Ladies and gentlemen, welcome to SNB 1Q 2025 earnings conference call hosted by SNB Capital. 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 Q1 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, the CEO, Mr. Salman Syed, acting CFO, Mr. Mazen Khalefah, Acting Head Group Strategy and Innovation, Mr. Raja Asad Khan, Group Chief Economist, and Mr. Abdulbadie Alyafi, Head Investor Relations and Market Intelligence. I will start by handing over to the SNB Head of Investor Relations and Market Intelligence. Abdulbadie, please go ahead.
Thank you, Iyad. Good afternoon from Riyadh. Welcome to The Saudi National Bank's first quarter 2025 earnings call. We would like to thank SNB Capital for hosting. As a reminder, today's discussions and presented materials include forward-looking statements. In this regard, please take note of page two of the earnings presentation containing our disclaimer. Today's 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. I'll add my voice in welcoming everyone and thanking them for joining us for the earnings call for the first quarter 2025. Today we have a short presentation. We hope to cover it in half an hour, leaving half an hour for Q&A. I'll be covering the first part, which is a quick one, having a recap on our strategy session that we conducted last February. Then I'll hand over to my colleague, Mazen, which will take you through the progress in our strategy execution. Then my colleague, Salman, will deep dive on the financial performance for the first quarter. My colleague, Asad, our Chief Economist, will be ready to answer any tough question related to the economy. We always give him that task.
Moving into the slides, looking at slide five, a quick recap on our key strategic pillar that we discussed with you back in February, where our focus is summarized on this slide. The market share and value creation by focusing on the right segment in our growth and improving our return and fee generation. Grow financing and market share by focusing on more value-added contribution to the bottom line, driving CASA acquisition with a big focus on current accounts and enhancing the fee contribution to the income statement by increasing the percentage of fee contribution to loans.
When we look at the second pillar, operational excellence, here we're talking about operational resilience and operational agility, where we capitalize on our fourth elements of innovation to capture more cost to cost optimization, but more importantly, time to market and lower error rate and enhancing our agility and our entrepreneurial activities doing the business in the bank. The third key pillar is the customer centricity, where we want to embed that in our DNA in the bank. Everything we do in the bank, we keep our customers and clients as a focus area, and hopefully that will enable us to enhance our customer journey and our customer experience, where it will enable us also to grow in the focused market segment, whether in attracting CASA and current accounts, but also in tackling the right segment when it comes to the lending activities.
Innovation is a very key pillar for our strategic key pillars. We are talking about beyond digitization. We're talking about innovation, how the banking sector will look like in the near future, but also capitalizing a lot on the data agenda where we can capture cost saving initiatives or a leap in our revenue targets. Definitely the fifth key pillars, which is the talent magnet, is really important to achieving all our aspiration related to the other four key pillars. We want to be the talent magnet, where we can really attract the best talent in the financial sector, where we can retain them, develop them, and grow them in the business, where we see them the leaders of the future and the leaders of tomorrow.
With that focus on our key pillars and our clear direction and aspiration, taking into consideration our competitive advantage by being or having a strong loan origination pipeline, diversified balance sheet, having a very low cost of funding and high CASA ratio, solid capitalization, ample liquidity, high quality of assets and lean operating model, that really helped us in achieving our great result on the first quarter, where we grew our assets to almost SAR 1.2 trillion. That's growing by 6% year-to-date. Net growth in our financing by SAR 52 billion. It's an outstanding growth that we have achieved in the first quarter. Also, a very strong growth in our CASA, which complement our focus in growing our CASA and lowering our cost of funding by a net growth of SAR 48 billion that we have witnessed in the first quarter.
A good implication to that to our bottom line by achieving SAR 6 billion profit, and that's 19% growth year-over-year. If we look at our Q1 strategy and driving the impact, our return on tangible equity has grown by 150 basis points year-over-year. Our financing also has grown 8% year to date. CASA has grown by 11% year to date. Net special commission income has grown by 5% year-on-year. Fee income, 16% growth year-on-year. Cost-to-income ratio witnessed an improvement of 125 basis points year-on-year.
In terms of our digital agenda and pushing the agenda for enhancing our sales through our digital channels, we have witnessed a growth of our personal finance, an increase of 36% year-on-year, and in the credit card business, 41% year-on-year. That's only the start where we want to see more products that the digital contributes for that growth. With all that, we still maintain number one in terms of assets, net income, investment, and micro and small medium enterprises. This a big achievement and a focus area for us, where we had achieved number one in on the balance sheet exposure. From our capital activities, we maintain the highest asset under management and the highest value traded in the brokerage business.
Excellent achievement, Alhamdulillah, on the first quarter, and we are very excited for the remainder of the 2025. With that, I'll hand over to my colleague, Mazen, to take us through the progress in our strategy, and I will join you again on the Q&A session. Thank you.
Thank you, Tareq, and welcome everyone. This is Mazen Khalefah. As you mentioned, Tareq, back in February during our capital market event, we unveiled our strategic roadmap along with clearly defined medium-term performance targets. As part of our promise, we commit to provide quarterly updates on our progress against these targets. In this slide, I will cover where we stand against the KPIs previously set, those which can be measured on a quarterly basis. Also on the other slides, I'll cover the achievement supported by our financial result in Q1. As you can see, we have made good progress across all strategic themes, starting by the market share and value creation one. Our financing growth of 8% year to date with Wholesale financing up to 15% allowed us to expand our total financing market share.
As for the Wholesale and Retail financing, market share will be available once all industry financials are published. Moving to the CASA, a strong growth of 12% driven by both retail and wholesale in Q1 2025 versus low-teen annual growth targets. Fee income to loan up one basis point to 0.74%, where the 2024 baseline was recalculated due to a fee income restatement from 74 basis points to 73 basis points. We also expect to maintain leading market shares in asset management and brokerage at SNB Capital. However, these results, as you know, are only available on an annual basis. Moving to the operational excellence, our domestic cost-to-income ratio 23.3%, close to 2027 ambitious target. This was due to our NOR expansion and strong effective cost governance, which I will highlight later on.
In the customer centricity part, we improved our retail brand satisfaction scores to 87%. In the wholesales side, NPS, as you know, is verified independently and calculated less frequently. We expect to have an update by Q2 or Q3 this year. In the innovation side, as mentioned by CEO, digital retail financing sales now account for 25% of total sales, up from 15% in 2024. We're also continually building up our customer base in NEO. Furthermore, we launched now seven use cases in data management, many of which have already started yielding positive results, and we have few examples in the next page. In the talent magnet, we maintain our commitment to the Organizational Health Index, which is measured infrequently, and through management actions.
As for the training days in Q1, as you know, it's a seasonally low due to Ramadan coming in March. SNB has made a number of breakthrough and strategic achievement, as you can see in Q1, and I'll provide some examples on each of the strategic pillars and proof of the impact it had. Starting by the market share and value creation, we have recalibrated our risk appetite and launched new credit programs to facilitate financing originations. The focus was on targeted segments such as retail mass by adjusting our risk acceptance criteria and MSME through commercial guidelines. This was a key driver behind our loan growth in Q1, especially in wholesales. We also unlocked new revenue streams to enhance our fee income, as stated by Tareq.
Some of the key ones addressed in Q1 were cash management fees, new trade corridors, and retail. The sum of these activities contributed to 10%, around SAR 70 million, of our total fee income in Q1. Our MSME portfolio grow by SAR 29 billion across both funded and non-funded exposures. New client acquisition supported our MSME growth. Total of borrowing clients today is 4x from one year ago. In the operational excellence pillar, we have improved the automation for key products, which resulted in reduced processing time for retail loans by 23% through digitized workflow. This include both residential finance and lease finance. We have an ambitious cost optimization program in place also, of which we have already realized 50% of our target for this year.
This is on a run rate basis, and benefits will continue to be captured until the end of the year. Some example of our cost initiatives are ongoing renegotiation of contracts and fixed asset optimization. Moving to the second pillar, customer centricity. Late in Q4, the bank have redesigned the organizational structure to centralize the CX governance under our newly joined Chief Customer Experience Officer. Also, we expanded our SME coverage through opening 16 new centers within our branches to improve customer reach and enhance our services. As part of target alignment, also we have aligned the NPS KPI target in both the business and customer experience team. Joint effort have resulted in 1+ basis point of branches NPS and represent 25% of our 2025 targets. In the innovation side, we accelerated digital sales through enhancing our platform and revamping functionalities.
This resulted in a 36%-41% increase in our digital sales across personal finance and credit cards. As discussed earlier, we now have 10 live data use cases, most of which have direct impact on revenues. Some examples are personalized targeting of customers and retail and cross-selling opportunities identification. We are also in process of upgrading our data infrastructure to allow for real-time analytics, such as instant marketing based on client behavior. Furthermore, we are exploring ways to incorporate the latest technologies related to generative AI and large language models or LLMs to identify innovation opportunities that will complement our transformation journey. Last but not least, in the talent magnet, we've launched two targeted programs for technology and data, attracting and training top talent to drive innovation.
The two programs resulted in 50 FTEs hired, while a total of 150 structured program graduates are joining the workforce this year. These results are leading to exceptionally strong results for this quarter. Next slide. We are here double-clicking in our successful and strong SME franchise. As you can see, we have made a huge leaps in penetrating the MSME market. This is evident in our portfolio growth of SAR 29 billion, representing 44% growth in our Q1 alone. Growth as well diversified across segments and sectors, and we managed to grow our borrowing customer base by more than 4x compared to Q1 2024. MSME now makes up almost 9.5% compared to 8.6% of total loans a year prior.
We will continue to expand in this segment through our upcoming launch of MSME applications and other supporting service model and technology enhancement to further digitize our product and continue to collaborate with government entities such as Monsha'at. Now I'll pass it over to my colleague Salman Syed for more details on the financial performance and guidance. Please.
Thank you, Mazen, and hello to everyone. I just want to leverage off what you know, our CEO, Tareq, and our colleague, Mazen have said earlier. I will just cover the financial performance part of those aspects they have elaborated to you guys. We have indeed had an exceptionally strong start of the year with impressive momentum in financing and attracting customer deposits, while at the same time we were improving efficiency and profitability. The strategic initiative that we launched at the beginning of the year have significantly contributed to these results. We have achieved an unprecedented high quality financing growth of 8% for the quarter, primarily driven by domestic wholesale and retail financing, even though we did have some growth in our international segment.
It is noteworthy that SAR 52 billion in net financing growth for this quarter matches our entire annual growth that we clocked last year. Customer deposit, particularly CASA, increased significantly during this quarter in line with our strategy. We delivered robust top-line growth, meaning the total operating income accelerated 8% year-over-year. It was driven by a 5% growth in NSCI, net special commission income, and a 16% increase in fee and other income. It reinforces our diversified revenue streams. As you will see later, both NSCI and the NIM registered an increase for the second consecutive quarter. Our strategic initiatives and focus on efficiency improvements resulted in a positive trend in our group cost-to-income ratio, which decreased by 125 basis points year-over-year. Our domestic cost-to-income ratio also decreased to a record low level of 23.3%.
As anticipated last quarter, our prudent provisioning and high-quality portfolio helped us achieve a very low cost of risk of just two basis points for the quarter. These factors contributed to a record net income of SAR 6 billion, reflecting a remarkable growth of 19% compared to last year and sequentially 8% growth from Q4 of 2024. Our return on tangible equity after Sukuk cost reached 17.5%. As Abu Khalid mentioned earlier, this was up by more than 130 basis points compared to last year. It highlights the superior value we are generating for our shareholders. Now, before we go into further details, I think it's very important for us to give you a flavor of, you know, how we see the macroeconomic developments and how it's gonna affect our full year guidance.
With regards to the macroeconomic outlook, it must be highlighted that the situation remains dynamic, and we are keeping a very close eye on global affairs. We are not protected from this global happening, so we acknowledge that the global volatility, trade tensions, and potential lower oil prices may have implication on the Kingdom. Nevertheless, we believe that the Saudi economy is resilient and well-positioned in the face of these challenges. We are confident in the continued strong prospects for the domestic market moving forward. It is worth reiterating that we are on track of our medium-term strategic targets. Regarding our full year 2025 targets and guidance, we are currently meeting or exceeding guidance in several areas. These strong results align with the strategic vision and the financial KPIs we presented in February.
Notwithstanding, we believe it is not pragmatic to adjust our targets after just one quarter. We will revisit the full year guidance around mid-year time and provide you with an update in our second quarter's call. Now, if you go to the details for the balance sheet. Our total assets increased by 9% compared to the same period last year and 6% over the last quarter. It was fueled by financing and investments. Our liabilities composition remains very healthy and diversified. We acquired substantial customer deposits, another pillar of our strategy, during this quarter, and our active presence in the DCM markets, debt securities and term loans, they also rose around 10% during the quarter.
When it comes to financing, the portfolio showed an impressive 13% growth year-on-year and 8% increase year-to-date, with the total portfolio now crossing SAR 700 billion mark, which is approximately 65% of our total assets. We saw a strong demand for financing across various sectors due to healthy economic activity in the Kingdom. While we continue to book high quality deals in the large corporate and project finance domains, we are also making a strong progress in attractive mid-market and MSME segments, as we have alluded to earlier. Strategic initiatives such as risk appetite recalibration and new credit program also supported our growth. Especially, I like to highlight that we were able to acquire new customers that contributed to more than 1/3 of the total Wholesale financing growth this quarter.
Also, while we continue to enjoy a diversified portfolio during this quarter, our growth was broad-based as we expanded our reach in MSME, manufacturing, utilities and health, and commerce, among other sectors. As a result, the Wholesale financing rose by 15% over the quarter. It totals to SAR 43 billion as we speak now. When it comes to Retail financing, it increased 2% year to date across multiple products. The 1% increase in mortgage portfolio is net of the SAR 3 billion securitization, which we completed last month with Saudi Real Estate Refinance Company. Including the securitization, the retail portfolio would have grown around 3.4% or close to SAR 12 billion. It now equals to approximately half of the last year's growth that we have achieved in our retail segment.
Growth in other retail also gained pace with a 3% increase or SAR 6 billion over the quarter, primarily driven by personal finance, the product personal finance that we have. All these exceptional growth in financing will bode very well towards our meeting Group's short-term and medium-term targets. Moving on to the investments. The investment portfolio increased 13% year-on-year and 6% over the last quarter. It now surpasses SAR 310 billion on our balance sheet. By taking a measured approach to interest rate, we have steadily increased our longer-term fixed-rate assets to strategically position ourselves for anticipated rate cuts. The growth was primarily in other fixed income and Saudi government debt securities, which are up SAR 9 billion and SAR 6 billion respectively.
We also capitalize on market opportunities to grow funds and equities by SAR 3 billion whenever the right opportunity emerged in the past few months. Moving on to customers' deposits. They were 5% less year-on-year, though we have rebounded with 8% increase from 2024 year-end. It was primarily driven by our domestic CASA growth. As part of our strategy, our emphasis on CASA is re-energizing our efforts and helping us to strengthen customer relationships, a very important strategic pillar for us. As we consistently advise, there is a transitory element in our funding base, as we provide active cash management solution for institutional customers. These regular deposits and subsequent drawdowns can cause fluctuations in the spot balances. Nevertheless, the average balances continue to demonstrate healthy progress during the first three months of this year.
Consequently, our CASA ratio was very strong and even increased to 74.5% in the quarter. When we talk about the net income, it's a record for us. We have made SAR 6 billion for this quarter, which is 19% growth over the last quarter. I mean, sorry, the first quarter of last year. Sequentially, we have progressed 8% over Q4 of last year. This growth is primarily driven by strong domestic operating income, which increased by 8% year-on-year and 6% quarter-over-quarter from core revenue streams, along with improved efficiency and lower risk costs. Persistent hyperinflation in Turkey did affect the Group's quarterly net income. In addition to a strong net income growth, return on tangible equity and return on tangible assets expanded both year-on-year and sequentially.
They reached 17.5% and 2.2% respectively. Nonetheless, I'd like to highlight that return on tangible equity is expected to moderate in the coming quarters. If you look into the P&L components, especially the NSCI and the NIM. Our NSCI is at 5% year-over-year, reaching SAR 7.3 billion. This growth was primarily fueled by a 7% rise in average and commission earning assets and supported by the growth in CASA. On a sequential basis, NSCI is also up 5% for the quarter. The progression of NSCI is important to understand how it shaped up for year-over-year. This includes several key elements. Our commission income that grew slightly less than 6%, which was driven by the retail, which contributed additional 0.4 billion riyals.
The investment portfolio, which expanded, and it helped adding another SAR 0.3 billion to the commission income. On the other hand, conversely, the yield from Wholesale financing experienced a very moderate decline from lower rates in the second half of 2024, as we all know. Why? Because it was expected, given our majority of the corporate and wholesale book is floating. The cost of fund was a bit higher than 6% year-on-year, although the average cost of fund rate was stable if you compare with Q1 of 2024. It results in an NSCI growth of 5%.
On a sequential basis, we were able to reduce the cost of funds more than the decrease in NIM and NSCI, which was attributed to the diversified funding base, rate cuts in the second half of the year, and higher average CASA balances. Regarding the NIM trajectory, considering the current balance sheet mix, the margin grew sequentially to 3.05% for the Group and has likely peaked in the first quarter after capturing the full benefit from a strong first quarter's CASA growth. On the international side, the recent rate hike in Turkey presents a modest headwind. As you recall, the Turkish Central Bank did raise the interest rate by 4% only a couple of weeks ago. Our sensitivity to interest rates remained largely unchanged.
Assuming a stable balance sheet, a 25 basis point decrease in rates will result in a NIM expansion of approximately two basis points over two to three quarters. We are currently factoring two rate cuts this year, one in June and one in September. When we talk about the fee and other income, it is another very strong story supporting our strategy that fee and other income, it grew by 16% year-over-year. It was driven by an increase in investment-related income. FX and banking services performed really well, which include trade, even though we have some weakness on the brokerage, which come out a bit weaker on that side. Sequentially, the fee and other income grew 13%. Domestic fee and other income increase is also up 16%, with the key highlights as follows.
Q1 investment income performance was strong, supported by solid momentum at the start of the year and positive revaluation of our assets. Looking ahead, the outlook for coming quarters is less clear, as you all know, with an element of macroeconomic headwinds which could pose challenges globally. In this environment, we continue to maintain a longer term perspective and remain focused on prudent risk management and diversified positioning to navigate markets. The rise in FX fees is attributed to increased activity from both Wholesale and Retail customers. Overall, the non-funded income is one of our key strategic priorities, and we are continuing our focus on this in 2025 and beyond. Operating expenses, excluding the amortization of intangibles, rose by 3% to just over SAR 2.5 billion year-over-year.
We are pleased to report that on a quarterly basis, we managed to reduce the OpEx by around 1%. Domestic OpEx increased by 2% year on year, with key highlights as follows: Employee-related expenses grew by less than 2%, incorporating our annual salary increment at the start of this year. Premises and depreciation expenses decreased thanks to our strategic focus on cost optimization, which included the renegotiated contracts and fixed asset optimization, as Mazen mentioned earlier. General and administrative expenses increased by 17% due to higher investments in bank's marketing activities and digital solutions, which includes Neo, to support customer growth and engagement in the coming years. Moving on to credit impairment and cost of risk for financing. The Group cost of risk was just two basis points for the first quarter of 2025, with the domestic cost of risk was almost zero.
The healthy credit environment highlighted in our previous calls has continued this year. While we are currently ahead of our guidance, we aim to remain cautious and, as mentioned, will not adjust our outlook at this time. When you look at the NPL formation, the NPL balances, excluding POCI balances, declined by 16% from the year-end to SAR 6.5 billion, and the NPL ratio improved 2.91% due primarily to write off of approximately SAR 1 billion. A fully provided vintage portfolio in the mortgage. Following the shift in the stage two and three coverage levels during fourth quarter of last year, we saw quite a stable stage-wise coverage during this year. Let's talk about the capitalization and liquidity.
We are very proud that our total regulatory capital increased 1% over the quarter to SAR 158 billion, and it is mostly from the net income generation and improvement in our OCI. It was offset by the SAR 6 billion dividend payout that we did in the first quarter, which translated to a 2024 total dividend payout ratio of 51%. As mentioned in our strategic update call in February, we aim to have an attractive dividend payout ratio of between 50%-60%, of course, subject to the necessary approvals, whereby we balance our aim to deliver strong shareholder returns, growing in line with profitability, with capital generation and retention to support future growth. The bank's capital adequacy is very healthy, with a Tier 1 CAR of 18.8%, even with a robust Q1 financing growth. Liquidity ratios are securely above prudential thresholds.
If you compare versus the 100% regulatory requirement, LCR and NSFR are comfortably above at 244% and 107% respectively. The SAMA LDR improved this quarter to 82.5% and remains well below the regulatory limit of 90%. This concludes a very brief overview of the national section, and I request Abu Khalid to have his closing remarks.
Thank you, Salman. Thank you, Mazen. We are very excited and proud of our achievement on the first quarter and very optimistic about the outlook for 2025. With that, knowing that we took two minutes from the Q&A part, I'll go straight to the Q&A.
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, please submit written questions using the Q&A button on your Webex toolbar. Thank you for not exceeding one to two questions per caller, and please stand by until we have our first question today. Our first question will be from the line of Mohammed Al-Rasheed with Ashmore. Please unmute locally. Proceed with your question.
Salaam alaikum. Am I audible? Hello?
Please go ahead.
Hello, sir. Salam Alaikum. Thank you, gentlemen, for the presentation, and congrats on these impressive results. A couple of questions from my side. I know that you have stated you will update the guidance in the second quarter, but I would like to hear your thoughts about the NIM. Basically, based on what we have observed in the first quarter in terms of the NIM expansion, if this is sustained, this will imply a year-over-year expansion, your NIM of around five to seven basis points. Given your NIM sensitivity, I think this is a valid assumption. While the current guidance imply a contraction of around 10 basis points. I would like to hear your thoughts. What could cause NIM contraction for the remainder of the year?
Will it be mainly the Turkish subsidiary or some outflow of the CASA that we have witnessed during the first quarter? My second question is regarding your spread over SAIBOR for the corporate book. It has went down from 1.46% in the fourth quarter of 2024 to around 66 basis points in the first quarter of 2025. Was that slowly driven by the growth in your corporate portfolio coming toward the end of the period, or was there some tightening in the credit spread within the corporate to support this massive growth? Finally, just regarding your RWA intensity, it has increased by around 230 basis points quarter over quarter. Is this mainly because of your growth in SMEs, or was there other factors behind the increase in the RWA intensity? Thank you.
Thank you, Mohammed Al-Rashid. For the NIM, you know, we are not changing the guidance for a reason, because we would like to have more clarity going forward. What we have seen in the first quarter was very impressive for us. We have, you know, not only grow in CASA, but also within CASA, we were able to generate, the average NIMs, you know, month after month, at a higher level one month after the other. Now we would like to really see how it shapes up. It goes back to your question as well on the spread, for the corporate spread. I don't know where you are getting the 66 basis points drop from, you know, 1% above, but what we've seen in the new deals, our spread is not really compressed or comparable.
We can talk about it offline about how you got this number. With these two together, our NIM guidance at the moment, we are sticking with this, but it does not mean that we will not revisit it in the next quarter. Hopefully we'll come with the good news for you. The reason is that, you know, our focus on CASA growth has not, you know, touched down. It has to increase, and, you know, we continue to push for this very important strategic pillar for us to achieve quarter after quarter. When it comes to the RWA density, it is definitely up because we have foray into certain segments, which, especially in project finance, which attracts a little bit more of RWA, but at the same time, we were never compromising on our ROE, which was driven from the RWA.
Another aspect is the density did increase. If I'm not mistaken, it has increased by around 8%, compared to what we have at the year-end. This density is also a factor of our off-balance sheet. Our LGs and LCs and, you know, other corporate commitment, they have also gone up by approximately 9% year to date. All in all, it did increase the density, but the density, approximately 70%, remains within our risk appetite.
Okay. Clear. Just to follow up, how much of your growth in the first quarter was from the project finance?
I would say roughly around 10%-12% growth came from project finance.
Okay. Clear. Thank you, gentlemen. Take care.
Sorry, can you hear me?
Yes, Olga.
Oh, thank you. Thank you. Good day. Thank you very much for the improving disclosures. This is really value add for us to see it in the presentation. I have several questions. One is on your deposit inflow. Did you see any large depositors migration from the biggest competitors in the SNB in the first quarter? And if yes, then how sticky do you think was this migration? And which other products do clients usually bring together with the deposits and accounts? Do they bring payroll services? What else do they bring to you? My second question is actually also on deposits. Most of increase in deposits in the first quarter came from PIF. We conclude from looking at related parties transactions. How does PIF allocate this money? Is this an auction? How price sensitive are they?
Can this money move away if somebody else offers a better rate? Also, do you include in this related parties PIF-owned companies? If I can ask that. Yeah, I think that these are two of my questions. Thank you.
Olga, I'll take some of the questions, and Salman will take and can add also. On the PIF and PIF subsidiaries, definitely they are very competitive when it comes to pricing their either deposits or call accounts. They go for a bid for banks to bid for it, and the banks will win based on their offering to PIF. They are very professional in doing that. The growth on our CASA, it's coming from all sort of customers. It's coming from our mass, our affluent, our private banking, and also the Wholesale segment as well. We want. We're not worried about the concentration. We definitely want to see more from the mass retail and the affluent, which is we believe it's more sticky.
That's also complements our strategy and our value proposition from a customer centricity point of view that will enable us to really penetrate and attract more customers in these focused segments. We'll continue to do and we'll continue to enhance. Today, I think we achieved a good momentum from the mass and from the gold affluent. We would like to see more again from the same, from the mass and other affluent segments, and also continue growing our private banking, our corporate, and our public sector CASA attraction as well. Salman, if I missed anything.
Yes, Abu Khalid. Just want to add what Olga asked that, you know, which product. When it comes to Retail, you know, one of the key success factors for us was the payroll acquisitions. This really drive very sticky deposit for us when it comes to NIBs. Mass segment, you know, mass and affluent, they were really, you know, contributed towards this growth.
If you recall, Olga, in our strategy session in February, we talked about the cross-sell and the cooperation between corporate and retail, where we can capitalize on our strength in corporate by attracting more payroll that will enhance our retail activities and ensure that also these customers, the executives in these corporates, are banking with us in our private banking and our affluent banking. I think we started seeing that momentum happening and bringing more business to the bank. We will continue to do more, and we hope to see also more contribution to that cooperation cross-sell.
That's perfect. Thank you. May I conclude from your comments that you believe year-to-date inflows should be viewed as reasonably sticky?
We do, definitely. The fact that we don't have a high concentration out of these deposits gives us that impression that we are really doing the right things to ensure that this is sticky deposits, sticky CASA, and we will enhance it, Inshallah, for the coming quarters.
Great. Thank you so much.
The next question will be from the line of Naresh Bilandani with Jefferies. Please unmute locally and proceed with your question.
Thank you. Hi, it's Naresh Bilandani from Jefferies. Congrats on the results. Just two questions please from my side. The first one is just carrying on from the previous question on deposits. You know, while the franchise is quite comfortable on the regulatory LDR, I think the headline LDR at 113% is already looking quite stretched. Additionally, I think if I take a look at the mix of deposits that are funding your total assets, which is currently around 53%, that I think has consistently only come down. I'm just keen to understand hence more on the funding strategy through the medium term. I know you're focusing a lot on generating sticky deposits from various segments.
Should the headline LDR see some improvement in the medium term or should it stay stretched at current levels or do you still feel there's room for this to increase further? Just keen to understand somewhat better on the amount of, you know, funding room that you have for future growth. That's the first question. My second question is on the write-offs. I'm just keen to understand the reason for the elevated write-offs that you've had in this quarter. You did mention, Salman, you kindly mentioned that this was led by mortgages. This is generally perceived as a safe product, so it would be much appreciated if you could please offer some more color.
Just keen to understand following these write-offs, your provisions to loans ratio has dropped to close to around 1.3%, compared to what was 1.76% in this point last year. Do you feel the need to add more provisions from this point on? Thank you so much.
Thank you, Naresh. I'll again start then Salman can add. On the LDR, I think we always try to be very efficient in managing our LDR, where we don't attract costly deposits to finance our growth. We will always push for the current account and the low-cost call accounts to support our growth. Our treasury team have the accessibility to attract more funding, but we are very careful on not attracting very costly deposit that will enhance our LDR, but it will impact our NIM and our bottom line. We always look at it to be very efficient in catering for that. Whenever we need, I think we have a very solid access to funding to cater for the growth that we aspire.
I think that's obvious if you compare the fourth quarter last year compared to the growth. Significant growth on the assets and in the lending activities came with a very strong growth on the CASA and the deposits as well on the first quarter. That's intentionally driven by careful management of our LDR. We don't wanna breach the LDR, but again, we want to be very close to the SAMA threshold. That will give us more efficiency in managing our cost of funding. Salman, anything you wanna add on the LDR?
Just one quick comment, Naresh. I think we spoke about this subject so many times that our key strength is the ability to tap funding from various sources. CASA is definitely one of the topmost priority. Customer deposit is definitely the priority. But at the same time, we just don't want to concentrate on this particular segment because if we do this, it will become very costly to run the business. This is why we have different pockets to tap in. When we do our stress testing, we definitely stress test that if these deposits go out, whether they were from Wholesale or from Retail or from wherever, we have the ability to generate the fund from somewhere else.
The second point on the write-off for NRF, this is just a you know, fully written off vintage portfolio that we have been accumulating as part of our NPLs. Now we have decided to make a little change in our policy of write-off for the retail product, which used to be, you know, 720 days, and now we have reduced it to 360 days as part of our policy change.
Okay.
There was no risk in this, and it was fully provided, and that's why we write them off.
We will write it off, but we will definitely push and continue for the collection of that portfolio as well.
Absolutely, Abu Khalid. This is one of the KPI we have given to the collection team to specifically work on this portfolio to start collecting or recovering from the houses as collaterals.
Understood. Just as a follow-up, should we then, you know, through the next few quarters, do you reckon the provisions to loans ratio, which is just about 1.3% right now, should start increasing further from the current levels?
We look at it slightly differently. We look at it from the NPL coverage, and we also look for each stage coverage. I think as per our ECL model, we are at a very comfortable place, so I cannot say for sure that this was gonna be our strategy going forward. I think our strategy will remain be that we provide as per our models, and our models are updated, and we have enough coverage that we put in our risk appetite for each stage.
Thank you so much. Thanks, Tareq. Thanks, Salman. Thanks.
Thank you. Thank you, Naresh.
The next question today will be from the line of Gabor Kemeny with Autonomous. Please unmute locally and proceed with your question.
Hello. A couple of questions from me. First on asset quality. Can you elaborate a bit on what sort of early indicators do you look at?
For the asset quality outlook, I'm asking this in the context of lower oil prices currently, and how do you get comfort on lending more to the MSME sector, just given the possible slowdown in the economy? That's the first one. The second one is on your ROE, your return outlook. You alluded to your returns maybe pulling back a bit from the Q1 levels going forward. Do you expect this to be driven by provisions rising from the Q1 level, or any other drivers? Thank you.
Thank you. I'll comment on the first question, and Salman can also add to that and answer the second question. Look, we are very optimistic about the activities happening in the country. Yes, oil price is a very important element, but I think the government is totally committed to the agenda of diversification from oil prices. I always recall when the Vision 2030 was announced in April 2016, if I recall, oil prices was much lower than what it is today, which shows the commitment of the government that we will continue enhancing, we'll continue investing, we'll continue diversifying regardless of the oil prices. Yes, that's happening, but again, we acknowledge that oil price is really important. Today, the liquidity in the country is healthy.
The activities and the ongoing activities in the country is very positive. The pipeline is healthy on the lending demand. I think the oil prices today at mid-$60s, and I'll give also the room to my colleague, Asad, to comment as well. It's not catastrophe. It's something that I would expect it in one of the scenarios that the government is running when they build their budget. Definitely they have alternative solution to continue the growth and to continue the investments. We have no concerns as we speak today on the activities and then the demand of loans or even among the SME side when you highlighted.
I think SME sector has witnessed a significant improvement in the last five years, where it's became a very attractive segment where you see banks are really competing to support. I think the maturity, the regulation that enables SMEs to succeed are far more important than a concern on immediate impact on them whether oil prices have declined slightly. Asad, please, any comments you want to add here on the economy and oil prices and implication?
Yeah. Thank you, Abu Khalid. Look, first of all, of course, we have to repeat what our CFO said in terms of, you know, the global macro picture is indeed evolving. You know, even when we look at indicators of global economic policy, they're highly volatile. That you know, kind of, we have to take that in context in our current kind of outlook. We take a step back, and we look at, you know, Saudi Arabia from a sovereign economic perspective. Fundamental growth story is still there, as Abu Khalid, our CEO, alluded to. Diversification efforts, you know, cannot wait.
We still have major sports projects and events that need to be you know hosted and that are immovable, whether it's the Asian Games, Winter Games, whether it's stadiums that have timelines to build even prior to the World Cups. The sovereign balance sheet and external balance sheet is still very strong. Excellent access to external credit markets, as demonstrated by the international issuance in Q1. Indeed, Saudi Arabia isn't directly impacted by this tariff turbulence, considering that only 4% of its exports are to the U.S. and most of those are not eligible for tariffs being energy.
Lastly, of course, you know, when we look at the picture going forward, we're still pricing in interest rates cuts, which would add momentum to the you know the economic story. If I may can just point out some of the high-frequency data such as weekly POS spending and indeed weekly money supply data, which is up until you know late or last week even, we don't see any fundamental change in those indicators suggesting any drop-off in economic activity.
On the ROTE outlook, you know, I think it's a mathematical function because we're gonna retain more income going forward until the next dividends are paid throughout the year. Meaning, you know, if you do a quick sensitivity, you know, of say, you know, SAR 1 billion increase in your average equity, you know, it's gonna, you know, affect your ROTE by approximately 11 or 12 basis points. You know, this is where we are coming from that, you know, the function that you have seen in the first quarter, meaning we paid the dividend, it helped the return on equity to go up. At the same time, I like to highlight that, you know, we have to maintain these kind of capitalization levels because, if we don't do this, we cannot support our growth going forward.
At the same time, I just want to reiterate that, you know, our guidance on dividend payout ratio is still the same as we speak now.
Well, that's all useful color. Thank you very much.
The next question today will be from the line of Chiro Ghosh with SICO Bank. Please unmute locally and proceed with your question.
This is Chiro Ghosh from SICO. I have a couple of questions from my side. The first one is again related to the SME sector. Most other banks are also looking into getting into the SME sector. I just want to get a sense of how profitable this is and also how much risk is associated in this sector compared to a normal corporate loan, just to get a sense of that, because this appears to be an area of focus. Second is, I'm just looking at the first-quarterly number in which you made roughly around SAR 6 billion, but the provision is very low, the operating expense is quite good, and they are good, I mean, it's good. Whether this SAR 6 billion would be sustainable over the next three quarters would be something I would be looking at.
If your thoughts would be highly helpful.
Quick comment on the MSME, then Salman will continue the answering and take the net income question. The MSME is a very profitable segment that is really not very sensitive on pricing. What they need really more is a quick turnaround time and a customer service. That's their priority. We look at it, we evaluate it and assess it in a very also prudent way where we want to grow with the successful SMEs. Yes, it is a very profitable business. The risk associated with that and the NPL ratios that we have witnessed in the past are really acceptable looking at the contribution from revenue side. It's definitely a focus area for us that we would like to see more business generated from our MSME.
Salman, on the MSME or if you wanna jump straight to the income statement and profits for the year, for the quarter, sorry.
Abu Khalid, I think you covered everything about SME. I don't think I have anything to add on that. On the sustainability of SAR 6 billion, look, you know, we definitely aspire to have a sustainable growth in our profitability. At the same time, I just wanna single out one of the main risks that we have for Q2 is the valuations of our portfolios, just because of the market volatility that I, you know, alluded to earlier in my statement, as well as, you know, Asad, you know, elaborated a lot on that it may have an impact on our valuation. Okay. This is something we are currently watching for, and we're trying to come up with a plan so that if this thing happens, how could we do, you know, other things?
For example, a special focus area, which Abu Khalid also mentioned, is the recovery for these written-off portfolios. This is now a special focus areas and, you know, we are trying hard that to get more recoveries from the portfolio that have been written off, not only now, but also in the past years to increase the recovery. It will not really impact the BAU risk cost that we will continue to gonna calculate based on our ECL models.
Just thank you. Just a quick follow-up on the previous one. Do you expect the default in the SME sector to go up if oil prices comes up or it even that would, is like fairly agnostic?
Well, at the moment we don't see any risk on the SME portfolio because the only reason is that when we lend, we have a very tight risk criteria that we follow, and it goes all on the RAROC that we abide by. The risk in the portfolio itself, we don't see any stress on that portfolio.
Okay. That's very clear. Thanks. That's all from my side. Okay.
Thank you. Next question will be from the line of Yazeed Alj ammaz. Please unmute locally, introduce yourself, and then proceed with your question.
I have two questions, quickly. The first question pertains to the cost of risk. It seems to me that the number is very low compared to historical averages and to the industry as a whole. Can you shed more light on this? How was that achieved? I know you look at it from the NPL coverage, but the number is still very low. Aren't we here being non-conservative enough, let's say? The second question is about the LDR. We have seen the last couple of years how the loan growth has far exceeded the deposit growth, and it seems that this is a trend that will continue in the next couple of years. What weapons SNB has to continue its loan growth in such environment?
Do we expect the net foreign position to go negative more and more in the next couple of years? Thank you.
I'll take the cost of risk piece first. It is low. Yeah, you are absolutely right, it is low. There's a reason behind it because we have got some good recoveries. You know, this is exactly what I said that, you know, the focus is on the previously written-off portfolios to be recovered. This quarter we have good recoveries, not only on the corporate side, but also healthy recoveries and healthy collections on the retail side. Of course, the quality of the portfolio is as such that, you know, we don't like, we don't create a lot of charge just because the quality of the portfolio. Our ECL models, they are updated and audited every year. The cost of risk is as BAU, and we got benefit from our recoveries.
If I may add also, Salman. Yazeed , to your point regarding not conservative enough, I think we are very conservative, and that's proven by our recovery activities. That we've been providing for these bad loans, and now we are collecting them. That shows you that the bank actually is proactively conservative by making provisioning when needed. Now we are collecting these bad debts, which is helping our recovery and improving our cost of risk. We will always continue being a conservative bank. Now IFRS 9 and the ECL is carefully designed to ensure that you cannot be non-conservative, let's say.
Yeah. On your second point, you know, deposit to loans, you know, of course. But if you look at our this quarter growth specifically, you know, they're very close to each other. But going forward, you are right, but it. I would just mention back what I said to Naresh that, you know, LDR 100%, the headline one, it is definitely higher, but it does not mean that we will stop our growth in assets. Because we have other sources to tap into. Customer deposits remains a focus for us, but at the same time, we are gonna go out and tap, you know, whatever resources that we have available at our end.
These resources, if I may just follow up on this question quickly. What part of it would be affecting the international financial position of the bank?
Sorry, Yazeed, what do you mean by that? Just so you could elaborate.
You know, the net position on international assets. Your international assets and your international liabilities.
We are actually capitalizing on our international presence to attract more deposits. In succeeding in doing that, our position might be impacted, but that shows confidence from international community in giving us this funding, as a Saudi leading bank. Whenever we see an opportunity to attract deposits, low-cost deposits from the local market, definitely as a priority from the mass and more sticky segments, but also from our international branches where we can attract from the Singapore branch, which we've been very successful in Formosa issuance and others, then we'll always continue.
Watching and keeping an eye on our net foreign assets is something that we look at in ALCO every meeting, and we monitor that, and we ensure it is within the allowed thresholds that's been set internally by our risk team and also by our regulator and our board as well.
Thank you. With no further time for questions, any remaining or further questions will need to reach out to the investor relations and market intelligence teams. With that, Mr. Iyad Ghulam, I would like to hand the call back to you for the conclusion.
SNB Capital would like to thank SNB management for taking the time to conduct this call. We'd like also to thank all participants for attending. We wish you a pleasant day. Thank you.