Good afternoon and good evening, everyone. On behalf of EFG Hermes, I welcome you to Alinma's second quarter and first half results call. My name is Shabbir Malik. Management will start with a commentary on the results. Then we will open the floor for Q&A. I will now hand over the call to Ms. Arwa Alshehri, the Head of Investor Relations, to commence the call. Arwa, over to you.
Thank you, Shabbir. Good day, everyone. Welcome, and thank you for joining us for Alinma's earnings call for the second quarter of 2025. Before I take you through the call's agenda, I would like to invite you to visit our fully revamped IR website that includes much more disclosures and finance publications, including last year's sustainability reports, sustainability metrics, performance data, providing more comprehensive and transparent view of the bank's activity. Back to the call agenda. Our MD and CEO, Mr. Abdullah AlKhalifa, will begin by providing an overview of Alinma's performance and financial highlights, followed by strategy recap updates on the strategy financial KPIs and initiatives progress. After that, our CFO, Mr. Adel Abalkhail, will be presenting a detailed financial performance for the first half of this year, ending with the guidance for the rest of the year.
We will make sure to have proper time to conclude with the Q&A session, where we will be addressing your questions, along with our Deputy CEO, Mr. Faisal Al Jamea, covering digital and retail, and our Chief Corporate Officer, Mr. Jameel AlHamdan. With that, I'll hand it over to you, Abdullah.
Hello, everyone. Thank you for taking the time to attend our earnings call. As mentioned by Arwa, I'll take you through a quick presentation covering the high-level performance as well as a reminder on the progress of our current strategy. I'll start with slide number six, where our financing increased by 8% year-to-date to reach SAR 218.6. Our total assets also witnessed a growth of 7%, strong growth of 7%. Our customer deposits increased by 9% year-to-date to reach SAR 229.9, while our CASA continue our growth of 7% year-to-date to reach SAR 116.5, bringing the CASA as a percentage of total deposit to 50.7%. Our operating income went through an 8% increase, to reach SAR 5.76. Our net income increased to 13%, to reach SAR 3.081 billion. Cost income increased slightly to be at 31.6%.
In terms of credit quality, our NPL ratio stands at 125%, while our coverage ratio is close to 174%. Our NIMs decreased by 22 basis points compared to the same first half last year, to reach a standard at 3.52%. However, compared to the full year of 2024, the decrease is 18 basis points. Our first half ROE increased by 42 basis points to reach 18.4%. On slide number eight, a quick reminder of our current strategy. By the way, this is the last year of our 2025 strategy. We already developed a 2030 strategy, and we're going to present it for the board for board review and hopefully approval in September. We'll come to the market and talk about the new strategy.
Our current strategy, we basically aspire to be the fastest and most convenient bank in the country, provide the best quality of service through aspiring to be number one in Net Promoter Score, and be number one as employer of choice. If we flip to slide nine, I'll talk more detail about the current strategy. Obviously, investing or aspiring to be the fastest and most convenient requires significant investment in digital. We built a digital factory. We developed our analytics to enable for data-driven decision making. There's been a lot of cultural transformation to be able to attract and retain the best talents in the country. In retail, the three main pillars focusing on growing affluent and high-net-worth business, as well as attract more youth segments and offer the best customer experience and operational excellence.
Corporate, we wanted to be the core bank for large mid-corporates and project finance through diversified sectors. We want to develop our SME proposition and grow our cash and trade business. For treasury, we wanted to be the core partner for our corporate clients' needs, whether it's hedging or investments. We want to grow our FI business as well as maintain a high quality and a function. On page 10, it shows all the progress that took place in the second quarter. Out of the current 86 initiatives, we've already delivered on 78 of those. We're still working on eight more to be delivered and finalized this year before we switch into the new strategy. Bank-wide, we established an automation lab and implemented system automation in order to improve the quality of service as well as the time to market improvements.
We will also introduce Banking as a Service to be able to reach more customers outside our customer base. We hired a new graduate team to go through extensive training on GenAI. On retail, we've opened five more branches in this quarter. We launched also sustainable saving accounts for non-individuals, and also we launched Buy Now Pay Later for our credit card holders. In corporate, we launched a new AI engine for next products to buy. We had an overall growth in CPG portfolio of 14%, while we have a stronger growth on mid-corporates, 30% on mid-corporates, 21% on SME. On treasury, we've issued $500 million sustainable AT1 Sukuk, as well as $500 million of unsecured Sukuk, 10-year unsecured Sukuk. We've done multiple cash flow hedges totaling $5.2 billion as of Q2 this year.
On this slide 11, as I mentioned, we have eight more initiatives to work on. Some of the things that we're working on till maybe end of this year is leveraging more advanced analytics and GenAI to drive business insight, optimize operations, and deliver personalized customer experience. We will continue to enhance our ESG practices. In retail, we want to continue to enhance our product per customer ratio or the ratios of product per customer, leveraging the data analytics and GenAI to generate targeted marketing campaign, and continue to leverage the branch network in terms of sales of insurance and wealth management products. In corporate, we're soon to launch phase two of supply chain financing. We want to also do further enhancements to our digital trade platform. We want to also continue to focus on cross-sell and more products and offering to drive higher growth and liabilities.
In treasury, we want to obviously continue to enhance our offering of structured deposits, as well also enhance the sources of funding through diversified sources of funding, obviously focus on cross-selling our products and treasury products. Page 12, the last slide for me before I hand it to the CFO. It just shows some of the KPIs as a result of the current strategy. In retail, we grew at 37% on revolving credit card portfolio. Auto lease continued to have very strong growth, 57% year-on-year growth. Accounts opening, now 93% of our newer accounts are opened through online. In corporate, we had a bit of a slow start on project finance. However, through the significant approved projects recently, we expect stronger growth in the second half. SME had, as I mentioned before, 21% growth and mid-corporate 30%.
On treasury, we've improved our average yield on investments by 15 basis points. Cost of funding reduced by 27 basis points, exchange income improved by 5%. With that, I hand over the floor to our CFO, Adel.
Thank you. A very good afternoon to you all, welcome again to our earnings call for the second quarter of this year. As usual, I'll be walking you through the financial performance that will be followed by the overall outlook and the guidance for the remaining of the year. I will open the questions of the Q&A at the end. Starting with the slide number 14 on the balance sheet trend. Total assets has grown 7%, reaching roughly SAR 300 billion by end of Q2. This was driven mainly by financing growth of 8% and also the 6% was the growth in our investment book. In this slide, total liabilities, we've seen 7% align with the growth in the assets. Total liabilities are roughly SAR 250 billion by end of the quarter.
This was clearly driven by customer deposits growth of 9%, we have seen a slight drop in the interbank. On the next slide 15 on the P&L trend. As you have seen, the growth in net income is 15% year-on-year, this was mainly driven by an 8% growth in the top line, which is the total operating income. The 8% was mainly driven by 9% growth in the funded income and also complemented by a 5% growth in the non-interest income. This was offset by a 9% growth in the OpEx, we'll see some details later on. We go to slide 16, a little bit of details on the financing. 8% growth in YTD with 15.5% growth on the financing on a sequential basis from first quarter of this year.
The YTD growth of 8% was driven by corporate portfolio growth of 9%. The growth was in retail portfolio of 8%. You can see the same applied in the top right-hand, the gross financing composition as of June, was 65% large corporate and project financing. Of that, 53% is project finance and almost 52% for large corporate. Mid-corporate represents 6% of the overall financing portfolio of the bank. SME portfolio is 5%. The remaining 24% is the overall retail financing, which is 12% each between the mortgage portfolio and the other 12% is for the consumer finance. In the next slide 17 on the deposits. Even though we have seen a slight drop in the CASA growth on a sequential basis, 1%, however, the CASA growth YTD is 7% and also time deposits have grown 11% since December.
The growth in time deposits on a sequential basis this quarter is more than what we have seen if you recall in Q1. The growth in time deposits from December to March was only 1%. We have more growth, 12% on time deposits this quarter if you compare it to Q1, which as you can see on the graph in the center of the page that diluted the CASA, the percentage of total deposits being 50.7% by end of March, which was Q1, this percentage was 53.9%. We move to slide 18, which is a little bit of details on the NIM. We have seen the gross funded income amount grown by 8%, it's driven by 6% growth in the financing related funded income and also 24% on the investment side.
If you can see the graph on the bottom left on the net profits margin movements, as mentioned by the CEO previously, 22 basis points was a contraction on the NIM from where we were same period last year. Clearly this was as a result of the reduction of 55 basis points in the financing yield, even though there was six basis points improvement in the investment yield. However, the drop in the cost of funding given the elevated liquidity costs we have seen only a drop of 28 basis points from the same period of last year. The graph in the center here, net profits margin YTD, we closed at 3.52. This is an 18 basis point contraction from the full year NIM of last year, which was at 3.7%. Slide 19 on the fees and other income, the non-funded income.
We have seen a very strong growth during this quarter on a sequential basis from Q1 this year. The growth in non-yield income is 27%. This is actually driven by 22% growth in net fees from banking services, on a sequential basis of course, and 58% growth in other income. The year-on-year growth on the non-funded income was 6% from fees from banking services and exchange income was 5%, and the investment gains and dividends remains flat year-on-year. On the next slide number 20 on the operating expenses. We've seen a growth in operating expenses, 1% on a sequential basis from Q1. If you recall, in Q1, the growth from the Q4 was 5%. This quarter, the growth on a sequential basis for the quarter was 1%.
If you look at this year-on-year, the growth overall 9%, which was driven by 9% growth in personnel cost and 17% growth in depreciation and amortization, and we have 7% growth in other G&A. The growth in overall OpEx 9%, which is lower than the growth that we have mentioned on the top line, has diluted, has actually increased the cost to income ratio. If you can see in the cost to income ratio, if you recall, we closed the year in December at 50.9. We closed the first half at a cost to income ratio of 51.6. However, the cost to income ratio for the quarter has dropped actually from where we were when we closed in March, where we closed at 52.2 back in Q1. We have a 60 basis point drop in the cost to income ratio.
On the next slide number 21 on the impairment. This year, the six months charge is less by SAR 86 million from the same period of last year. This is a 15% lower impairment charge for the same period. Cost of risk actually four basis points increased from Q1. However, if we look at the cost of risk back in June 2024 or comparing this to the same period, cost of risk was at 63 basis points. We closed the first half at 47 basis points, which is actually a 16 basis point drop. On the next slide number 22, we have the NPL MBL coverage. We have seen the NPL has increased by 28%. This is resulting on MBL ratio reaching 101.25%. Nevertheless, the non-MBL coverage ratio has improved. Back in Q1, we were at 156.4%. The coverage ratio as of June 2025 was 173%.
Also looking into the stage wise coverage, Stage 1 remains flat as 40 basis points coverage. However, as we mentioned in the call for the Q1 results, we are working to improve the Stage 2 coverage, which has increased from 14.4%- 16.5%. We have an improvement on Stage 3 coverage, that has reached 70.4% from 54.8% back in the first quarter. Looking also on slide number 23 on the capitalization and liquidity. The capitalization has improved by 20 basis points in the total capital, which is pillar one, Tier 1 and Tier 2 for pillar one risks, which was in Q1 at 18.3%. That's a 20 basis points improvement. That's also as mentioned by the CEO, part of it is because of the $500 million that was issued as a capital instrument during this Q2. We have also a 40 basis points improvement on ROE.
We were at 18% ROE in Q1. We closed the first half at 18.4% ROE. Looking into the prudential ratios, LCR stands at 123%, which is in line with the previous periods on average, and remains well above the regulatory minimum of 100%. We are operating at 82.5% liquid loan-to-deposit ratio, which is the regulatory, or SAMA LDR ratio, which is well below the regulatory maximum. NSFR remained healthy at 108.2%, which as I mentioned, also well above the regulatory minimum. On the second section on the outlook and the guidance on slide number 25. We closed the first half of the year with financing growth at 8% YTD. We're keeping the guidance unchanged for the full year as a mid-teens growth for financing.
Given the elevated liquidity cost and we do have seen especially in the first half on the cost of funding side, where we closed the first half at 22 basis points contraction on the NIMs, year-on-year, and also 18 basis points contraction from December, compared to the full year of 2024. We are revising the guidance from previously 0 to -10 basis points. The new guidance is -10 basis points to -20 basis points. In the light of that, also, we are revising the cost to income ratio guidance. The guidance will be below 31%. This is revised from the previous guidance, which was 30.5%. Also the ROE, as a result, ROE also as a guidance has been revised to be above 18.5%. This is revised from the previous guidance for ROE, which was above 19%. Cost of risk remains unchanged.
We closed the first half at 47 basis points cost of risk. What was mentioned earlier, we are keeping the cost of risk guidance unchanged, 50-40 basis points. As far as the capitalization for total capital for pillar one, Tier 1 and Tier 2, we closed the first half at 18.5% and the guidance is kept unchanged for 18%-19%. With that, I will hand it over back to the operator for the Q&A. Thank you.
Thank you very much for the presentation. We now open the floor for Q&A. If you would like to ask a question, please raise your hands. You can also type in your question in the text box. We'll start the Q&A section with the audio questions first. We'll first go to the line of Chiro Ghosh. Chiro, your line should be open.
Hi, this is Chiro Ghosh. Can you hear me?
Yes, please go ahead.
Hi. I have three very quick questions. This is Chiro Ghosh from SICO BSC. The first one is related to the cost of funding, of course. In a scenario of two to three rate cuts, does your cost of funding improve or the competition is still very strong for you to see a NIM improvement? That's my first one. Second is, where does your CET1 stand considering would you be able to sustain this kind of mid-teen level growth, purely from the CET1 perspective? The third one is, again, quickly, the project finance growth was relatively softer, like at 5%. Is there a systemic lower demand or it's a strategic decision to stay away from the segment? These are my three questions.
Thank you. As far as the cost of funding, if you look at the three-month average SAIBOR for the first half this year compared to last year, it actually went down by 82, 83 basis points. The issue here was the demand on liquidity driven by strong growth on loans as banks are forced back to be well above SAIBOR to compete on deposits. To have further cuts in rates, certainly will help, generally speaking, but it's not to the same level. The cuts of, say two cuts at, say, 50 basis points does not going to translate, in my opinion, to a 50 basis point lower cost of funding because banks are still paying higher than SAIBOR. There will be some of it.
Mentioned before, like I think 27, 28 basis points lower cost of funding because the SAIBOR itself or average three-month SAIBOR declined by 83, 84 basis points. You can see there's a gap.
It's obviously lower.
A higher decline on interest that charge our customers. It's also coupled with the fact that there is still aggressive pricing in the market for some corporate loans, coupled with higher cost of funding. That's what forces us to change the outlook. As I said, we always promise investors that we're going to continue to report our three forecasts before the earning calls, and basically report what we as management see going forward. As far as CET1, we're fully aware that we're maybe operating below market's average. However, as mentioned before, we keep getting this issue again and again. The issue is that one of the tools that we can obviously do is reduce the dividends payout. We haven't done it yet. We don't see an urgent need to do it now, but that's one of the tools. Ultimately, going for rights issue, it's always a possibility.
We're not planning to do, but that's one of the other options. On project finance, and I think I quickly mentioned, maybe Jameel here is our chief credit, chief corporate head. Jameel, do you want to comment on this?
Yes. In this regard, yes, maybe there was a soft growth. As you know, due to the competition, we are very selective on deals that are priced well. However, we are catching up, and we are positive about the continuing growth as projected before.
The demand is there. It was a strategic decision, if I can summarize.
It's more of the timing of projects. I think recently there have been significant size of project finance that's been approved, and we're going to see a much stronger growth in the second half. It's a matter of timing.
Yeah. That's all from my side. Very clear. Thank you very much.
Sure.
Thanks. We'll move to the next question. This is from the line of Naresh Bilandani. Naresh, your line should be open. Please go ahead.
Yes. Hi. Thank you very much. It's Naresh Bilandani from Jefferies. Thanks a lot for the presentation. I have three questions, please. My first question is on the operating environment. Across the board in the sector, we've seen a pressure come through on the NIMs led by funding costs and definitely yields not compensating due to competitive pressures, as you indicated in the reply to the previous question. As is also visible in your numbers, we are not seeing any notable slowdown in credit origination. Even your guidance, you're maintaining a mid-teens guidance, even though the revenue is going to be softer probably for the rest of the year. Do you believe this phenomenon of growth despite tight spreads is likely to continue into the next year, given the market structure or the opportunity in the industry?
Do you believe the industry participants could eventually start opting towards a lower growth option to conserve the spreads? I'm just keen to understand how do you see this situation, which is kind of unique in this Saudi market right now, pan out beyond sort of like the year 2025 at this stage? That's the first question. The second question I had was on CET1. In addition to the answer that you offered to the previous question, is there a level of CET1 that you're planning to maintain through the medium term? I think the level that we saw at the end of last year was 13.2%. In context of that level, what would be the level that you would opt to maintain over the medium term? That's the second question.
My third and final question is, we've seen recently changes to the credit cards that were promulgated by the regulator, in June. Do you believe these changes are going to be meaningful enough to put a pressure on fees, in any form in the second half of the year? Also keeping in context that the brokerage volumes are relatively sluggish at this stage across the industry. Thank you.
Thank you, Naresh. I think in terms of credit environment, certainly there is a pressure on liquidity. There is also competition on pricing. However, I think in terms of the bank's ability to continue to grow, there is also certainly a capacity. One is the liquidity, the other one is capital adequacy. You must have heard in the news that the regulator came up with countercyclical buffer addition to the CAR of 100 basis points.
Yeah.
Certainly, that may have a bit of a slower growth, but I don't think the growth will be going down to single digits in the industry. I think we're going to see multiple years of still double digits. In terms of loan growth, the demand is strong, and that's the core business for banks. Despite maybe lower NIMs, the fact that you're adding volume. When you look at cost of funding for banks, because the fact that they have significant CASA balances in their books, their true cost of funding is not actually 5%, it's below. In our case, I think it's below 3% in terms of cost of funding. When you lend at 5%, with 190 basis points , with 110 basis points still adds optimally to the bottom line.
Yes, it may have a bit contraction in NIMs, but the volume impact should more than offset that. On the CET level, on CET1, we don't really have a specific targeted level. I think we see the level currently is comfortable. Would it decline further? Certainly, there's a possibility, but as I mentioned, we possibly, certainly want to see this double digit. We want to make sure it never goes to single digits. It does not mean that our target is 10%. It could be obviously higher, but we'll see. We're assessing this periodically. We don't have a specific target on the credit card changes.
Yeah, I assume that I can take the credit card part. The recent regulations, as you know, came to effect recently. It just, as you maybe have seen them, this is public actually, but it specified some of the fees for banks—
What they can charge as an issuer. We did the assessment, we think the impact is immaterial. Especially when you think about it, that is from the point of view that it might increase the acquiring part.
Lower fees could also trigger more utilization for the acquiring business. We did the assessment, it's not really material. Some of the fees, actually, are just put there for banks just to specify the rates, because it will not be left to banks to charge more or less. Just to be unified among banks. Yeah, we did the assessment, it's not really material.
Thank you so much, Adel. I appreciate it. Just one final small follow-up. Could you just clarify what is the level of CET1 for the second quarter?
13.2%.
Got it. Thank you so much.
Thank you. We now move to the next question. This is from the line of Murad Ansari. Murad, your line should be open. Please go ahead.
Yes. Good day, everyone. Thanks for the presentation. On the asset quality, you've made significant improvement on Stage 3 coverage in particular. I just wanted to get a sense of, has there been a reduction in your Stage 3 loan balances? We saw a pickup in the last quarter. Just wanted to get a bit more insight on, how it's evolved over the last quarter. Secondly, on NIMs. Just on the rate cuts that have come through, is the book largely now reflecting those rate cuts? Do you see further downward repricing possibility over there? Third is on loan growth. You've had a good first half, 8% year to date.
Your guidance is for about mid-teens, about 15%-16% growth would mean an additional about SAR 16 billion-SAR 17 billion growth in absolute terms, which is similar to what your first half absolute expansion has been, in the loan book. Mr. Abdullah, earlier in the call you said, you're expecting second half to be much stronger. Just wanted to get a sense, is there an upside risk on that loan growth guidance to being higher teens? Lastly, on fee income, a good quarter. Are there any extra one-offs over there? Just some insight on what are the key drivers for this pickup that we've seen in the fee income. Thank you.
I can take maybe the two questions on Stage 3 and also maybe the fees. On the fees, the growth in Q2 was strong on a sequential basis at 27%. 22% was the growth from Q1, actually, was mainly on the banking services fees. We have seen 38% growth in the other income that is part of the non-yield. If we look at the fee from banking services for Q2, we have seen improvement across many metrics there. We have seen the improvement on the point of sales business. We have seen a pickup versus what we have seen in Q1, and even in Q4, where there was a drop from Q3. We have seen a good improvement on the level of fees we are getting as part of the assets management that is being done by our Alinma Investment, which is our investment arm.
We have seen also slight drop on the cards related expenses, there was a big improvement coming from the cards business. That would be linked in one part to the improvement that we have done in the operating model with some of the international schemes that provides the credit card services, the utilization of cards, which resulted in more interchange income. Collectively, this translated into the Q2 result. On the other hand, in the other income, not specifically the fees from banking services, was also we've seen a pickup from Q1, 6% growth in our tax income given the volume that has been transacted. We have seen a decent growth in gains and dividends from those investments that fair value from income statement.
We have seen some growth in dividends for some investments and for fair value through other comprehensive income. There was small loss increase on the overall other income as well. Maybe back to Stage 3. Stage 3, as a movement, we haven't seen any significant movement in Stage 3 during the quarter. As far as certain accounts that by March will be usually get staged into Stage 3, and clearly there will be a Stage 2 before. I think what is being more meaningful to us is look at the stage coverage, which has improved significantly from the previous quarter, where Stage 3 coverage was around 55%, the emission delivery in my slides. We are now at 75%, which is slightly higher than what you would see as the rise in the market.
Okay. On the numbers, as I said, every time we do the reforecasting before the earnings call, we take the latest forward yield curve from the markets. We don't build our own yield curve. We just take whatever the markets at that time believes. That's already taken into consideration. The loan growth, as I said, we had a small slow start on compare year-on-year growth on project finance. Recently there have been significant amounts of projects being approved, and we're going to see stronger growth in project finance in the second half. As mentioned by Adel, 33% of the total portfolio is actually project finance. You can imagine if the growth rate accelerates as percentage, that has a bigger impact on the overall portfolio growth.
We're going to continue to grow strongly in the areas of SME, project finance, sorry, and mid-corporate, as well as good growth, very strong growth on the retail side.
All right. Thank you so much.
Thank you, Murad. Next question is from the line of Mehmet. Mehmet, your line should be open. Please go ahead.
Good evening. Thanks very much for taking my question. I have just two follow-up questions on capital, please, if I may. Firstly, you had executed some RWA optimization measures in the first quarter, and back then was, I think, on the back of eligible collateral. I am just wondering if you've taken any specific measures this quarter, in the second quarter, and if there are any other pockets of optimization possible going forward. Secondly, just a clarification on the increase in the Countercyclical buffer requirement by SAMA. I remember from our previous conversations that there were still some clarifications needed, whether it would be CET1 or total capital, in terms of the increase in the requirement. Could you please clarify whether this will be filled through CET1 or is it seen from a total capital perspective? Thanks very much.
Hi, this is Adel. On the earlier question that relates to the.
Can you—
Can you repeat the first question? Sorry.
Mehmet.
Mehmet, would you mind repeating your question again?
Oh, yes, absolutely. I was just wondering.
First question.
Yes, absolutely. I was just wondering if there are any RWA optimization measures that you took in the second quarter similar to the first one, and if there are any other pockets of optimization that you see that you can take going forward.
Oh, clear, Mehmet. Thank you. I missed the question. Now clear. Yeah, as you rightly said, during Q1, the risk density has been about 50 impacted. The optimization is actually an ongoing exercise. During Q1, as you rightly mentioned and we mentioned before, that there were certain liquidity eligible collateral that we started now take into account. Nothing really specific to Q2. However, the overall optimization process to the risk-weighted assets is ongoing exercise. I wouldn't say that it's something purely specific for Q2. On the CCYB, the countercyclical buffer, the circular that came out from the regulator, which I believe it's public, that the countercyclical buffer will be moved from 0% - 100%, so from 0 basis points to 100 basis points. That, as mentioned in the circular itself, that it's going to be off the total risk-weighted assets.
There will be the requirements, all on about the overall capital requirements.
That's very clear. Thank you very much, Adel. I appreciate it.
We'll move to the next question. This is from the line of Rahul. Rahul, your line should be open. Please go ahead.
Am I audible?
Yes, please. Go for it.
Thank you. Thank you for the presentation. A couple of questions from my end. Firstly, on the NIM guidance. You have sort of downgraded the NIM guidance. We are -18 basis points year-to-date, and the guidance of 10 basis points to 20 basis points implies that you either see a flat NIM through the year-end or an improvement in the NIM. What is sort of driving this NIM? Like how many rate cuts do you factor in, number one. Number two is, assuming no rate cuts further from here, how do you see NIM panning out? That is number one. Secondly, on the cost of risk perspective, again, given your coverage ratio has increased while net, your NPLs hasn't increased. Are you expecting the coverage to increase further from here, or do you expect NPLs to go up? That would be helpful.
Sorry, one last question. On the loan growth perspective, last three quarters, we have seen that Alinma sort of grew either at the market or slightly slower than the market, whereas this quarter, again, you've started to grow faster. What is it? You mentioned project finance, but apart from that, could you just add more color on that? Or is it that you will be clearly focusing on growth over profitability? Thank you.
I'll take maybe on the first point on the NIM. As maybe mentioned by our CEO earlier on the answer to the previous question, every quarter, we really take the portfolio composition and the profile of the liabilities along with the expected growth on the assets, and also the latest yield curve that we have with the assumptions of the category growth as well. We do that actively, and also before the annual call, we always run our forecast for the full year, given also with how the NIM have performed in the last previous quarters. Looking into the yield curve in the market now, the assumptions are two rate cuts. One end of the year, there will be maybe a cut somewhere in December. Today, there is a meeting.
The probability is that maybe that wasn't really the yield curve that we have used, that there might be no cuts. I think if we keep rates flat and where the NIM will move, that would again be really heavily reliant on where the also elevated liquidity cost will be from now until year-end, and we have seen that in the first half. Maybe on the other part, the rates cost of risk was increased, even though NPL did not increase, at least on a sequential basis. You've seen an improvement on the coverage ratio itself, and this was a driver also from what I mentioned on our prudence to always have Stage 2 coverage as well to be within the market, and also to have a bit of Stage 3 coverage that has also dropped in the last two quarters, as you can see.
As we mentioned, we'll always be happy to be around 150% on the coverage ratio. We'll never lose a sleep that goes above. That's also part of the prudence in managing the coverage ratio itself. I think in the long run, you mentioned that it's true that we had less stronger growth in the first quarter, second quarter versus first quarter. I keep mentioning that slow year-on-year growth on the project finance side. We had strong growth on SME, on retail, on mid-corporate, and corporate. I forgot to mention corporate. We had good growth in the second quarter. These are the main drivers for the growth that we see in the second quarter.
Thank you.
Thank you. We'll now move to the next question in the queue. This is from the line of Aybek . Aybek, your line should be open. Aybek, can you hear us? Aybek, your line should be open.
Yes, sir. Can you hear me?
You're not very clear. Can you try again?
Yes. Can you hear me now?
Yes, please go ahead.
Yeah. Thank you. I think, yeah, thank you for the [inaudible]. I want to verify your [inaudible].
Sorry, we cannot hear you at all. Can you maybe check your connectivity?
Yes. Is this better now?
No. Unfortunately, no.
I will get back to you by email. That's fine.
Okay.
Thank you, Aybek. We'll move to the next audio question in the queue. This is from the line of [Mozamel]. [Mozamel], please go ahead. [Mozamel], can you hear us?
Yeah. Can you hear me?
Yes. Please go ahead, ask your question.
Okay. This is [Mozamel] from Axi Research. I have just one question. Can you tell what are the spreads you are making on your corporate loan portfolio, combined with the SME portfolio? If they are already low, what will be the strategy that you will offer the loan to the customers, given the rates are already very competitive? Thank you.
Honestly, I didn't get the question right. Can you repeat that, please?
Sure. I was saying that your spreads on the corporate loan portfolio combined with SME portfolio, what are these spreads? If they are low, what will be the bank's strategy to catch a customer from the market who's already getting lower rates on the financing? Thank you.
Okay. Obviously, I did mention in the beginning, I think it was Murad who questioned about loan growth. Certainly, we've seen some aggressive pricing for certain customers. We had to compete, but we don't go aggressive on pricing. At the end of the day, if you don't compete, you lose significant market share. We did adjust some pricing lower, but not to the same level that we heard some clients are getting outside. We let go some clients if the rate is really uncompetitive for us to participate to that level.
We're focusing on project finance, mid-corporates, the semi-retail provides good rates, and we're very selective in large corporate, but we've been very successful in the second quarter in terms of growing large corporates. That's why I think over the last few years, that's the first time we've seen our loan growth was below the industry average in the first half this year. We do want to be aggressive on loan pricing.
Okay. Thank you. That was just a question from my side.
Thank you. I'll move to the next question in the queue. This is from Talal. Talal, please go ahead. Your line is open now.
Yeah. Thank you, management, for the presentation. Just one question from my end regarding asset yields. Just if you can elaborate a little bit about the segments or from where do you see a sharp decline in the asset yield? During this quarter, we have seen some banks expanded their asset yield. Just if you can say which sector or segments have been in a decrease in the quarter. Thank you.
I think, Jameel will agree, I think that in terms of the segments that you see in terms of tough competition in terms of pricing has been the large corporates. We've started feeling it in project finance to a certain extent, but mid-corporates are also facing some aggressive pricing, but not to the level that you see in large corporates.
Clear. Thank you.
We don't have any audio questions, maybe I'll move to one of the questions in the chat box. The name is not clear to me, but it basically asks for your NIM sensitivity to a 25 basis points cut in U.S. rates.
On the NIM sensitivity, again, the latest sensitivity we have did not again move much. We've seen this in Q1, which we communicate that around 1.6 basis points to 1.7 basis points drop for every 25 basis points cuts. As usual, Shabbir, this has to be always qualified that this is really a point in time sensitivity because this is subject to many factors and remains theoretical. As you move one day ahead and any changes to the overall balance sheet composition or the euro growth assumptions, this could always change, but did not change as a sensitivity from what was communicated back somewhere in Q1. Just was part of the basis points drop, but remains almost the same.
Great. Maybe I can add a couple of questions here. First one is on your deposit growth. I think about 5% quarter on quarter ahead of the sector growth. How should we see that? Should we see this as basically building liquidity in anticipation of stronger loan growth in the second half of this year? That's number one. Number two, I know you've discussed this point earlier in some of the questions, but when you talk about the countercyclical buffer of 100 basis points, is this going to be applied uniformly across all the banks or it will be dependent on the growth outlook or the historical growth rates? Related to that, it wasn't immediately clear to me based on your answer, if additional Tier 1 capital and Tier 2 capital can also be used to cover for this additional countercyclical buffer.
My third question around, again, on the capital side. You were quite clear that in 2Q, there was no RWA optimization as such. I was wondering if there are other pockets of opportunities for you in terms of asset sales, et cetera, which could help you generate some extra capital that can be used for these capital requirements. Those questions, please. Thank you.
Thank you, Shabbir. I'll cover the first point and leave the others to Adel. In terms about the growth, as I mentioned, and it's known in the market, the liquidity bit tight in the market and the future growth in loans is strong. The demand on loans is strong. We do all our efforts to basically bring up whatever liquidity that we can find at a reasonable price. We've been very successful in growing our CASA. We're successful in onboarding new relationships, whether in government, corporates, affluent, privates, and also in new segments and mass segments and so on. This is all helping. Whatever deposit we see reasonable rates, we take it. Certainly, I mentioned I expect stronger growth on second half on project finance and continue our strong growth in other sectors. Certainly that's going to help us maintain that level of growth. Adel.
Malik, on the question relating to the CCyB and countercyclical buffer. This circular is already public and can be found in this.
Regulator website. It's basically 0% - 1%, which, as I mentioned, 100% of total risk-weighted assets. This suggests that it's for this sort of capital, as I mentioned, including Tier 1 capital. Is this unified for all banks? Our understanding is this circular was sent to all banks, not specific to certain banks. On the risk-weighted assets, as I mentioned, the optimization is an ongoing exercise, honestly. Was there anything specific on this quarter versus last quarter? Not really. Going forward, as I mentioned, this is an exercise that there is always tools. One of them, like you mentioned, could be the sales of the mortgages to SRC. We would be also active going forward to optimize the risk-weighted assets, of course, in order to aim to reduce the risk density for the overall.
Great. Maybe a last question from my side. There was some news around.
Can you hear me?
I think another line has opened.
Yeah, just one second, please. Let me see if I can mute that line. Is it better now?
Yes, clear. Go ahead.
Yeah, just one question from my side. There has been some news about, for instance, the most recent one is about the PIF reevaluating some of the NEOM projects. It's interesting that you mentioned that you've seen a good pipeline going into the second half. It's very encouraging to see that the pipeline is still looking good. I think in terms of your industry focus, in terms of your project focus, what is that pipeline being driven by? Has these reprioritization activities not affected you?
Still getting this interference from another line. In terms of project finance, there have been multiple focus. One of the strong area of growth for us has been the renewables. Significant amounts of solar stations being awarded and needed finance, as well as other projects in the country, mainly in the infrastructure. Of course, other companies that have been set up by PIF is also in the market for finance.
Got it. There's one question from Fatima Al-Dosari in the chat box. What led to the increase in NPL loans? Any specific sector or industry?
The increase in NPL did not happen this quarter. If you go back to the last two, three quarters, this is where we started to see the pickup. If you recall, Alinma, we did a sizable write-offs actually in the first half last year, was even higher than the historical averages of the write-offs. Of course, any accounting write-ups that we do directly impact the level of NPL as an amount in the books and also have a reflection on the NPL as a percentage. It's not really growing as maybe the base was low if you compare it to the Q2 or maybe a Q1 or end of last.
Thank you. We have one audio question. Do you have a few minutes to take that question, please?
Yeah, it's okay, Shabbir.
Okay. This question is from the line of Yasser. Yasser, your line should be open. Please go ahead.
Hello, everyone. This is Yasser Alnejaimi from Al Nahdi Holding Company. I have one question regarding the asset yield and cost of funding. If we are taking the previous data that you shared in the first half in 2024, the asset yield stood around 6.9%. If we add six basis points, we are talking about approximately 7% in the asset yield side. In terms of the cost of rate or funding side, 3.2% up to 3.5%, we are talking about 28 basis points and come up with a NIM of 3.5%. My question is, do you have any plan to increase CASA ratio through the remaining of the year?
I mean, of course, CASA is always a focus for the bank. If you look back in the history, we have really seen a strong growth in CASA specifically. Even if you see this quarter, we have a one percentile drop. It's only six months, and we already have seen a 7% growth in CASA. It's also compared to double-digit growth that we have seen last year and the year before. Yeah, it will continue to be a focus. Of course, it's not only the current accounts but also even the saving accounts, we are seeing a growth there and also what goes into that and other accounts. Of course, given where we are in the environment and the elevated liquidity cost and the cost of funding, it's actually more important than ever. Of course, it is the focus.
Of course, it's the focus going forward.
Okay. Could you please give us a guidance in terms of how do you see the cost of funding in the full year?
Yeah, I'm afraid we don't really guide on the cost of funding itself specifically, or maybe the growth yield itself. However, I mentioned our NIM guidance is for the full year, if you recall, at 3.7% for the full year. Now we just revised the guidance to be -10 basis points to -20 basis points.
Okay. Clear. Thank you.
All right. I think that concludes the Q&A section of the call. I'll now hand it back to the management for any concluding remarks.
Okay. Thank you, Shabbir, for hosting the call, and thank you everyone for your time. If you have any follow-up questions, please contact us at our email and have a great day.
Thank you, Arwa. Thank you everyone for joining the call. Have a nice evening.