Ladies and gentlemen, good evening. I will now hand you over to your host, Mr. Iyad Ghulam. Mr. Iyad, please go ahead.
Good afternoon. On behalf of SNB Capital, I would like to welcome you to this conference call with SNB management regarding the bank's Q2 2025 results. Today's call is being recorded. Please note that this call is open for analysts, investors and shareholders only. Any media personnel, please disconnect at this point. Today's speakers are Mr. Tareq Al Sadhan, Chief Executive Officer, Mr. Hussein Eid, Group CFO, Mr. Fawaz Al-Thumairi, Head Treasury Business Group, Mr. Mazen Khalefah, Acting Head of Group Strategy and Innovation, and Mr. Abdulbadie Alyafi, Head Investor Relations. I will start by handing over to the SNB Head of Investor Relations. Abdulbadie, please go ahead.
Greetings from Riyadh. We would like to thank SNB Capital for hosting today's call. I wish to remind everyone that the presentation may include forward-looking statements. In that regard, please take note of page two of the earnings presentation containing our usual disclaimers. The presentation and other investor disclosures for the current and prior periods are available on our website. With that, I'll hand over to our CEO, Mr. Tareq Al Sadhan. Please go ahead.
Thank you Abdulbadie and good afternoon everyone and thank you for joining our earnings call for the second quarter. I'm delighted and happy to share with you that the progress on our strategy execution is undergoing with the, as expected and as planned. The initiatives that we have developed are executed, governed, and started to see the contribution of these initiatives to the performance of the bank. More to come, Insha'Allah, in the coming months and quarters. My colleague Mazen, when he covers the strategy progress, he can share with you some of the success stories. In terms of the performance of the second quarter, a very strong set of performance. We delivered a decent growth in our lending activities, reaching SAR 715 billion, a 9% growth in this first half of the year, mainly coming from wholesale.
A decent growth is coming also from the MSME, which shows that our focus area is really contributing and, Insha'Allah, will be contributing more to the bottom line on the coming quarters and months. A decent growth in the mortgage by 4%. Also, coming with that, a very solid growth in our deposits and CASA, reaching SAR 81 billion, as a growth from the end of the year. That bringing our CASA mix to close to 76%. We are focusing in growing our current account in the CASA, more than the call account. In terms of the fee, also it's another focus area for us, has grown by 23% year-on-year, contributing to 25% of our operating income. In terms of efficiency and cost optimization, we are also progressing very well.
2% growth year-on-year on our operating expenses. That's bringing us a very positive draw, and we'd like to continue with a stronger performance when it comes to the cost optimization on the second half of the year. That also contributed to a very healthy cost-to-income ratio at a group level of 26.6%, an improvement of 143 basis points. The cost-to-income ratio at a domestic level at 23.6% with an improvement of 155 basis points. During the second quarter, we had a very successful two issuances of AT1 and AT2 bringing SAR 6.4 billion that will give us a more room for growth for the coming, Insha'Allah, quarters. We continue focusing on our customers and our customer experience.
We are maintaining an NPS score of 88%. Our target is 90%, and we are heading to achieve that. Innovation and digital, we are pushing also the sales activities through the digital channels, and we are happy that we are progressing very well. I think my colleague Mazen will also cover that when it comes to his slides. In terms of the financial performance and the income statement, we've all witnessed SAR 6.14 billion profit in the second quarter. Good efforts coming from our risk activities.
A good contribution from our collection initiatives that really helped in reducing our cost of risks, and that also helps in bringing our return on total equity to 17.3% for the first half of the year. With that, I'll hand over to my colleague Mazen and I'll be joining you again during the Q&A session. Mazen?
Thank you Tareq and good afternoon everyone and it's a pleasure to connect with you all. As you can see on this page, this detailed scorecard reflects the strength of our performance and the steadiness of the execution across the bank. We're firmly on track to deliver on our strategy, and in many areas, as you can see, we are ahead of plan. Let's briefly review some of the highlights. Starting with the market share and value creation. As you can see, our financing market share remains strong at 23.5%, supported by double-digit growth in both wholesales and MSME. Wholesale market share expanded to 19.7% in Q2, reflecting our continued focus on the sector. On the other hand, retail declined to 27.4%, driven by outflow and high network segment and portfolio securitization.
Worth noting, normalized for the one-offs, portfolio growth would have been almost 60% growth year to date. Also in line with our objectives, we delivered strong CASA growth of 19% year to date, as mentioned by Tareq, or almost SAR 81 billion. Moving to operational excellence. Our cost-to-income ratios, both group and domestic, at very strong levels and continue to improve. Our domestic cost-to-income ratio is at 23.6%. This progress was underpinned by our NOR expansion and disciplined cost governance. In customer centricity, we achieved improved retail branch satisfaction scores reaching 88, taking halfway toward our 2027 targets. As for corporate NPS, we are currently undergoing the evaluation of an external vendor, and we should report this by Q4.
In the innovation side, digital retail financing sales now account for 24% of our total sales, up from 15% in last year. The data use cases, we launched 7 new cases, many of which have already started to yield positive results and support deposit acquisition, loan origination, and cost optimization. For NEO, our digital venture, we acquired more than 1.1 million active users, and we expect customer acquisition to continue. Last but not least, the talent magnet. We continue to invest in our people with upskilling initiatives and are taking a structured approach to hiring to attract and motivate the best in the market. Next page. Beyond the metrics, we have made strong qualitative progress this quarter across each pillar of our strategy.
Starting by the market share and creation, we continue to expand, as I mentioned, into priority segments. New wholesale credit programs, including project finance and raw land exposure, and recalibration of risk appetite enabled us to capture new demand and deepen relationships. This has already translated into SAR 58 billion growth in our wholesale portfolio. As part of improving our product offering with these new cards, we launched aimed at retail customers. Example cash back premium, multicurrency, and Flexi cards. At the same time, CASA acquisition remains a key focus area for us, and we have grown the balances meaningfully. Some of the strategic projects implemented were the data use cases, active customer retention, and enhancing global transaction banking penetration of the customer base.
Moving to operational excellence, we significantly improved turnaround times and credit approvals and enhanced productivity through process streamlining. We are making excellent progress in automation and targeted cost efficiencies and are on track. We have already achieved around 73% from our targeted cost savings. Additionally, credit approval turnaround time improved significantly. We're talking about 50% improvement in the wholesale turnaround time, showcasing faster decisions and a stronger client-centric approach. Speaking of which, customer centricity, we are focused on enhancing customer experience through key touch points, which helped in improving retail branches, as I mentioned, to 88, the NPS, representing 50% achievement of the uplift expected to our three years. We also set up a dedicated after-sales function to strengthen our merchant offering.
We have also expanded our SNB geographical coverage by opening 19 SNB centers year to date. In the innovation, as mentioned by Tareq, we rolled out seven new data use cases that include the identification of cross-selling opportunities and instant marketing based on client behavior, building on our data capabilities and embedding them into day-to-day decision-making. To further scale this momentum, we are actively upgrading our data infrastructure to support real-time analytics enabling initiatives such as instant marketing based on client behavior, as I mentioned. An interesting example of this include more than an 80% uplift in the retail digital financing sales in our personal finance product.
Finally, under talent, as I mentioned, we continue to strengthen our talent pipeline by launching a strategic upskilling journey to develop future ready pipeline of senior credit officers. We're also rolling out three structured hiring programs focused on technology, data, SNB sectors. These initiatives resulted in almost 65 specialized hires and more than 190 graduates from our structured programs. Now I'll pass over to my colleague, Hussein Eid, for more details on our financial performance and guidance.
Thank you, Mazen. Good afternoon, everyone. Let me start with the high-level summary of SNB financial performance in the first half of 2025. We delivered another quarter of strong results, underscoring the resilience of our business model and continued discipline in execution. Our key financial metrics reflect solid momentum and balance sheet expansion with healthy credit discipline, quality, efficiency improvements, income growth, and strong profitability. Financing growth remains strong, increasing 9% year to date to reach SAR 715 billion, driven mainly by a 20% increase in wholesale financing. Domestic customer deposits grew 14% year to date, mainly from CASA acquisition, increasing CASA ratio to 26%. NIM declined 21 basis points during the period, mainly reflecting higher funding costs. I will touch on this in more details later.
Fees and other income growth was strong, up 23% in the first half and 30% in the second quarter year-on-year. Our cost to income ratio continued to improve, coming at 26.6 for the group and 23.6 for the domestic operation, both ahead of our guidance for this year. Asset quality remained robust, with NPL ratio declining to 0.81%, and cost of risk was net benefit this quarter, supported by strong recoveries. Robust operating income, better risk cost, and continued efficiency gains drove net income up by 18% year-on-year, and the return on tangible equity to 17.3%, reflecting our continued focus on profitable growth. Now let's look at the balance sheet developments in more details. Total assets increased 9% year-to-date, driven mostly by growth in financing and investments.
To support this expansion, we continued to make solid progress on the liability side. Customer deposits increased 14% year-to-date, mainly from CASA inflows. During the quarter, we also took important steps to strengthen our capital base and diversify our funding resources. We successfully issued a Saudi riyal-denominated Additional Tier 1 instrument worth SAR 1.7 billion at 6% yield, while in the same time redeeming a SAR 4.2 billion Sukuk. In addition, we tapped debt markets for the second time this year with the $1.25 billion Tier 1 instruments, our largest ever USD public issuance. It was fully placed with international investors. The offering saw strong demand, with orders exceeding $4 billion. Let's now look at the financing in more details.
Our financing portfolio reached SAR 715 billion at the end of June, reflecting a 9% year-to-date increase. Wholesale financing remained main driver, growing by SAR 58 billion or almost 20% year-to-date and up five percent quarter-on-quarter. We saw strong momentum across both corporate and financial institutions, supported by strategic enablers such as expanded and recalibrated credit programs. This growth came despite both Eid holidays falling within this quarter. Total retail was steady year-to-date. Mortgage grew 4% growth and increased 6% if adjusted for the portfolio sold to SRC during Q1. While we continue to grow the other retail products, the decline in this category is due to repayments within the high net worth segments, reflecting natural life cycle and expected behavior of this portfolio.
From time to time, we experience such repayments, and in the second quarter, we saw above average activity. Also, we are implementing strategic repricing across products and segments. While this will have short-term impact on volumes, it supports the enhancement of risk-adjusted returns and optimized capital allocation. Over time, we expect this approach to support sustainable profitability and stronger balance sheet efficiency. Considering all these factors, you will note that similar to the previous quarter, we maintained full year guidance growth at low double digits. We will continue to push ahead on our strategy with careful eye to deliver sustainable and profitable growth. Now moving to the next page. Our investment portfolio grew by 8%, exceeding SAR 315 billion. As in previous quarter, we continued to steadily build high quality, longer term fixed rate assets.
Growth in the second quarter came at 2% quarter-over-quarter, mainly driven by higher Saudi government debt securities. Now let's talk about funding. Customer deposits grew 14% year to date, mainly supported by continued domestic CASA growth. In the second quarter of 2025, CASA deposit increased 7%, approaching SAR 0.5 trillion, with the CASA ratio improving to almost 76%. This quarter, we focused on securing CASA inflows from institutional clients to maintain a strong liquidity position. While this required a greater share of cost-bearing call accounts, we continue to manage the liability mix holistically, including capital markets placements, with a clear focus on optimizing our cost of funds. Moving to the next page.
Regarding the PNL, operating income increased 7% year-on-year, driven by strong growth in core revenues, a higher contribution from non-funded income, continued cost discipline, and improved risk cost. The international segments, which had been a drag on performance last year, recorded a rebound this quarter. However, it still carries a limited visibility in the near term due to ongoing uncertainties in the global economy. We delivered a record net income of SAR 6.14 billion for the second quarter and SAR 12.2 billion for the half-year. Profitability remains strong with the return on tangible equity at 17.3%. We have upgraded the upper end of our full-year guidance range now to stand at 17% instead of 16.5%.
This upgrade is enabled by our continued focus on profitable growth through non-funded income, solid credit quality recoveries and sustained cost discipline. Lastly, we are updating the adjusted return on tangible equity to a version that still excludes Tier 1 Sukuk cost, but also adding back intangible amortization costs in line with international practices. This change results in a ratio that is approximately 60 basis points higher than the previous measure. We are updating the adjusted return on tangible equity guidance for this to be between 17.5% and 18.5%. Now, let's focus next on the individual PNL components, starting with the net special commission income and margins. In the second quarter, net special commission income grew 3% year-on-year.
Volume growth remains strong, with average earning asset up 11% year-over-year and NIM moderating in line with what we mentioned in our last call. Group NIM decreased 21 basis points year-over-year, 17 basis points from domestic and 4 basis points from international. That's mainly because of the impact coming from the Turkish policy rate changes. Also, the moderation was impacted mostly by lower benchmark rates that we witnessed in the last quarter and last year, which was also reflected partially in retail floating portion. In retail, the pressure mainly came from our continuous effort to expand fixed rate portfolio. Even though this has a short-term margin impact, it enhances stability of income generation and position as well in the event of further rate cuts in the future. Sequentially, group NIM decreased 26 basis points.
Domestic margins were down 22 basis points and international margin by 4 basis points. Same impact because of the Turkish lira policy changes. On the domestic side, the quarter-on-quarter NIM declined, driven mainly by the increase in average cost bearing funds to support our asset growth. We continue to actively manage our asset and liability mix and expect margins to stabilize around the Q2 level by year end. On rates, we maintain a conservative base case that assume a single cut potentially by the end of Q4. Our interest rate sensitivity assume a stable balance sheet, where a 25 basis point rate cut would theoretically result in a 2-3 basis point over 2-3 quarters. Resulting from these elements, we are downgrading the net special commission income guidance.
We now expect the net special commission income to grow low to mid-single-digit in 2025. Moving on to non-funded income. Fee and other income grew strongly in the first half, up 23% year-on-year and 3% on a sequential basis, continuing the positive momentum observed earlier this year. Growth in fees was driven by several components as follows. Trade continues to show strength from the combination of active issuance across trade products and also initiatives to improve fees recognition which are non-recurring in nature. Foreign exchange income benefited from higher client activity supported by strategic management initiatives. Investment income also improved, supported by mark-to-market gains on the trading portfolio and realization of gains from the liquidation of financial instruments.
The gains were partially offset by lower brokerage and investment management income, which remains under pressure driven by softer market activity, with traded volume on Tadawul down 37% year-over-year in the second quarter. Overall, our fees and other income strategy is gaining traction. These revenue now represent a quarter of our total operating income, contributing to earnings diversification and helping to mitigate margin pressure. Moving to OpEx. We maintained strong cost discipline during the second quarter, in line with one of our core strategic priorities. Domestic operating expenses remained flat year-over-year, despite the growth in the total operating income, while group operating expenses rose only by 2%. Breaking this down, we saw an increase in domestic general and administrative expenses driven by targeted investment in marketing and digital capabilities and customer engagement initiatives.
At the same time, we achieved meaningful savings through efficient fixed asset management and administrative streamlining. Our careful cost efficiency, driven by continued positive jaws, resulted in a year-on-year improvements in efficiency ratios and guidance upgrades. Group cost to income ratio improved 143 basis points to 26.6% and domestic cost to income ratio improved by 155 basis points to 23.6%. Given this performance, we are confident in upgrading our guidance to be below 27% for the group and below 24% for the domestic operation. These outcomes highlight the resilience of our operating model, enabling us to support growth and transformation initiatives while maintaining strong profitability. Moving now to the credit impairment and cost of risk. In the second quarter, we recorded a group cost of risk of 4 basis points credit, reflecting strong quality and continued success of our recovery efforts.
While we do expect some normalization in the second half, we are confident in upgrading our guidance range, which is now 5-15 basis points. Next page, please. Continuing in asset quality, we maintained a strong performance in the second quarter with further improvements across the portfolio. The group impairment ratio declined to 0.81%, down another 10 basis points quarter-on-quarter. The decline in ratio is mainly due to corporate write-offs in the second quarter. It's worth noting that the write-off of loans were already fully provisioned, therefore no material impact during the quarter. The bank's strong stage-wise coverage levels are consistent with our expectation and highlight the effectiveness of our prudent credit management strategy. Also, the overall impairment coverage ratio remains very healthy at 147%. Moving to capital and liquidity.
SNB remains well-capitalized even after strong balance sheet growth in the first half of the year. Our Tier 1 capital ratio increased to 19.5%, aligning with our full year guidance range of 19%-20%. This reflects strong internal capital generation while continuing to support financing growth and dividend distributions. Our liquidity positions remain robust. Regulatory metrics such as LCR and NSFR are comfortably above regulatory threshold. In addition, our SAMA LDR remains well below the 90% ceiling at 29.2%, providing ample funding flexibility. It is also worth highlighting our recent Tier 1 and Tier 2 issuance, which further strengthened our capital and liquidity buffers. We continue to manage capital and liquidity proactively, ensuring SNB is well positioned to support its strategic ambitions while maintaining balance sheet strength and resilience.
Now let's summarize the macro outlook and recap guidance on the next page. The Saudi economy continued to demonstrate resilience in the first half of 2025. Full year real GDP growth has been revised upward 10 basis points to 4.6%, supported by stronger than expected non-oil activity, particularly in infrastructure, tourism, and financial services, all key pillars of the Saudi Vision 2030 agenda. Inflation expectations have also been adjusted from 1.8% to 2%, reflecting seasonal increase in food and transportation prices alongside the rise in domestic consumption. As noted earlier, we expect one rate cut to materialize toward the end of year 2025, and we continue to operate against broadly stable and supportive macroeconomic environments.
Given this, reflecting on our strong first half performance, we are upgrading three elements of the full year guidance while leaving two unchanged and downgrading one. As a reminder, financing growth and Tier 1 CAR guidance remain unchanged. Cost to income, cost of risk, and return on tangible equity are all upgraded. Net special commission income growth is downgraded. This level of profitability will position us to deliver superior returns, enabling us to fund growth opportunities, creating long-term shareholders value, and sustain attractive dividend distribution. With that, I will hand it back to Tareq Abdulrahman Al Sadhan.
Thank you Hussein Eid. Nothing really to add before opening the Q&A. Just stressing on the confidence that we are really on track on achieving our aspiration and our goal in execution of our strategy 2027, and confidence of delivering a very strong second half of 2025, supported by the initiatives and commitment and the hard work from everyone in SNB. With that, I'd like to thank my colleagues for the good performance for the first half, and we look forward for an even stronger performance in the second half of the year. I open the Q&A for our investors.
Thank you. Ladies and gentlemen, we will now start the Q&A session. If you wish to ask a question, please raise your hand through the webcast so that we can unmute you. Alternatively, you may submit a question in writing using the Q&A feature. Thank you for not exceeding one to two questions per caller. Our first question comes from Shabbir Malik from EFG Holding. Please unmute locally and proceed with your question.
Hi. Thank you very much. Congratulations on a good second quarter. I have two questions, please. You've revised your NII guidance to low- to mid-single-digit. If I look at your trend, in the second quarter especially, you're trending at about 1% year-on-year growth. It's a bit below what you're eyeing for the full year. I just want to kind of understand what assumptions are you factoring in that takes you to the low to mid-single-digit kind of NII outlook for 2025. My second question. There seems to be an improvement in your RWA density in Q2. I was wondering if you can comment on that.
Generally speaking, how do you see yourself positioned with your CET1 ratio with the new countercyclical buffer that is coming in next year? Thank you.
Hello, Shabbir. Thank you for the questions. Now, regarding the NII, we explained in our previous call that, you know, that was the NIM was actually at its peak. There are several reasons behind that. The rate cuts during the last quarter of last year, you know, was impacting our cost of funds faster than the assets, basically, which giving us a benefit during that quarter, while our assets will take around 3-6 months to be repriced. Also, during the first quarter, there was a growth in the call accounts that is coming toward the end of the quarter and having very minimal impact in the cost of funds that is materializing during quarter two.
With that, you know, that's back with temporary, and we are maintaining, you know, the 2.9 as a base going forward for the rest of the year. When we are talking about the risk-weighted density, basically, three factors impacted that. First of all, the high repayments that we received within the high net worth segment has improved our risk-weighted asset density. Second, the issuance, you know, of Tier 1 and Tier 2 actually improved the overall, you know, capitalization and related ratios. Third, we are effectively always working on RWA optimization. For example, we are always reviewing the unutilized limit, reducing the unneeded ones. And this is always a regular practice. From a CET1 or Tier 1 CAR, we are comfortable.
We have enough buffer above regulatory requirement and even above the internal buffer requirements. We are well-positioned to continue growth, distribute position with the current capital coverage we have.
Thank you.
Our next question comes from the line of Jon Peace from UBS. John, please unmute locally and proceed with your question.
Yes. Thank you for taking the question. The first one please is on your financing growth targets. If you've done 9% year to date already, even after the high net worth outflows and securitizations, I was just wondering why you didn't upgrade the low double-digit guidance. Is it a seasonal slowdown, or do you maybe anticipate some more outflows or securitizations in the second half of the year? Or are you just being a little conservative? The second question please is around the net special commission income outlook. In your 2024 to 2027 plan, you originally planned to grow net special commission income by 1.4 x over the three years. That was a, I think a low double-digit CAGR.
If in 2025 you're only going to do a low single digit CAGR, do you think you might fall a little short of that 1.4x goal? Do you expect it to accelerate over the next two years? If you're gonna come in a little under the goal, and you still feel you're on track for your 2027 targets, I just wonder where you think you're most likely to outperform. You know, could it be growing the fee income faster than the high teens, or could it be delivering cost growth maybe better than the mid-single digit? Thank you.
Hi, Jon. Okay, regarding your first question, loan growth, basically, we are committed to deliver on our guidance despite the high repayments within the high net worth. Just need to remind you that we front-loaded most of the targets related to the corporates during the first quarter. We will continue growing, you know, steadily our corporate during the second, third and fourth quarter. We'll continue growing mortgage and retail as well. We have to balance between value and growth. We'll not go crazy and just try to grow by losing value. We are balancing between both and trying to make sure that we are really capturing the right value.
Currently, we are going under a heavy exercise to reprice all of our segments and all of our products that should balance, you know, the growth and value generation to maintain and enhance our NIM going forward.
If I may add also, on the NSCI. I think the assumption of earlier cuts for the interest rate was in our consideration at the beginning of the year. Now we are assuming something on September, but also going forward next year, potentially three cuts during 2026 will definitely help. In addition to our initiatives where we're diversifying and allocating most of our asset growth to higher margin segments, that will also accelerate our growth when it comes to NSCI.
Okay, John, regarding your next questions. Basically, now we are focusing on enhancing our cost of funds by attracting more current accounts. This is one. Repricing as I stated previously across all segments and products. That will help our NIM. At the same time, fees and other income is a main focus for us, and we'll keep growing them. We think with the further rate cuts coming probably end of this year and in the coming years, the cost of funds will have immediate impact while corporate loans will be repriced down. However, as we are working on revising our spread and increasing our pricing, this should balance, and hopefully we are expanding, you know. I'm reconfirming that whatever NIM we have as of Q2, that should be the floor.
We are working really on enhancing this, and we are committed on our around 3% NIM for the three-year strategy to achieve.
Thank you.
Thank you. Our next question come from Aybek Islamov from HSBC. Aybek, your line is now open. Please go ahead. Apologies, Aybek, please unmute locally and proceed with your question. Aybek Islamov, please unmute your line locally and proceed with your question. Unfortunately, we're not receiving any audio from Aybek's line, so moving on. Our next question come from Olga Veselova from Bank of America. Please unmute locally and proceed with your question.
Thank you and good day. I have two questions. One is, during the answers in this Q&A session, you did mention that you currently go under heavy exercise in repricing of existing book. Can you please share more on this? Do you approach existing customers and basically say, "Look, your existing spread is going from X to Y," and for which portion of existing book are you doing this? Is this the reason why you expect some slowdown of loan growth for the second half of the year and recovery of margins? This is my first question, and my second question is on provisioning cost of risk was very low for the first half of the year, and you improved your full year guidance. You did mention that it's partly helped by recoveries and repayments.
Without this, what would be your underlying cost of risk? In other words, how shall we think about normalized or normal cost of risk into the next year or years? Thank you.
Okay. For the first question regarding the repricing, you know, we are. When we talk about retail, you know, the repricing happening is actually for the new origination. We're increasing the prices for the new origination, and that naturally will have maybe slight or moderate impact on the growth. When it comes to corporate, we're reviewing all customers with below-the-average spreads and really negotiating with them to increase the price. If the deal doesn't make it for us, then we let it go, and we look for value creating in our origination. In which portfolio? It's actually across all. It's mortgage, it's PF, it's auto lease. It's all segments within the corporate. It's private banking, it's business banking. It's really a focus for the next few quarters for us.
At the same time, we're working, you know, to enhance our cost of funds. Once we witness some rate cuts, that will take immediate effect and will show in our P&L. When it comes to cost of risk, we just need to assure that there are no reversal from the allowance, the provisions, you know. The cost of risk is improving or actually net credit. It's because of pure cash recoveries as a part of our efforts, continuous effort to increase recoveries. Retail has improved compared to last year, and we have significant improvement in wholesale. Portion of that is not recurring, but we'll continue achieving high level of recoveries as this is a key focus for us.
When it comes to cost of risk, again, we provided so far around SAR 1.1 billion additional provision during the year, and there was no reversal from that. Now, going forward, we think our cost of risk during this year will normalize to five, between 5-15 basis points. For the three years, I think it will be between 20-30 basis points. That's the normal, basically, average cost of fund that we expect over the longer term or the medium term.
Thank you. As a follow-up on your second answer, are you comfortable to continue reducing stage three coverage given that you are still above peers, above average?
Yeah, yeah. We sustain. It's an ACL model, you know, and we're following the accounting standards. This might go up, might go down, but we'll always maintain a healthy coverage ratio, depending on our models and metrics used to assess our credit quality.
Thank you very much.
Just bear in mind that, you know, our NPL coverage is around 147%, which is very, very healthy.
Mm-hmm. Thank you.
Our next question comes from the line of Mohammed Al-Rasheed from Hassana. Mohammed, please unmute locally and go ahead with your question.
Salam alaikum. Am I audible?
Loud and clear, yes.
Yeah thank you. 2 questions from my side. The first one is regarding the write-off. We have seen the write-off has been very escalated over the last 3 quarters. My question is: Is this due to some change in the internal policy for the write-off, or are there other factors driving this increase? My second question is a follow-up regarding your credit risk intensity. That went down by around 400 basis points quarter-over-quarter. I understand that part which is because of the repayments within the high net worth, but the decline over there was around SAR 10 billion, while your overall loan book has increased on a quarter-over-quarter basis. If you can shed some light on what drove such massive decline on your credit risk RWA? It's currently at the lowest level in the last 5 years. Thank you.
Mohammed. I think for the write-offs, I'll divide it in two parts. Yes, we have a change in policy, one-time write-off regarding the mortgage, where we accelerated the write-off timing to be in line with the best market practices, and this is a one-time exercise. It has no impact because these were already fully provisioned from previous years. For the corporate, this is a regular practice where we review every quarter fully provisioned loans where we see some of them need to be written off. That's really a normal practice. Mainly the acceleration or the increase is mainly coming from the one-time adjustment. Whatever you see in quarter two maybe and going forward, that's business as usual. We review every quarter our portfolio and propose a portfolio for write-off.
for write-off in case it's fully provided and meets the internal criteria. Now for the RWA, one, as you mentioned, is basically the high repayment in the high net worth segments. That gives some release or decline in the credit risk intensity. Also, during the quarter, we increased the collaterals across all segments in corporate. That's helped also to improve, you know, the credit risk intensity. The third one is the annualized commitment optimization, where we reviewed all limits that we have, and whenever the customer is not using his limits, we are immediately reducing that and canceling it, which has a positive impact in our credit intensity.
Okay. Just a follow-up regarding the point of the collateral. You have increased the collateral, you mean you have added collateral to some exposure or you have revalued the collateral?
No, we have added collaterals and, again, some of the collaterals, especially, specifically, the one that's collateralized by shares, you know, it has improvement.
Lower consumption from the current.
Yes, lower consumption. It has higher value. The value increased. The market value increased. That will have help. Plus we added more collaterals. You know, our corporate team is working always to secure more collaterals from clients to improve our basically credit quality and our capital adequacy.
Okay. Yeah. Thank you, Hussein.
Our next question comes from Rahul Bajaj from Citi. Rahul, please unmute locally and proceed with your question.
Hi this is Rahul Bajaj from Citi. I have two questions mainly. The first one is on Tier 1, Tier 2 issuances. You mentioned that you had SAR 6.5 billion of Tier 1, Tier 2 issuances in the first half. I just want to understand what the logic behind going for a Tier 1 or a Tier 2. Is there a cost differential between these two? How do you make a decision in terms of, when should you go for a Tier 1 versus when should you go for a Tier 2? i.e. is there kind of regulatory limits for each of these buckets that you try to maintain? How is that decision made? Going forward, how should I think about these wholesale issuances?
Will it be more Tier 1, more Tier 2? What could be the combination if there is one advantage over the other? That is something that I want to understand. That's my first question. My second question is on the high net worth individual repayments that you alluded to in the second quarter. Is that something which was expected? Why now? I mean, and is this something that you expect to continue in the second half of the year? What is driving this high net worth individual repayments suddenly? Thank you.
Thank you Rahul. Maybe for your first questions about the difference between the Tier 2, Tier 1 and Tier 2, I think both are capital instruments and they have a difference in the hierarchy, and obviously they have a difference in the pricing. In SNB, our platform, we ensure that we have the agility to move between one to other instrument based on the market opportunity. I think if you have seen our first Tier 1 issuance in Saudi riyal, we went to the market when everyone was busy issuing in the US dollar in the AT1 space. We found an opportunity, and we were really able to secure the capital at a very attractive level compared to what other capitals have been priced.
We had the capacity to issue the Tier 2, which is again giving us similar support into our capital. There was a huge demand because if you look at the dollar market at that time, it was well crowded with a lot of AT1 issuances coming from the region, you know. That's really allowed us to raise capital at a very cost-effective level. From our perspective, again, we look at it opportunistically since we have the platform and the approvals in place from the regulators, and we choose what fit best to our balance sheet based on the market, based on the market timing, you know. In a nutshell, this is the way we choose between different instruments.
It's what's providing the maximum value for the bank and how can we convert that capital to generate additional return while maintaining a healthy spread between the cost of capital and the cost of the return.
Thank you Fawaz. Sorry, on the second question, Rahul Bajaj, that was a one-off plan. We knew that the repayment is coming at that time, and we don't expect more repayment to come in the coming quarters.
Understood. Thank you.
Our next question comes from the line of Gabor Kemény from Autonomous. Gabor, please unmute locally and proceed with your question.
Hello. Just two quick questions from me, please. First, just another clarification on NII. Do you expect your NII to grow in the second half from the Q2 level? Because I believe that if we assume stable NII at the Q2 level, that still gets you to the new NII guidance for the full year. That's the first question. The second question is on fees. You are growing fees together with increasing the Net Promoter Score, which is pretty impressive, I believe. How far have you come with implementing your strategic initiatives on the fee side, and especially on product pricing? I'd be interested to hear your views on the trade-off between raising your fees and achieving similar or a further improvement in your NPS scores. Thank you.
Hi, Gabor. Regarding your first question, I think NII as of quarter two should be the floor. We are being prudent. We look forward to improve that, giving two factors. If rate cuts come earlier than what we are estimating in our forecast, then that will have positive, immediate positive impact on our cost of fund. At the same time, our pricing effort that we explained earlier should really increase our gross yields, and hopefully that would increase the NII. But that's really would take time. We cannot see it suddenly, you know, in the next quarter. It needs at least like two to three quarters to materialize that. All what I can say that's it is the floor. Okay?
We are aiming to grow this and to be in line with our three years strategy guidance of 3%.
On the fee question, I think we need to differentiate between introducing a new fee on our customer, where we do it very carefully to ensure that we continue provide a high satisfaction to our customers while we can collect a fee from them in line with the market. We are not doing something that really upsets our customers. Also by focusing on services that comes with a fee, like a trade finance, LCs and LGs, it always comes with a high fee, and the point of sales activities comes with a very decent fees. We're focusing on business that generate fees as well. That will help continuously grow our fee contribution to our NOR.
We are very careful in not impacting our customer experience by introducing fees that will upset or make customers not dealing with SNB. It's actually mostly coming from a new line of businesses that generate much fee than what we used to do before.
That's a full quarter. Thank you.
Thank you.
Our next question comes from the line of Naresh Bilandani from Jefferies. Naresh, please unmute locally and proceed with your question.
Thank you. It's Naresh Bilandani from Jefferies. Two questions, please. One, could you please guide on the sustainability of these recoveries which have helped your cost of risk being subdued in the first half? I mean, I'm just comparing this to one of your smaller peers who underwent a merger and continued to see cost of risk benefits come through for an elongated period of time, helped by recoveries. Do you think this could also be a reality for you? Because 5-15 score is still quite low. I'm just keen to just even broadly hear from you if this could still be a possibility going into the next year. So that's the first question. Second is an industry question.
We saw the IMF's Article IV report yesterday, which talks about the new banking law, which is finally in the legislative approval phase after a while. Would you please be able to share if the latest draft is in any way different from the previous draft that was circulated for public consultation a few years back? Alternatively, if you can please offer any thoughts on any key areas where you believe regulatory oversight is needed or requires a change. Any color on that would be extremely helpful. Thank you so much.
Recovery and collection. We started an exercise of looking at our old debts and trying to collect as much as we can, and this has paid really well in the last year and this year. When we built our assumption at the beginning of the year, we thought that we have achieved the most of it during last year. Surprisingly, positively surprisingly, we continue to achieve a very positive recoveries. We have a clarity on the pipeline for the second half of the year. Will that go for the next year? We will continue our effort, but I don't think it will be at the same level as of what we witnessed in 2024 and 2025.
We will continue our efforts on the collection, but again, I don't think that it will continue as strong in terms of the momentum as what we have witnessed in the last 18 months and potentially the next 6 months as well. On the new banking regulation, we were exposed also to the public consultation version, where we gave our comments. I haven't seen the final version, but I don't anticipate anything that really significant that we haven't been consulted on. I think the version that we've all seen in the public consultation, the final one will be very close to it. If there is anything that is really major, SAMA would have already discussed that with us.
We don't anticipate any major or significant changes that will really impact the business.
Understood, Tareq. Thank you.
Thank you.
Our next question come from the line of Varuna Kosanda from SICO. Varuna, please unmute locally and proceed with your question.
Hello. Hello, am I audible?
Yes, loud and clear.
Yeah. Thank you very much. Thank you, gentlemen, for this opportunity. Basically I have two questions. The first one is related to the comment that you made regarding the cost of funding. You mentioned that one reason for the high cost of funding is related to call accounts that you got towards the end of last quarter. I just want to know, just from my understanding, how different is this, I mean, call account rates compared to the SAIBOR? I mean, if you can. I'm not looking for an exact figure, but ballpark, I mean, where do we stand for these call accounts?
Secondly, regarding the new regulation on the credit card fees, just want to get an idea as to the impact that you foresee in your P&L on annual basis. Thank you.
Okay. With regards to the first question, on the cost of fund and the call account, just let me clarify a couple of points here with regards to the cost of fund. If we look at the bank's cost of fund for interest-bearing liability on a standalone basis, actually the cost as a rate went down a quarter-over-quarter basis, you know. Our cost went down. However, the cost of fund we are referring to, or what you can calculate based on the financial statement, is subject to two items, which we are talking about. Okay, taking the full commission expense and you divide it by the balance of the outstanding liability. And one item you have the daily average, and the other item you are having only the end of period average, right?
If you look at Q1, our asset growth was around SAR 67 billion riyal, and most of that came into the end of the quarter. Really technically, the accrual for the SCI was very low, but the balance was there, you know, when we look at that. That will artificially give you a low cost of fund. During the second quarter, if you accrued the full amount, and the cost of fund will artificially be higher than that, you know. But when we look at the cost of fund on interest-bearing liability, it actually went down relative to the previous quarter as well as relative to the benchmark.
I think when you got a quarter where you see substantial growth that is coming toward the end of the period, I think, the calculation based on the public financial statement can be sometimes inaccurate, in reflection. The second question is the credit card question.
Regarding the credit card, you know, as a start, the impact is really immaterial to the bank. You know, whether it's positive or negative, it's really immaterial. It doesn't really change any of the major metrics. But you know, capping these fees, reducing these fees, definitely will have a reduction in the fees income. However, in the same time, we anticipate an increased usage that should generate a higher yield in terms of special commission income that should compensate to some extent.
Now when you look at it from the acquiring side, also that increases, there will be a reduction in the interchange cost, okay, which will motivate merchants and customer to make more transaction, and that actually will help the average portfolio balance to grow, and therefore generating more special commission income that should offset the most of the negative impact that comes from the credit card. All in all, it's really immaterial. It doesn't change anything in the metrics or the guidance we are providing. Any impact is already captured as part of our guidance.
All right. That's clear. Thank you very much, gentlemen.
We have reached the end of the call. For any further questions, please kindly reach out to SNB's Investor Relations team. Mr. Iyad Ghulam, back to you for the conclusion.
SNB Capital would like to thank SNB management for taking the time to conduct this call. We would like also to thank all participants for attending. We wish you a pleasant day. Thank you.
This concludes today's webinar. Thank you all for joining. You may now disconnect.