that's being done, expectation, if it's achieved on the kind of growth internally that we have, I will definitely update the same. Could we end up in the year by, as I said, at the end of the range of this guidance? Probably. To be sure, we will be, again, updating this whenever needed following Q3. As far as the Q2, this is where we see it, and it could be ended, as I mentioned, by the end of the guidance, that's really about.
In terms of NIM sensitivity, if you can point towards that. Maybe if I can ask one more question. Year-to-date, your loan growth has been about 6%. You're targeting low teens. That kind of suggests an uptick in the second half. If you can comment on that as well. Thank you.
Yeah. On the NIM sensitivity, again, did not change much as we previously communicated. We checked this based on our position by end of June. It's 1- 2 basis points for every 25 basis points. As far as the 6% growth that the guidance suggests for the financing, you'd assume the portion of that would come from corporate, and primarily maybe project financing along with SMEs. You will see a small portion of that coming also supported by retail growth for the second half of this year, both in mortgage and consumer finances.
Thank you.
Our next question comes from Jon Peace from UBS. If you could just unmute yourself, please, Jon.
Hi. Thank you for taking my questions. The first one is just on the cost of risk. Can you remind us what sort of run rates you had embedded in your 2030 plan? Should we imagine in the medium term it stays around this 45-55 basis points range? Second question, please, was just a little bit more color on the lending outlook. Firstly, on retail, you seem to be gaining some good market share versus your peers. What's really driving that? Is it the products you're playing in? Is it the pricing? Just a little more color there. Secondly, on the project finance market. We can see in the data that the second quarter seems to have had quite a nice acceleration in new government project awards. What are you seeing in your pipeline? Thank you.
On cost of risk, we give guidance on a yearly basis, we can obviously update it every quarter. We haven't given a specific guidance on 2030, what we use every year. Every year we'll come to you and give you guidance on that yearly. We give a few 2030 guidance like capital adequacy, ROE, cost to income. The cost of risk is not something that we provide a guidance for. On retail growth, Saleh?
Yeah. Again, we keep emphasizing on this. We are not going in any war price. We have enough customers. We have to see the opportunities within the bank. As mentioned in this presentation and previous presentations, that we are one of the biggest bank in acquisition customers. We are a third largest in retail customer base. As mentioned by the CEO, we invest a lot in customer journeys, especially in digital channels. A lot of our products in retail, you can name it, mortgage, personal finance, credit cards, auto lease, are on our application, end-to-end journeys, and we are monitoring this. Customer experience, full range of products that we have, turnaround time, this is what we always capitalize on in our retail business.
May I add, this is not one-off. I mean, we've been long track record now, outperforming the industry in terms of loan growth in retail. On projects On project finance, as you have rightly said, yes, there were announcement in some projects. We have captured good portion of infrastructure as well as our generation that will heat up our future pipeline in this sector. In fact, significant portion of the growth from now to the end of the year is also coming from project finance, what we see in our pipeline.
Great. Thank you.
Our next question comes from Olga Veselova from Bank of America. If you could just unmute yourself, please, Olga. Hello, Olga. I can see that you are now unmuted if you would like to ask your question. Thanks so much.
Operator, can you make sure that Olga has access to unmute herself?
Yes, I can see that Olga is unmuted.
Operators, can you go next in line and then come back to Olga?
Yes, no problem. Next we have Rahul Bajaj from Citi. If you could please unmute yourself and ask your question, please, Rahul.
Hi, this is Rahul Bajaj from Citi. Thanks for taking my questions. I have two questions mainly. The first one is on cost of risk. As you mentioned, the increase in cost of risk in 2Q was largely driven by a particular project which was canceled, and you're taking provisions prudently, and this is good on part of that project. Are you concerned that there are other projects in your portfolio which have been canceled or are facing delays and these could drive higher cost of risk, maybe in the second half of this year or through 2027, 2028? Do you see that likelihood shaping up, as we move ahead? You think that the second quarter charge was just a one-off, and you're not expecting any material change in sort of cost of risk expectations as we move ahead? That's my first question.
My second question is on margins. I think the second quarter margins have actually held up pretty well. Just trying to understand how this moves from here on. I see your guidance, which is 5-1 0 basis points. If I think about the components of margin, cost of funding yields, how are you expecting these two components independently to move over the next few quarters? Also linked to it is the repricing of profit loans that was happening, at the system level, and Alinma was also part of it. Just trying to understand, is the repricing all done, or you expect some more repricing to happen on the corporate side as we move ahead? Thank you.
Thank you, Rahul. Every year it's normal that you see some projects may be delayed, may be canceled, but it's usually small size. Nothing significant that we've seen. We had some projects before was canceled. This time, when I mentioned the specific project, it was large. The size of the project is what really matters. We've seen smaller ones that had really small impact or little impact on our cost of risk. This one is large, that's why. In terms of margins, as the CFO, Adel, already covered that. Before the earning call, we do reforecast again using the latest of market yields, forward yields curve. We don't build our own model for yield curve. We use the market itself. Our assessment is showing maintaining that guidance of 5- 10 basis points.
As Adel mentioned, to look at the market probability of rate hike, it keeps changing significantly. Sometimes it's close to 100. I think recently it's about 80. Obviously that has an impact on the forward yield curve. I guess on daily basis that forward yield curve is changing. We will reassess it again every quarter, and we will see if guidance is changeable, we'll change the guidance.
Thank you. Just to clarify, on the [audio distortion] . From a cost of funding perspective, are you not seeing, or are you seeing any major change in cost of funding outlook, in terms of competition, or it remains pretty stable now?
Actually, Rahul, I forgot today to comment about this. One of the very positive things that happened over this year compared to the same period last year is obviously the ample level of liquidity that we see in the market. The level of liquidity has increased. As a result, it's reducing the aggressive competition on deposits, which means we're getting now deposits at SAIBOR even.
Unlike the same period last year, where we had to pay more to build the deposits. I'm talking about the institutional, the depositors. That has helped lower the cost of funding. At the same time, if you look at three-month average, SAIBOR three-month average compared to the first six months last year, it's actually gone down by almost 61 basis points. You have the benchmark itself is lower by 61 basis points, but at the same time, the ample level of liquidity has improved and reduced the aggressive competition on those deposits.
Understood. This is very clear. Thank you.
We're going to try Olga again. Would you like to unmute yourself and see if it works this time, please? I can see you're now unmuted, Olga. It doesn't seem to be working. For now, we will move on to Aybek Islamov from HSBC. If you would like to unmute yourself and ask your question, please.
Yes. Hi, everyone. Thank you for the conference call. Thank you for taking my questions. I think what I would like to ask is on your medium-term program, right, that you announced earlier in the year. To what extent does it assume that you need to ramp up your costs pretty aggressively at the start of this program in order to produce results later on? What are the implications for the cost-income ratio, right? Obviously, you're tracking slightly above your full-year target for the time being, right? What are the chances we're going to see that excess in cost-income ratio in the next reporting quarters? That's first.
Secondly, I can see that your loan growth guidance continues to be quite good, right, compared to what the sector is delivering so far. Right? You are outperforming. Right? How should we think about the implications of the stronger loan growth for you, in particular for your asset policy, and what do you think about growing above sector, in an economy which is slowing down? What are your thoughts?
Okay. Look, obviously on the point of sale business model that we've done, it started somewhere during Q1. As we've seen so far, it has a positive net impact on the bottom line. The difference is obviously between fees and expenses, which is positive. As it's at the first phase, we're expecting further improvement. I don't want to get into details, but there are additional phases that should help us grow our business even further in that area. On finance growth, obviously, as you know, Aybek, we've been talking about it in the previous, I think, questions. Our retail team has done a fantastic job outperforming the market for a year. It wasn't like one-off, two years or three years. We've been outperforming the market for at least five years now. Growing much faster than the markets.
This is to do with customer acquisition, level of service, quality that we provide our customers, the turnaround time, you name it, and the simplicity of applying to these products. We're going to continue in our strength. We've gathered a significant customer base now that allows us to continue our growth. In terms of project finance, also as you know, it's another inherent advantage that we have. We've been one of the major players in that project finance business, as you know, under 2030. There's a lot of projects being done with private sector, and we're in very good position to benefit that business. As well as obviously, we started, I have to say, started late, a little bit late on mid-corporates and listed SMEs, our growth rates continue to be significant as we've already highlighted in the first half, and that will continue to be there.
Okay. If we're ready for our next caller, we have Abdullah from ENBD Capital KSA. If you would like to unmute yourself and ask your question, please, Abdullah.
Hello, this is Abdullah Al Buraidi from Emirates NBD Capital KSA. Thank you very much for your great presentation. Congrats for the great results. I have maybe two follow-up questions. The first one regarding the cost of risk. You've mentioned that you're being prudent on single contracts or regarding a certain type of a project, and you're increasing that cost of risk guidance in reference to this. Could it be that when all the exposure of default being realized, that we get out of such a guidance or you believe this guidance is covering all of such exposure? That's the first question.
The second one, how do you see the evolution of the non-funded income going on into the second half? Do you expect us to appear on a second half that is somewhat close to the second half last year? Of course, excluding the market-related income that is dependent on instrument movements. That's it.
Thank you, Abdullah. Obviously, on the second point, we don't give specific guidance on fee income or non-funded income, whether it's for the full- year or second half compared to the first half. It's part of our guidance on the cost of risk. It's part of our guidance on the return on equity. Sorry, on the cost of income and narrowly.
We don't give specific guidance on non-yield income. In terms of cost of risk, as I mentioned, the contract that was canceled, sizable, and we felt that we need to be conservative, prudent and start building provision because the final outcome of how much compensation the contractor will get is not yet clear to us. We know the sum estimate. That takes time. That is not something I would say, You know what, maybe in Q3 we'll fully understand, and we may revise the cost of risk. At the moment, it should take time, and this is our best estimate for this year.
Okay. Just to follow up on the non-funded income. Maybe not a guidance, but rather an evolution. Do you see it picking up from where we are, or is it still as slow as it is?
I think I talked about the point of sale business model that we've done, and I mentioned there are phases to come. That phases should help us in growing our bottom line and all the business or the income on that business. Other than that, if we see significant increase in shares traded in the market in the second half, that should help us grow our brokerage business. It's very hard to give specific guidance. We do the forecast, we understand, but we don't really communicate that to the market.
Okay. Thank you very much.
Okay, our next question is from Murad Ansari from GTN Middle East. If you would like to unmute yourself and ask your question, please.
Yes. [Non-English content] . Thank you for the presentation. Just one question on dividends. You've clearly laid out over last year your plan, that dividend payout ratios are going to be lower than what they've historically been. We saw that last year, three interim dividends and then a bonus stock dividend at the end of the year. This year seems to be, you've given out two interim dividends similar to last year. Is the playbook similar to last year that we have three interim dividends and possibly a fourth quarter skip? If you could give us any indication on how you're thinking on the dividend payouts. Thank you.
Thank you, Murad. Obviously, on dividends, it's really hard to give comments about the potential level of payouts. This is obviously, as you know, subject to the board and to our regulators. I think even though similar level of amounts paid to last year, I think the net income is obviously higher than last year, payout ratio is lower. We expect that our net income in the quarters to come will be improved further, and we'll see what level of payouts, we were not going to be aggressive on payout ratio. Certainly, would be not far off from what we had maybe last year.
Great. Thank you so much. That's it.
Okay. Now for our next question, we have Nauman Khan from SNB Capital. If you would like to unmute yourself, please.
Hello, can you hear me? Hello?
Go ahead.
Yeah, thank you. I have two set of questions again, they both, again, relate to NIMs as well as cost of risk. For NIM guidance as well, I think you have elaborated it, but just for a little more clarity. The 5-10 basis point dependence you are assuming, do you think it will be coming from further repricing of the asset yields, do you think there is still further room for the asset yields to come down? Is it the cost of funds? Are you seeing some pressures in cost of funds going forward? This is my first question. Second question is regarding the provision that you have taken. If you may elaborate on that. Have you taken the entire set of provision that is required on that project, is still something that can come in Q2 and Q3 and Q4? These are my two questions relating to that project.
Sure, Nauman. Yeah, sure, Nauman. On the first question on the NIMs, as I mentioned maybe earlier, we are still guiding for a contraction of 5- 10 basis points. Could this change following Q3 results, or to be, as I mentioned, at the edge of the guidance, could this be five rather than nine or 10? We will definitely take the yield curve and reflect that following Q3. As we speak, this is the way we see it. Ideally, we have the right to suggest that this is both. We continuously pricing on the corporate, even though we have seen the base market sort of movement, as CEO mentioned, the 61 basis points in three-month cycle. Also the level of liquidity that you are not seeing really an immediate intense competition on deposits, which could help. As far as the Q2, this is the guidance for the full- year.
Again, how the market is reading the yield curve, it is really becoming so volatile. We are taking the latest, maybe it is changing as we speak now, but again, of course, following Q3, we will be updating the same. As far as the cost of risk, besides what was mentioned by our CEO is, and to clarify maybe something, it is maybe probably an uplift from one contractor whether the project was canceled.
There is some questions regarding, have we taken the whole bill in back or earn in back. It is an IFRS 9-based model that reflects the nature of. Of course, it allows for the management overlays. At the end, there are stage movements that there are conditions for every client when to move and how to move, and a third level of a provision based on the PDs and LGDs. As you know, the technicality is behind this. Besides that, there is this maybe driving the big movements still remains subject to the requirements of the model itself. Th at we are validating the review obviously every year.
Thank you very much. Thank you again.
Okay. We now have Dan Mikhaylov from Vergent Asset Management. If you would like to unmute yourself, please.
Hello, am I audible?
Dan, go ahead.
Marvelous. Congratulations on the results. Just a quick question on the cost side. I see that Q2 OpEx base was about 3% lower sequentially. Were there any one-offs in the OpEx in Q2, or can we assume that the Q2 OpEx is a sustainable run rate for the rest of the year?
As you rightly observed, the 3% reduction in Q2 sequentially from Q1, there are two major parts of that. Of course, besides the ongoing exercises we are running on the efficiency side, but of course, at the same time, we will continue to invest for the strategy. There are two main parts. One is what was mentioned by the CEO earlier on the point-of-sales related programs. You'll see some reduction of the leasing of point-of-sales terminals that used to be part of the G&A. Now the bank is not paying anything on that as part of the profit sharing on the income side. Also, another major, and you will see this on the financial statements with the separate notes, note number three on that, which is on the depreciation side. We have seen the competition.
We have laid out the benchmark on changing, assessing the useful lives of buildings and software, and that we have taken the impact in this quarter. Of course, the impact that we have taken this quarter is not from beginning of the year, it's from April, so it's reflecting the three months. On the notes to the financial statements, you will see that there is SAR 23 million for the second quarter. That was the immediate impact. From the financials also, as part of the assessment, we put in the disclosure around SAR 76 million will be for the remaining of the year from Q2 until year-end. In the disclosure as well, SAR 105 million will be for 2027, assuming the new lives. The changes is on the buildings and also the software.
Yeah, thank you. Just to confirm, both of these changes, were they embedded in the guidance that you gave at the beginning of the year, or were these not budgeted in? How should we think about them versus the guidance? Are these benefits of the guidance or were they budgeted in?
These changes are already part of the guidance that was mentioned at the-
Got it.
During this call.
Thank you. Clear. Thank you so much.
Okay. We now have Ahmad Arif from Aljazira Capital. If you could please unmute yourself.
[Non-English content]. First of all, congratulations on your results. Thank you for the presentation. I just wanted to ask on the ROE guidance, the revision of the ROE, could you talk through the main factors behind that revision, other than obviously the cost of risk?
Yeah, obviously, the cost of risk was the main driver behind that revision. As I mentioned, I think the revision is, effectively, we look at the two ranges, is about 10 basis point shift. That obviously has a negative impact on the ROE.
Thank you very much.
It's also reflecting the changes in regulatory pricing for the consumer products. That's how it works. As well as I mentioned, the impact that we're seeing, negative impact on lower international spend by our customers because of the geopolitics, maybe, and the impact on trade finance that we've seen because of lower imports as we've seen so far.
All right. Thank you for the guidance.
We have our final question as we are at time from Bijoy J from QIC.
Thank you for the call. My question is on NPLs. Given the current environment where a lot of businesses and corporates getting impacted, how do you see the NPLs shaping up over the next couple of quarters? Obviously, there will be a lag effect on the bank. Is the management prudently going to increase the cost of risk in the short term to cushion any increase in NPLs over the coming quarters?
We don't see any significant change in formation of new NPLs. I mentioned already the Far Large project that was suspended or canceled. As I mentioned, it will take time to find out exactly how much contractor will get in compensation and i.e., how much money we'll be recovering, and maybe a year or so to find out exactly how much that's. It will take time, but I don't think we've seen specific change in the migration of NPLs. As you know, the NPLs level now is below 1%. I don't suspect that will change significantly.
Okay. My second question is on the dividends. Any change in dividend policy? Do you plan to increase in line with the profitability?
I think I already covered that. The dividends level, the payout ratio, I already covered Murad's question. Thank you.
Thank you.
Thank you so much, everyone. We are now at time, and I would like to pass you back to our host. Thank you so much.
Thank you, everyone. Please reach out if you have any follow-up questions, especially Olga, we would be happy to receive your questions. Thank you so much.