Good day, everyone. On behalf of EFG Hermes, I welcome you to Alinma Bank's third quarter results call. My name is Shabbir Malik. Management will first go over the presentation and then we will open the call for questions and answers. I will now hand the call over to Arwa Alshehri, the Head of Investor Relations. Arwa, please go ahead.
Thank you, Shabbir. Good day, everyone. Welcome and thank you for joining us for Alinma's earnings call for the third quarter of 2025. Before I take you through the call's agenda, I'm glad and excited to announce that Alinma management will be conducting a standalone call to launch the bank's upcoming five-year strategy. We will be distributing save the date emails for Alinma's 2030 strategy early next week. Back to the call's agenda. Our MD and CEO, Mr. Abdullah AlKhalifa, will begin by providing an overview of Alinma's performance and financial highlights, followed by the current strategy recap and the update on the strategy financial KPI. Followed by our CFO, Mr. Adel Abalkhail, who will be presenting a detailed financial performance up to September this year, ending with the guidance for the rest of the year.
We'll make sure to have proper time to conclude with a Q&A session where we will be addressing your questions along with our Deputy CEO, Mr. Saleh AlZumaie, covering retail, private, and digital, and Chief Corporate Officer, Mr. Jameel AlHamdan. With that, I will hand this over to you, Abdullah.
Thank you, Arwa. Hello and welcome everyone for our earnings call. I'll start my presentation on slide six, where our financing has grown in line with our guidance, year-to-date, 12%, as well as 11% growth in customer deposits. More balanced growth, I would say. In total assets, it grew by 11% year-to-date. Our CASA, which is more important than just the growth of customer deposits, increased by 14% year-to-date. Our revenue is up 7% year-on-year, and our net income increased by 9%. CASA represent now a 53% of total customer deposits. The cost to income stands at 31.6. As far as the credit quality and capital, our NPL ratio is 120. Our coverage ratio is 158. Our NIMs is 346, 24 basis points compared to the full year last year. Our ROE stands at 18.4.
On slide eight, give a quick reminder of the strategy. This is the last time I'm going to talk about 2025 strategy. As Arwa mentioned earlier, we're going to present before the earning call of Q4. We're going to present to the investors and the analysts our 2030 strategy. Our current strategy as of today, which ends this year, is basically the headline is to be the path of the most convenient bank. To be number one in terms of Net Promoter Score as a sign for quality of service that we provide our customers, and be number one employer of choice. In more detail in the next slide, which happens to be not numbered. Number nine, next slide, shows more details.
In terms of business, the three pillars for retail was focus on growing affluent and privates business, focus on attracting the youth segments, and offer the best customer experience and operational excellence. In corporates, we have three main pillars there. Want to be a core bank for all segments and our customers, not just, sorry, large and project, but also mid-corporates. That's an area that we focus to grow and you'll see later on with the detailed presentation how much we grow mid-corporates. Develop high quality SME business as well as focus on growing our trade and cash business. Treasury, basically want to be the core partner to our customers, fulfilling all their hedging and investment needs, and grow our FI business, as well as maintain a proper ALM, high quality ALM function.
That obviously for the bank to achieve these targets, we needed to build digital factory to scale customer experience. We want to foster a culture of advanced analytics and decision-making based on data, and that we set on. Of course, culture transformation to be able to attract and retain the best talents in the country. On slide 10, we give you some flavor of things that was achieved during Q3. We introduced travel and medical malpractice insurance policies online. We've also launched cash flow management for our customers, tools for our customers. We've also introduced payment deferral products for certain retail customers as part of the CSR initiatives that we have. On retail, we've opened three more branches. We've launched a special package for expat affluent, and we continue adaptation of our youth app and increasing the attractiveness of new customers.
Quarter-to-quarter growth in customer base is 47% in that application. In corporate we launched as business soft launch now we finally got it. This is basically a solution or a product that we developed with a digital attacker for micro and very small SMEs. All digital transaction, including the credits engine. That is now soft launched and we'll expand into it in the next few months. We've also done straight-through processing for LG in our new e-trade system . We had overall growth in corporates assets of 15%. The one that I mentioned about mid-corporates, we continue to have this very strong growth, 31% year-on-year growth. Now on SMEs also we had very good growth. The reasons showed 6% as we done some reclassification. There are some businesses that under SME that was managed by the mid-corporates.
The SME as a department itself or as a sector itself will merge in certain portfolio of their customers. I think obviously the one that we report here versus the one that in our annual report following requirements of the central bank are different. We merged the two. That's why it shows only 6%, but it is actually higher than that we reported before. In treasury, we launched a $500 million sustainable AT1 Sukuk as well as $500 million senior Sukuk. Also we established a new program for CDs. Up to the end of Q3, we had issued $550 million. On the next page, page 11, I just showed you some of the strategy impact on year-on-year basis. In revolving credit card we had a 33% increase. In auto loans we had 43% increase.
In accounts opened digitally onboarded from 88% last year to 95% this year. In corporates, project finance had a growth of 9% year-on-year. I think we mentioned this in the first half earnings call that most of the projects that we have approved are coming toward the second half more than the first half, and that's why up to end of Q3, it is only 9%. SME, as I mentioned, the reason for the 6%. Without this reclassification, that would have been 18% year-on-year growth. In mid-corporates we had 31% growth, as I mentioned before. The average yield on investments increased by 4 basis points, as well as cost of funding decreased by 27 basis point. Exchange income, we had 2% growth. We had solid strong one-off effects yield last year. If you normalize that, it comes to high single digits.
With that, I give the floor to our CFO, Adel, to take you through detailed presentation. Thank you.
Thank you. Hello, everyone, and welcome again to our earnings call for the third quarter of this year. I will be starting with giving our overall a bit of more details on the financial performance. As Arwa said, that will be followed by the guidance, and then I will leave the last thing for the Q&A as usual. Starting with slide number 13 on the balance sheet trend. We have seen a growth in total assets of 11% YTD that was mainly driven by, as you can see in the graph here, 12% growth in financing. Also we have seen 7% growth on the investments. On the overall liabilities, we have seen a growth in total 10% YTD that was mainly driven by 11% increase in customer deposits. As mentioned by the CEO earlier, 12% of financing versus 11% on deposits.
It is a balanced growth between the financing and the deposits. Moving on the next slide, slide number 14 on the P&L trend. The net income for the nine months for 2025 has grown 9% year-on-year, reaching SAR 4.673 million, from 7% growth in the operating income. Also the nine months funded income, we have seen increase year-on-year 8%, also we have seen a 4% growth on the non-funded income. Environment year-on-year were lower by 4%, and the overall net income, as mentioned earlier, is 9%. You can see in the bottom right graph the composition of the operating income where the funded income remains the major there, which is obvious, almost 80%. Moving to the next slide, just shedding some light on the financing. We have seen retail financing increasing 10% YTD from December. That was driven primarily by the robust growth in the auto financing.
We have seen also the growth continue to be in the mortgage as well. Also we have seen the continuous growth on the other retail financing. Corporate financing also has grown 12% YTD from December, this was also driven by 32% growth in mid corporate, along with a 5% growth in SMEs, also I am referring to the note given by the CEO and the SMEs giving the classification. The actual growth is much higher than that. The overall gross financing comprise of 76% corporate financing as of end of September this year, where 24% relates to retail lending. If you can see in the top right graph the composition of the financing as end of the quarter, 65% would be for large corporate and project financing.
I would say project finance and large corporate is also half that, 6% is mid corporate financing as part of the overall portfolio, and 5% SMEs, 24% of the overall retail split, 12% each between the mortgage financing and the other retail consumer financing. Moving to the next slide on the deposits, slide number 16. We have seen deposits rose by 11% during the nine months. That was mainly driven by the growth in CASA and time deposits. CASA growth was 14% during the nine months. We have seen also 9% growth in time deposits. CASA deposits represent 32.8% of the overall total deposits. That is an increase of 147 basis points from where we were the same period. Total deposits comprise of 67% that is managed by retail, the remaining 33% is management of the corporate business.
Moving into the net income from financing, the funded income in slide number 17. Gross funded income in the nine months has increased 8%, as you can see year-on-year, reaching SAR 12.8 billion. This is coming from 22% increase in investment income, we have seen a 6% increase on the financing income. You can see in the bottom left graph, the net profit margin or the NIMs movement, from same period last year comparing the nine months versus the nine months of last year. We stand at 3.46%. That was coming from slight improvement investment yield. Also we have seen 57 basis points drop in financing yield. However, the drop in cost of funding was much lower at 27%. Hence, we have seen the YTD NIMs as YTD is growing from what it was in the first half at 3.52%, standing at 3.46%.
If we move to the next slide , slide number 18 on the other income or the non-funded income. The non-funded income for the nine months has increased 4%, reaching by end of December, SAR 1.8 billion. That was contributed by the improvements on the fees from banking services. Also we have seen an improvement in the other income by SAR 27 million. The composition is, as you can see in the bottom left graph, the composition of the fees from banking services, which is totaling SAR 1.25 billion in the first nine months, 37% is relating to the fund management. We have 22% that is in the other income. We have seen also the brokerage fees is becoming at 8% as a composition of the overall fees from banking services. Moving to the OpEx, the next slide, which is slide number 19 in the operating expenses.
Operating expenses growth is 9% year-on-year, reaching SAR 2.7 billion for the first nine months of this year. Personnel cost comprise the majority of the operating expenses along with the G&A. If you can see in the center of the graph, even though we've seen in a sequential basis, a 2% growth in the OpEx versus the previous quarter, cost-to-income ratio standing at 31.6% versus where we were same period, 31%, in September the previous year. If we move to the next slide, which is the slide on the impairment, slide number 20. We have seen the impairment charge for the nine months for financing has decreased by 6% year-on-year. The total charge for the first nine months on a net basis is SAR 747 million.
Cost of risks for the nine months has improved by 10 basis points year-on-year, standing at 46 basis points. The same period of last year, we were at 56 basis points cost of risk. The bottom left graph just shows the composition of the impairment allowance totaling SAR 4.3 billion. 88% of that goes to the corporate, 12% of the overall impairment as a balance is for the retail financing. Moving to the NPL and NPL coverage ratio, on slide number 21. NPL ratio has increased by 42 basis points year-on-year, standing at 1.2% in the third quarter of this year. And NPL coverage ratio decreased by 87 points per thousand year-on-year, standing at 158.2. We have seen a slight drop in the stage three coverage standing at 66.4% versus 70.4% that was in the previous quarter.
Also we have seen a slight drop in the stage two coverage given certain write-offs that was happening to one of the accounts. On the slide, on the capitalization, slide number 22. It has remained healthy. Capitalization stands at 19.2 with CEOs referred to the issuance of the capital instruments that were issued during Q3 at SAR 1 billion. The ROE also was standing at 18.4%, and also ROA is at 2.1%. The bottom of the slide is in the prudential ratios. It remains very healthy, very strong. 125% LCR is well above the regulatory minimum. LDR is also at 80.1%, and that is, as you can see, as well below the regulatory maximum there.
So far also has improved given the longer funding that we have mobilized during the first nine months, standing at 113.1%, well above the regulatory minimum. I'll move now to the next section on the outlook and the guidance for the remaining of this year. We did not change any of the guidances that were provided in the previous quarter. The financing growth 12% YTD, we are keeping the guidance at mid-teens for the full year. The guidance for net profit margin remains unchanged. We revised that back in Q2, standing at 3.46. That's 27 basis points year-on-year, we're keeping the guidance as -10 to -20 basis points for the full year. Cost-to-income ratio remain below as a guidance for the full year, remains below 31%.
Return on equity remains above 18.5% for the full year. Also we are keeping the cost of risk guidance unchanged between 50- 40 basis points. Also the overall capitalization, we have seen an improvement from Q2 given the capital instruments that were issued with standing at tier one and tier two CAR for pillar one risks at 19.2%. We are keeping also the guidance unchanged to be 19%-18%. With that, I'll hand it over back to operator for the questions. Thank you very much.
Thank you, Adel, for the presentation. Thank you the rest of the management team as well. We'll now open the floor for Q&A. Kindly note that in today's call, we'll only take audio questions. May I also request the audience to announce their name and their company name before asking the question. If you would like to ask a question, please raise your hand. As we wait for the questions to be logged in, maybe I'll start off with the first question. In terms of your margin, at least in the presentation, it suggests that there was a NIM compression quarter-on-quarter. Whereas if I look at your NII growth, QoQ, it was pretty decent. Just want to check that, what has been driving that NIM compression quarter-on-quarter? Secondly, a question on non-funded income.
That to my eyes at least looks a bit weak relative to the sector. Maybe if you can give us some thoughts on your non-funded income trends as well.
Yeah. Thank you. As far as the NIMs construction, I've seen some analyst reports about suggesting that we either flat or we actually lost about 3 basis points, driven mainly by higher cost of funding in Q3 versus Q2. The way we calculate it, just to be for clarity, we take interest expense and divide it by average earning assets as we do for interest income divided by average earning assets, and the difference is the NIMs. For us, obviously we have daily averages, we have very much more accurate averages than the outsider may see. For us, it's driven mainly by higher cost of funding. As you recall, there have been obviously more intense competition on deposits, and that has driven the costs higher despite SIBOR or the benchmark itself actually reduce quarter-on-quarter.
We've also managed to improve our gross income by about 4 basis points. The difference is between seven and four is about 3 basis points reduction in our NIMs. That is equivalent to 24 basis points below the full year last year. We kept the guidance at 10- 20. We believe this is, in Q4, that 24 basis point will be lower and closer to that range. The other questions was about the.
Non-funded income.
Yeah. Adel, I don't have the details in front of me directly.
Sure. Yeah, I can take that, Abu Faisal. If you look at the non-funded income for Q3 specifically, it's trending in total, as you mentioned, maybe lower than what you've seen in previous quarters. If you look at the fees from banking services as a net, and this is the core of the fees from banking services. As we mentioned in Q2, there was a small one-off there in the fees from banking services that was part of our ongoing improvements on our operating model with the main cards scheme. This actually did not happen this quarter, but if you look at quarter on quarter in total, the yield, we are looking into the fair valuation of home investments. This has actually dropped during Q3. That's the nature of the business. We've seen the volatility before on this item.
Also the effects income, we have seen it drop also during Q3. That would be mainly explained by the lower volumes that we have seen during Q3 versus the previous quarter. Hopefully that help.
Yeah. Also, when I look at the nine-month trend, I think you're trending at about high single- digit. I think some of the banks have seen double-digit non-interest income growth. Anything specific that you want to highlight on that front?
Yeah, sure. The nine months versus nine months, there's a drop, of course, if we take it to the YTD. We have seen also improvements, especially in the fixed income, if you look at it in the certain quarters of last year. Also, we've seen drop in the card business as well, we've seen that back in Q3 specifically, and also Q2 of last year. Yeah, it remains maybe below the averages. I think this is something we'll continue to focus on strategically. I think that part of that, as I mentioned, will always be impacted of the big investments and evaluations that we do from quarter to quarter and certain big investments that we have.
Thank you. We now open the floor for the audience. The first question comes from the line of Olga. Just bear with me for a second. Okay, let me try someone else. Next question is from the line of John . Okay, let me try Olga one more time. Olga, can you hear us?
Thank you. Yes. Thank you. Perfect. I can hear you. Hope you can hear me as well.
Yes.
Thank you. Thank you for the Q&A and for presentation. Several questions from my side. One is on capital and on dividends. Why do you keep paying the same dividend, despite higher capital requirements and one of the lowest CET1 ratios in the banking sector? Also maybe as a part of this question, how far are you from your minimum pillar one, pillar two requirements? That's number one. Number two is on asset quality. I see that your stage two coverage went down quarter-over-quarter, stage three coverage down. What makes you comfortable to do so in the current environment? That's question number two. Question number three, we did notice there was some expansion of asset yields quarter-over-quarter. What helped you to do so?
Do I understand correctly that your full year margin guidance suggests that you believe margin will go up in the fourth quarter? Thank you.
Thank you, Olga. Now, as far as the dividends, I think we did announce, obviously, the three quarters dividends. Payout ratio, I think, was in the range of 47%, roughly. The question is, why are we paying dividends despite the fact that our CET1 is one of the lowest among the Saudi banks? I am not confirming or giving you a heads up, but we've done similar patterns, I think, back two years ago when we paid around that range, and in Q4 we actually did not pay dividends. It could happen. Would not say it will, but it could happen. That's another way. At stage three, I think the change of stage two, stage three, there was some movement from stage two to stage three, and also, I think mainly the write-off that took place from stage three.
Of course, when you write off something, it's usually 100% coverage. If that disappears, obviously overall rate would be lower. It's in line with the industry average, and we want to continue to have this approach of being prudent and conservative in terms of taking the cost of risk. That's why, yes, we're declining cost of risk year-on-year for over the last years, but we've always been conservative, and we're higher than the market average as far as the cost of risk. On the expansion on the assets, this is the thing that should have been done, I guess, from maybe second half of last year when we saw cost of funding creeping up. Banks should have normally at that time increased their pricing or passed some of that increment across to their clients.
We will push it as hard as we can, but obviously some good clients that we have very good ancillary business with, we could not push the price higher. We continued our efforts, and that's helped. At the same time, also with rates going down and we have a cash flow hedge, that also helps. We also managed to get good investments. That's why you see investment yields improve year-on-year. I think all these combination of free pricing, higher pricing on all segments, as much as possible, as much as you can. We're not alone in the market, so we have to compete. I think probably I could say that in Q3 we see less aggressive pricing in the profit side, and that could help us improve on our margin.
Mm-hmm. Thank you. Fourth quarter margin, does your guidance suggest you expect a pickup by the end of the year?
Yeah, true. If we are saying that compared to the full year last year, we're 24 basis points below, we keep the guidance of 10- 20, that is clearly an indication that our numbers will improve in Q4.
[Driven by a CTL]?
No, I think will be more of the funding cost, as the yield will continue to push higher, we managed to get, as I said, 4 basis point improvement. In terms of the cost of funding, certainly that would be, especially with the expected rate cuts this year, and hopefully we saw a bit of a smoother growth now on the assets in the industry versus aggressive growth. That can help in terms of the competition department.
Thank you very much. Thank you.
Thank you, Olga. We'll take the next question. This is from the line of John. John, your line should be open. John, can you hear us? Okay, maybe I'll come back to John later. Let's try the next one. This is from the line of Aybek.
Yes. Hi, can you hear me okay?
Yes, please go ahead.
Yes. All right. Thank you. Yeah. Thank you for the conference call. Yeah, a couple questions from me. The first one is, can you discuss your exposure to REIT products, real estate investment trusts? I believe you have some through Alinma Capital. Related to that, what are your thoughts around the real estate price outlook, how it may impact the commercial real estate sector and your overall exposure to commercial real estate, if you can cover that, direct and indirect through things like REIT products. That's the first question. Secondly, can you elaborate on how you think about your growth outlook and appetite for specific risk assets, in particular project finance, in view of this countercyclical buffer coming in from next year. Project finance obviously is very capital-intensive segment, very high risk weighting there.
Do you think you will deprioritize project finance in view of this countercyclical buffer coming in? That's the second question. Thirdly, in the third quarter, you launched your $2 billion Sukuk program. I can see that the cost of your first Sukuk that you issued is about 4.9%. How does it compare to the marginal cost of funds, let's say, in Saudi Riyal term deposits? Is that giving you a lower funding cost? You have quite a lot of headroom to lean on this Sukuk program. Yeah, that's the third question. Thank you.
Thank you, Aybek. I'll leave the second point on the capital charge on project finance to Adel, and you have to excuse us because Adel is in a different time zone. On the real estate exposure, I think you're referring to the recent regulation changes on white land taxes and so on. Honestly, I see this, or we see this as in a positive way because obviously, the supply was limited, affordability was impacted for mortgage business, which has had significant growth over the last five years. It slowed down because of affordability impact, because of the prices going up for real estate, as well as the higher interest rate. A combination of these two factors has impacted affordability. With this white land tax, in riyal, this is applicable to riyal , by the way, mainly, the changes that happened recently.
That should increase supply, that should incentivize owner of this white land to develop them. With higher supply would mean better affordability, more projects to be developed, as well as coupled with the lower interest rates going forward, it should help affordability. In terms of our exposure, typically, we take real estate as not the main source of repayment. We look at the source of repayment first. Real estate is taken as additional collaterals, we don't believe that it's a significant threat to us in terms of significant lower of cost of value. I think there would be some reduction in value, but I don't think it's going to be material enough to really impact us. The second point about Adel, maybe second point, you take the second point, please.
Yeah, sure. Aybek, on the second question on the risk-weighted assets. If you look at the project financing, we've been always mentioned that project financing would remain a driver on the growth. Of course, the risk-weighted assets optimization is an ongoing exercise. If you recall, Aybek, in Q1, we have seen our risk density has went down as we started to recognize certain eligible equity collaterals there, which reduces the risk-weighted assets from credit perspective. Also we have to add to that the growth is not only in specifically in project financing. Of course, the volume is there. It's just the growth that we have seen in mortgage, for example, which is figure based on the LTVs, as you know, lower credit risk weighting charge. Also, the growth in SMEs that also much lower than you would otherwise see on the project financing.
Also project financing itself. As you know, it's split within Basel into the type of projects and to the level of quality, and whether it be operational or not operational. We'll continue to be selective in that, as we have been always doing so. If you look at the overall capital requirements, as you mentioned, the CCYB, we're looking at the total CAR. Specifically, if you look at this quarter, for example, the market risk has went down from Q2, that was specifically for the offload that we did for part of our equity portfolio. As you know, this triggers more than 160% charges there. That has reduced sequentially this quarter. Just to nutshell, the risk-weighted assets optimization overall is an ongoing exercise that we review.
There are many other factors, not specifically one business line, but you could see other improvements on other business lines. Not specifically also in credit, but could be also on the market risk side. On the other point, on the 2 billion programs, it's around 4.9. That was the senior unsecured. It did not, as pricing went off the market, these are the ones which will be more spread that will be over five years U.S. Treasuries. If you look at specifically this percentage, if you compare it to the Saudi Riyal time deposits or the deposits you take usually to fund the gap, it is lower. It is fixed for five years, but it's lower if you compare it, as you mentioned, to the Saudi Riyal normal time deposits.
If I may add, Aybek , this Sukuk itself will carry higher weight for LDR because of five-year. It gives us stability, better asset liability mismatch, and it reduces the level of need for us to continue on the short- term because obviously time deposits are short- term. Continue every quarter or every month, you have actually maturity and you have to replace. That eases off the pressure on that.
Thank you.
Thank you, Aybek . We'll now move to the next question. The next question is from the line of Mehmet. Mehmet, can you unmute your line and go ahead with your question?
Good afternoon. Thanks very much for taking my question. I have just two, please. One, I appreciate you're still working on the new strategy, this question may be a bit unfair, a bit too early, but you know how impatient we are. I was just wondering if there is any early flavor in terms of the focus areas of the new strategy that you can share with us. Any specific areas that you may want to address, considering where you stand today? My second question was actually a follow-up on the RWA density. It's been actually quite remarkable, the decrease in the density so far year to date, and I've noticed another, I think, two points or so of a decrease this quarter.
I was just wondering if there were any specific actions you took this quarter similar to what you did in the first quarter, and how we should think about it into the fourth quarter and maybe the next few quarters. Also, particularly because you mentioned we should see a little bit of a pickup in project finance growth coming into the year-end. Thanks very much.
Thank you. I think I'll take the first point. Adel will handle the second one on managing density. For us, in the 2030, as I mentioned, we will have a detailed presentation to the investors early on in January, sometimes January before the annual call for Q4. In terms of maybe sort of some flavor or at least a teaser in that strategy is basically AI, customer centricity, and also adjacent businesses. That's all I can say now, and we'll give details in the presentation, as I mentioned. Adel?
Sure, Mehmet. On the risk-weighted assets and the risk density, as you said, we mentioned that actually following Q4 results of last year, that the risk-weighted assets optimization overall is an ongoing exercise. We have seen the results on the three quarters of this year so far. I have to just maybe, because the second point is the project financing. Once you look at the project financing, it's actually the way we're lending, because there is always a minimum requirements of our rate on RAROC that also takes the required capital charges for every exposure and lending that we do, which is part of the considerations both in the pricing and the profitability of the account to the overall. This is an ongoing, it's going to continue. It did not start only because of the CCYB.
It's something that we always want to optimize and be efficient in how we see our risk-weighted assets look like. Of course, the requirements are there. As I mentioned, there are other lines of businesses that would trigger much less
Taking into, for example, yes, of course, new growth in mortgages, you would have an existing portfolio that would trigger lower capital charge because the existence of the lower LTVs that moves forward. I know the amount might not be that significant. All I can say, it's an ongoing exercise. We've been doing that, and we've seen the results. Also looking not only purely in the credit side, it's the main one. It just may be also looking at the other pillar one risks other than being operational or the market risks, same as I mentioned to you back in the previous question.
Okay, great. Thanks very much.
Thank you very much. We'll move to the next question. This is from the line of Rahul Bajaj .
Hi. Am I audible?
Yes. Please go ahead, Rahul.
Yes. Thank you for the opportunity. A couple of quick questions. One is on the financing side. The retail loan growth sort of slowed in the third quarter at around 2.5%, slower than previous quarters. Anything that you would like to throw light on as to what's led to the slower loan growth in retail? That's number one. Number two, you mentioned that there was a write-off in this quarter. What's the nature of write-offs? Is it any specific account, any specific industry it pertains to? Yeah, these would be my two questions. Thank you.
Sorry, can you repeat the second point? Sorry, I missed that.
Yeah. The second one is on write-offs. You mentioned that there were some write-offs in this quarter. Could you shed some light as to which industry it pertains to? Is it any account specific or any specific industries where you start seeing some kind of stress?
Okay. I'll handle the second part. My colleague, Saleh, will talk about the first one, about the retail loan growth. Write-off is a mix of multiple segments. There have been some contractors. There have also been an SME. It's more write-off on SMEs, more write-off on retail. It's a mix. It's not specific industries that have all the write-offs there. That's what happened, and that's a normal business that we do. We follow certain strategy as far as write-off, in terms of days past dues and so on. That's a normal process that we do. It's just the volume may go up or go down based on how many of those accounts, past due accounts, have passed certain thresholds in terms of number of past due. Saleh?
Yeah. The overall retail portfolio, we've seen an increase. Seasonality is there, and people are accepting some regulation will be issued regarding the mortgage. You know that majority of our sales are mortgages. Again, you know our strategy since beginning, that we don't go into a price competition, we need to maintain certain yields on our portfolio. We do believe, after people know what's exactly going on after this white land tax, things will pick up in the right directions. We are sure that we'll be achieving our KPIs for this year and the right yield that will make us having a very healthy portfolio.
Got it. Sorry, just a couple of quick follow-ups. When you mentioned on the last point on people are expecting some kind of regulatory change which slowed growth, are you referring to the white land related regulatory change or the capping of rentals in Riyadh? Is that what you're referring to?
Yes.
Okay. Clear. Sorry if I can just add one more question here. On the asset quality front, the coverage has been declining, although it is still healthy, probably higher than average. How do you see coverage going forward? Are these comfortable levels? Would you want to bring that back up to historical averages? Thank you.
As I mentioned multiple times, I think during many communications with investors and analysts, we feel comfortable at 150 or above. This is something that may increase to 170, 180. Sometimes it's timing differences because the write-off was coming in. Write-off comes in, certainly drag it down. We're comfortable at 160 and above, and that's the level that we aspire to. If it goes higher, it's not that significant for us as a ratio. If it goes significantly below 150, we're not comfortable with that. We illustrate the floor for us as a management and as a board for the bank is at 150.
Clear. Thank you.
Thank you, Rahul. We'll move to the next question. Just before I do that, just a kind reminder to everyone to please announce their name and company name before they ask a question. The next question is from the line of Nauman Khan. Nauman, please go ahead.
Thank you, Shabbir. Can you hear me?
Yes, please go ahead.
This is Nauman Khan from SNB Capital . I think I have just two short questions. One is about the dividend policy, and the other is about the capital, given the land fees that was imposed, implication to capital. One is, given that there is a countercyclical buffer that will be increased by 100 basis points, and this was referred to in the last call as well, and then there's a 75 basis points impact of IRRBB. The first one is on the CET1. Is there any change in the dividend policy that the bank is looking for, is to pop up the capital, or will you just do it through other capital or risk-weighted amortization or optimization? This is one question. The other is, given that the recent decline or, for example, the land reforms that have happened, I think you've talked about it as well.
It is definitely positive for the overall mortgage and overall development of the land market, as well as it has somewhat of a dilution impact on the prices as well. The prices have corrected slightly, especially in the Riyadh region. Given that you have improved your risk-weighted average by including the collateral values of the prices as well. Can we expect that this move may have a negative impact on the risk-weighted assets going forward as well? That may impact the capital requirements going forward? Capital ratios going forward. Two things.
On capital and dividends, I think I already addressed that point. In our dividends policy, we want to maintain at least 50% of our annual income every year. Naturally, if we see the need for a lower payout ratio, and I've been very clear that we can go for lower payouts. I know some investors and some analysts mentioned that we have not actually lowered the payout ratio over the last three quarters, first payout quarter up to third quarter. I remind others, there is still one more quarter to go. The possibility of lower, and I expect it to be highly possible to be lower payout ratio. How much lower? It depends, obviously, on the discussion with the board and the regulator at the end. That's an option. We still have an option to do that.
I think for next year, certainly with additional countercyclical requirements, it not necessarily has to be CET1. It could be also the tool that we are issuing. We've been issuing capital instruments, whether it's tier one or the intention to issue maybe other capital instruments in the future that allow us to continue to grow with the level of capital required. It's a tool that we can adjust for. Adel, on the other part, please.
Sorry, could you repeat the question?
Okay. In simple terms, these land reforms announcements that have been announced over the last one month or two months, it has a negative impact on the land prices in Riyadh. Given you have a high exposure to real estate and the collateral that has been placed according to it, do you think that could have anything implication for ECL or for that matter, it could have an implication for the capital risk-weighted assets as well, that may adversely affect them as well?
Oh, clear. Okay. If you look at this part, what happens as far as the business demand and how this could be positive on having more capacity now for people to demand more mortgages, that's the business side. As far as collaterals, as you know, the mortgage portfolio is not really being revalued. As far as the commercial side and also the real estate held in the funds, it's always been revalued at a minimum every two years, could be one year, could be six months based on the annual reviews. We haven't seen any significant drop on the valuations there that could trigger more ECL because of the lower coverages there. You need to think about also the most of the real estate held, it's not really all of them in the Riyadh region.
They are distributed across the country, and these are commercial lands in very prime locations. We didn't really expect a significant deterioration in the value all of a sudden for many lands in one point in time. We have been doing the revaluation, and we haven't seen anything significant so far.
That will not have any implications or major implications for capital as well, right?
Well, as you know, I mean, for capital, because risk-weighted assets for real estate are not eligible collateral that you deduct from the exposure for the purpose of calculating the risk-weighted assets. It's regardless of the valuation of the collateral as far as capital, because it's not in part of the calculation in the first place. If you have a land, you're calculating the exposure, you are not getting that. You would have certain eligible equities, but you wouldn't include real estate. The revaluation as far as capital doesn't really matter.
Perfect. Thank you. Thanks a lot. Thanks for the clarity.
Thank you. We'll take a question from the line of Murad Ansari. Murad, your line should be open.
Yes. Morning. Thank you for the call. Just a couple of questions around your guidance. On loan growth, you've delivered very steady growth throughout the first three quarters. It's been around SAR 7 billion expansion like clockwork every quarter over the past three. A number of your peers have been talking about, and I think you also mentioned about the risks of corporate repayments that come through in the fourth quarter. Just wanted to get your thoughts on the guidance. Your mid-term guidance would suggest another SAR 7 billion, SAR 7.5 billion expansion in the loan book in the fourth quarter. Could there be risks from corporate repayments to this mid-teens growth? That's one. The other one is on NIM.
Historically, we've seen, and I think you've been talking about this since last, I think third quarter, fourth quarter last year as well, that funding costs tend to rise towards the end of the year. There's obviously a lot of competition that kind of comes in. H ow does that impact your view or expectations on NIM improvement in the fourth quarter? Finally, I just wanted to pick on the comments that you highlighted, that there's now more smoother growth, which kind of suggests that the competition level, at least on the pricing side, has kind of subsided. You also talked about improvement in asset yields as you've continued to push, and we've been talking about this since last year.
Is it fair to assume that with rising capital requirements adding on to the already existing liquidity pressures, this is basically the straw that breaks the camel's back, which is that banks now become a lot more disciplined in pricing loans going into 2026. Thank you.
Thank you. [audio distortion]
For the growth in the assets for the remaining of the year as well, if it's going to be impacted with the repayment, there is a normal trend of the repayment that is always covered with the volume of pipeline of business that was established early during the year. We don't expect any major repayment for the remaining of the year.
The second question you had about NIM and how are we improving it, as our guidance suggests, is basically, I think I touched on that earlier on. There are going to be further reduction cost of funding, because on one hand, the loan growth in the industry is a bit slower, softer, I would say. Expected to be softer in Q4, which reduces the level of competition on deposit. Not eliminated, but a bit reduction on that. Plus rate cut expected to come, I think, in today and something, one more rate cut in December. As well as revision pricing that I talked about, the ability to reprice some of the exposure that we have. When the new loans or on annual review for certain loans, we've actually managed to increase pricing on that. A combination of those would help.
Competition level, I think also I touched on this one. I think aggressive pricing is not actually eliminated, but it's much lower compared to at least the first half. I would say in Q3, our experience has been lower level in terms of aggressive pricing, especially on large corporates, compared to the first half this year.
Do you expect these rising capital requirements now also to be a big factor in terms of how banks price loans going into next year? Do you think that brings in a little bit more discipline? It's still too early to say?
I think it plays a part, for sure, in terms of being more disciplined in terms of pricing. I think that's one of the important factors, I'm sure.
All right. Thank you.
Thank you, Murad. Unfortunately, the time has come to an end. I'll now hand the call back to Arwa for any concluding remarks.
Thank you, Shabbir. Thank you, everyone, for your time. Please reach out if you have any follow-up questions, and you will receive a save-the-date email for our upcoming strategy call early next week. Thank you so much.
Thank you, everyone. Have a nice evening.