Ladies and gentlemen, it's my pleasure to introduce your co-host, Mr. Iyad Ghulam. Mr. Ghulam, 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 2026 results. Today's call is being recorded. Please note that this call is for analysts, investors, and shareholders. Media personnel are requested to disconnect at this point. Today's speakers are Mr. Tareq Al-Sadhan , Group CEO; Mr. Hussein Eid, Group CFO; Mr. Raja Asad Khan, Group Chief Economist; and Mr. Abdulbadie Alyafi , Head of Investor Relations. I will start by handing over to the SNB Head of Investor Relations. Abdulbadie , please go ahead.
Hello, everyone, and good afternoon. We'd like to thank SNB Capital for hosting today's call. The presentation and other investor disclosures for the current and prior periods are accessible from our website. As usual, please take note of page two in our earnings presentation, which provides important information regarding today's disclosures and discussion, including the use of forward-looking statements. With that, I'll hand over to our Group CEO, Mr. Tareq Al-Sadhan . Please go ahead.
Thanks you, Abdulbadie , warm welcome, everyone, and thank you for joining our call. Taking the high-level view of our quarter, we delivered a balanced and carefully managed set of results for the group. As always, we are guided by our comprehensive strategy focused on maximizing shareholder value while taking a long-term view. We remain optimistic about the future while also being vigilant and taking a risk-averse approach. Looking at the growth potential of SNB, we must start with the Saudi operating environment, which remains supportive, driven by strong macro fundamentals, a business-forward ecosystem, and favorable demographics. Throughout this period, the Saudi economy has continued to demonstrate resilience with sustained economic growth and proactive leadership of authorities who are pressing ahead with prioritized long-term investment plans while at the same time adjusting with agility in order to navigate a dynamic environment.
Despite the current circumstances, we have been blessed in Saudi Arabia to be able to go about our daily lives, run our business as usual, and serve our customers without any interruption. SNB is Saudi Arabia's best-diversified banking group. We are capturing many digital 2030-driven opportunities across wholesale, retail, capital market, and beyond. We are leveraging opportunities across the Kingdom, including large projects and our partnership with public entities, which are creating attractive opportunities in wholesale. Our large retail business, which is well-positioned to meet the needs of our young, energized, and ambitious population. At the same time, we are leveraging our franchise in MSME, affluent wealth management, and capturing the value-driven growth. As an example, in Q1 2026, we launched two SME flagship centers to support this key segment, one center in the Eastern Province and the other one is in Jeddah.
We've planned the third flagship center to be opened in Riyadh in the next quarter . These dedicated flagship centers offer a comprehensive and differentiated customer service model for banking and beyond banking services, which creates convenience for our clients and holds great promise for our growth prospects. With regards to our strategic competitive advantage, we will continue to foster these and build upon them to compound their benefits. We are focusing on leveraging our scale and the breadth of our relationships while investing in our advanced digital ecosystem, enhancing the client experience, and improving efficiency to drive growth, broaden our market position, and develop new revenue streams. This applies not only to our wholesale and retail franchise but also SNB Capital, who is a leader in supporting its large and diversified client base, leading the Kingdom's AUMs, and well as offering differentiated advisory and market solutions.
As a result, we consistently deliver attractive returns with consistent revenue streams across retail, corporate treasury, and capital markets. Reducing seasonal volatility, enhancing revenue resilience, and solidifying our ability to capture growth across cycles. This translates into consistent returns of our shareholders, where we have continued to boost high-teens ROTE. This is backed up by our world-class efficiency ratio, where we maintain a domestic cost-to-income ratio of 24.4%. Our capital allocation, we remain disciplined and conservative, and our strong diversification supports balance sheet resilience and growth. We maintain robust capital adequacy and strong liquidity comfortably within the requirements. This places us in a unique position with ample headroom to drive toward our growth aspirations.
In combination, these key elements of our business, which place us in the center of the large opportunities in the Kingdom, continue to give us optimism and energize us as we pursue our strategy to deliver sustainable, profitable growth aligned with Vision 2030 and sustainable returns to our shareholders. Moving next to give you an update on our strategy. First of all, you will recall that last quarter, in light of the prevailing market dynamics at the time, we updated some of the strategy metrics. Those updates are preserved in the targets presented today. Rather than running through all of the figures, I highlight a few elements worth noting.
On the financing growth, financing growth remains healthy. We continue to see attractive prospects in our pipeline as our CFO will cover in more details today. You will see that we continue to be selective in acquiring businesses in line with the key target markets and our push for value. Financing market share is mostly stable quarter-over-quarter, standing at 23% versus 23.2% at the end of 2025. This reflects our balanced approach to growth while pursuing value and focusing on our local markets. On the funding side, we are seeing good momentum in cash acquisition. We will continue to leverage SNB leading business and network to deepen and expand our relationships. Moving to banking fees, as one would expect, the market is contending with healthy competition and very mild sector fee.
At SNB, we continue to focus on enhancing efforts through upgrading our cards proposition, accelerating transaction banking and other fee-generating businesses, such as bancassurance . Next, on the operational excellence front and its implication for the cost-to-income ratio, we continue to invest in efficiency initiatives across our major OpEx streams, as well as our ongoing investment in innovation. The cost-to-income ratio remains within healthy levels and as I always highlighted, we will not shy away from investing in the key enablers of growth, which holds high promise to deliver sustainable long-term value. Speaking of future and shareholder value, I'm pleased to highlight that ROTE is tracking within our 2026 guidance and will continue to be among our key strategic KPIs as we navigate the evolving condition which the entire global economy is contending with these days. Moving to the non-financial KPIs, I also check live on a few key points.
We are accelerating our digital adoption by enhancing our processes and adding digital functionalities while improving the user experience. To highlight this, retail digital financing sales reached 32% already ahead of our targets. SNB NEO continues to scale, where the number of customers reached 1.4 million. We have a pipeline of additional services and functionalities planned. We will be sure to keep you updated on our ongoing progress. We have received an initial approval from SAMA to launch our NEO financing subsidiary that will complement our retail offering. We anticipate commencing the operation before the end of the year 2026. As for AI and data intelligence, investing is ongoing. We have been increasing the number of use cases from three to 19 with a clear roadmap to exceed 30 in 2027.
I'm very pleased to share that we are going ahead with the launch of our dedicated SMEs app. I believe we talked about it earlier, which we recently received the SAMA approval to go ahead with it. The app will bring together best of breed digital financial services, customized support, and scale up our reach to this key segment. This is in line with our strategy to be the biggest enabler for SMEs in the Kingdom. Next, on our people front, we continue to invest in our people to embody our thesis of being the talent magnets. We are empowering our staff with specialized training and capabilities building to enhance SNB performance-driven culture. SNB Capital, which is the Saudi leading capital markets business, continues to lead the sector in dynamic markets while it's competitive.
The capital markets space is also enjoying expanding opportunities in line with the Vision and Financial Sector Development Program. Objective is to develop the equity and this capital market. To support this, SNB Capital recently conducted the Equity Connect and the Sukuk Connect event, bringing together key KSA players across ECM and DCM. On the customer centricity front, as mentioned last quarter, we are embedding a customer experience living culture targeting best-in-class CX in the Kingdom and guided by the details CX maturity assessment exercise. Enhancement initiatives related to this theme are in the works, and we look forward to updating you on the due course. In conclusion, we will continue to take a disciplined approach to execution against our strategy while maintaining a healthy cadence of our initiatives and delivering SNB's mandate on broad scale.
In combination with the Kingdom's supportive environment, each day our efforts are compounding and getting us closer to our desired outcome, where serving our customers and delivering value to our shareholders will remain the central objectives. With that, I'll hand over to Hussein for more details on the financial performance.
Thank you, Tareq . Greetings to everyone. I will begin with the macro outlook of Egypt. [audio distortion] , we have revised our full year real GDP growth from 4.3% to 3.7%. On the non-oil side, domestic consumption remains relatively resilient, but supply side constraints and disruptions have led us to slightly lower our full year non-oil GDP forecast from 3.2% previously to 2.9%. It is worth highlighting that the Saudi National Bank Index expanded to 61.5 points in April versus contraction in March when the figure dipped to 48.8 points. The recovery was supported by improved domestic demand and pick up in new business. But price pressures, accelerated sharply as supply chain disruptions continue to weigh on the non-oil sector.
Overall, underlying economic momentum remains, and we are confident of Saudi Arabia's economic resilience in 2026. Moving to the financial targets. Of course, there is a degree of uncertainty caused by the current geopolitical situation that calls for a cautious approach to guidance. In case of a prolonged conflict or more stressed situation, we would consider guidance restrictions depending on the situation. Nevertheless, we consider this a glass ahead on delivering on our plans and initiatives, and we'll keep you updated at our quarterly press forums. A few key words to highlight on the financial targets. On financing, we will continue to enjoy a healthy pipeline in wholesale, where we are balancing the opportunities with our focus on value. The retail market continues to be our focus but on a balance. As we mentioned previously, we anticipate that more of the 2026 growth will be coming from the wholesale.
As mentioned previously, we are projecting mid-single-digit expansion of net interest and commission income. As a soft guidance for margins, we are focused on preserving the NIM at similar levels. Cost efficiency initiatives are ongoing. While at the same time we take long-term view to invest for the future and driving value creation. This cost came down on the first half and recovered in Q1. At the same time, we are expecting normalization going to be in the remainder of the year. We expect capitalization to continue to be healthy. Finally, as always, sustainable tangible equity and sustainable shareholder value creation remain core to our strategy. Next, I will jump to page 10 and briefly cover the highlights of the financial performance. Overall, looking at the financial performance for the quarter, there are a few key elements to highlight. We took a balanced approach to asset growth.
We focused on local market, and we supported this with healthy growth in customer deposits. As a result, we preserved stable earnings income at SAR 9.7 billion, growth of 4% year-over-year, with the most coming from international. Net income is up 7% year-over-year, while maintaining very tangible equity at 16.7% within the guidance. We achieved this while maintaining solid operating efficiency, robust capitalization, and healthy liquidity. On the coming pages, we will review these elements in more details. I will now turn to the balance sheet of managed credit. We expanded the balance sheet footing with total assets up 2% for the quarter, exceeding SAR 1.23 million. SNB continues to represent around 1/4 of the total banking assets in the Kingdom.
On the remaining two slides, strong customer deposit growth, especially cash, allows us to replace interbank funding in order to support a more efficient funding structure as a part of our drive to optimize cost funds. Also worth noting, in January, we successfully issued a $1 billion AT1 instrument, which was almost 3x oversubscribed, demonstrating continued healthy demand for these issuance and continued strength of our relationship with capital markets. Moving to the next page. Financing was broadly stable for the quarter, up 0.5% sequentially, reflecting our measured approach and focus on value. Breaking this down. Our retail financing remained healthy overall, expanding 2%. The basic mortgage activity held up pretty well. Although we have seen, across the market, asset ticket sales have been modulating along with improvements in the supply and reduction of repossessions, we should be supportive of the segment.
Q1 also saw good traction in investment finance and private banking, driving positive retail up to the same year-to-date and in line with our focus on these segments. Wholesale financing was broadly stable, declining 0.6% year-to-date, where the contractions in the supply and corporate portfolio were more than offset by the growth in the MSME financing. MSME financing expanded 9% year-to-date, or more than SAR 7 billion, with a strong traction driven by lower focus on the attractive segment. Given the corporate sector some seasonality bias as well as our focus on value, we continue to see healthy pipeline in this key segment. Financial institutions remained an integral part of our strategy to enhance returns. However, due to its opportunistic nature and our focus on local market, we witnessed a reduction of around 30% year-to-date.
Overall, we are focusing on managing the portfolio for quality and value. Going forward, we see a healthy pipeline of potential business. As I've discussed, we are maintaining our financing growth expectation to be at high single-digit level for the year. On next page, the investment portfolio increased by 1% in Q1, reaching SAR 323 billion. The portfolio remains broadly diversified across various types of investments. As well positioned to balance yield, liquidity, and quality. That said, there have been no significant changes in allocation or concentration, reflecting a stable and disciplined investment approach. Moving to the next page. Customer deposits increased by 5% [inaudible] to reach SAR 665 billion. They are thus strengthening our funding profile and supporting an improvement in funding cost and liquidity ratios. Cash balances increased 2% supported by strong client cash shares and growth in targeted segments.
Term deposits increased 16%, reflecting our ability to capture market liquidity. As a result, the cash ratio for the period came in at a comparable 31.5%. Moving next to the [inaudible] . Net income increased by 7% year-on-year, supported by higher recoveries and release of pandemic provisions, plus growth in net special commission income across core business lines. These were partly offset by lower non-interest revenues, mainly due to market volatility during the quarter. Looking at the group overall, it is worth noting that our strategy in Turkey has been yielding positive results. Despite the challenging operational environment, the international segment has continued to contribute positively to our performance. Return on tangible equity is currently at the upper end of our guidance range, standing at 16.7%.
Worth noting that in this annual meeting, if condition holds, the board proposes to pay a cash dividend of SAR 1.15 per share for the second half of 2025, amounting to a total of SAR 6.9 billion. Our next page. Net special commission income increased 3% year-on-year, reaching SAR 7.5 billion with transaction across wholesale, retail investments, and international. As expected, margins remained stable at 2.85% on a sequential basis. As for margin sensitivity, it has remained broadly stable, with an expected improvement of around 2 basis points following the 25 basis point rate cut, typically materializing over two to three quarters. As always, this is a theoretical estimation assuming a static balance sheet.
Looking ahead, we expect margins to remain broadly stable and sequential improvement in net special commission income during the year supported by financing growth catch-up, re-pricing initiatives, further funding optimization, and overall balance sheet management with a focus on optimizing the earning asset mix. Moving to the next page. Fee and other income declined [6% year-on-year, coming in above SAR 1.1 billion for the quarter]. Year-over-year growth in fees income from financing and cards, cash management, international, and FX was offset by certain factors as follows. First was a sharp lower investment related income, mainly driven by market conditions and volatility. We experienced weaker trade finance activity that affected the trade fees income margin, which came in lower by 27% year-over-year. Investment management income was 16% lower due to softer market activity.
Despite this, SNB Capital did manage to expand AUMs. Also, 19% weaker brokerage income was mainly due to lower market trade volumes, declining around 30% year-on-year and competitive pressures from low heavy launches for investment banks. Despite this, in Q1, SNB Capital ranked number one in terms of volume traded market share. Moving to the next page. Operating expenses were up 2.7% year-on-year, largely in line with inflation, driven mainly by annual salary increments and hiring of specialized talent, particularly in the front office, IT, and data analytics. Looking ahead, we have multiple efficiency program in place, including workforce efficiency, vendor and procurement optimization, digitalization and automation, as well as physical network and branches optimization. We will continue to focus on our ongoing cost efficiency initiatives, with benefits expected to realize over the coming periods, while at the same time continuing to invest for growth.
Overall, we will be managing our cost base relative to the expected expansion in revenue, keeping in mind there can be a time lag between the two. All in all, we will continue to focus our efforts to drive towards a full year guidance in order to deliver a group cost to income ratio below 25% and domestic cost to income ratio below 22.5%. Moving to the next page. Cost of risk came at - 72 basis points for the quarter. This was driven by the national, [the further of pandemic provisions] in wholesale portfolio, mainly related to energy facilities, and continued successful recovery efforts in both retail and wholesale. It is worth noting that normalized cost of risk, excluding recent marks would have been closer to the lower end of our guidance.
Going forward, we will continue to apply our prudent provisioning approach. As mentioned, we are maintaining our cost of risk guidance at 15- 25 basis points for the year. On the next page, credit quality remains healthy, with NPL ratio improving sequentially to 0.67%, while stage wise coverage remains robust. Moving to the next page, capital and liquidity remains strong and comfortably within all regulatory ratios. In summary, the bank has delivered a balanced set of results with measures growth against an evolving macro. We remain focused on actively managing the balance sheet with a view to optimize profitability and maintain resilient capital allocation. With that, let's move to the question and answers.
Thank you. Ladies and gentlemen, we will now start the Q&A session. If you'd like to ask a question, please raise your hand through the webcast so that we can unmute your line. Thank you for not exceeding one to two questions per caller. Please stand by until we have our first question. Our first question today comes from Mohammed Al-Rasheed of Hassana. Mohammed, your line is open. Please unmute yourself locally and proceed with your question.
[Non-English content]. Am I audible?
You are, yes.
Yeah. Thank you, gentlemen, for the call. Two question from my end. The first question is regarding the yield on your corporate book. We have witnessed a decline on your corporate yield spread over SAIBOR by around 38 basis points on a quarter-over-quarter basis. I'm wondering what drove such a decline in your spread for your corporate book and how would that be impacted going forward with the repricing initiatives. My second question is regarding cost of risk. There was a sizable recovery of around SAR 1.3 billion in the first quarter. What was the reason behind such a recovery? Was it a single large exposure or was it more of a broad-based recoveries across your corporate book? Thank you.
For the first question regarding the corporate yields, we're experiencing decline mainly because of the benchmark impact coming from Diriyah. That's happened during the last year. All in all, we are working hard on repricing our corporate book. Again, the improvement of this repricing will be seen over the time. The main impact to this is really coming from Diriyah cuts happened over the past years.
Just to clarify, I'm comparing the yield to the benchmark. The spread over the benchmark has dropped by 38 basis points in the first quarter compared to the fourth quarter. I'm isolating for the benchmark impact.
Honestly, we do see that decline in the yield in this very honestly, specifically when it comes to wholesale. You are referring to which segment exactly? We can review it and come back to you, to be honest.
Okay. Regarding the recoveries?
Regarding the recoveries, that's mainly, again, we have a strong recovery coming from the wholesale, as we said. In this quarter, we have also a major recovery of indirect provisions, which is not part of the ACL structure. It's part of the provisions kept in the under legacy related to indirect facilities. This is business as usual. We always work hard on the recovery to improve our cost of risk.
Okay. Thank you.
Our next question comes from Shabbir Malik of Morgan Stanley. Shabbir, your line is open. Please unmute yourself locally.
Hi, can you hear me now?
We can, yes.
Yes. Thank you very much for the presentation. My first question is around your financing growth outlook. I think the first quarter we saw growth was very muted. If my memory serves me right, typically first quarter is usually a strong quarter for the bank. I just want to get your sense on how comfortable you are with your full-year guidance, which is high single- digit. This implies that 7%-8% growth for the rest of the year. How comfortable you are in terms of achieving that target with a relatively slow start in the first quarter? My second question is around margins. Your comments were very encouraging around margins, but I was a bit surprised that you're still eyeing a relatively stable NIM for the rest of the year.
Liquidity in first quarter has improved, and you've grown in the SME space and you've grown CASA. I just want to hear your thoughts on why you're still expecting NIM to be relatively stable for the remainder of the year. Maybe a clarification regarding the previous question. You said the recoveries were non-credit related. Just a clarification on that, please. Thank you.
Thank you, Shabbir. I'll take this question and Hussein, if you can add. Absolutely, you're right. I think that the whole banking sector witnessed a slow growth on the first quarter from a lending perspective. That was anticipated from the guidance of all banks, driven by the country reprioritization, driven by the reform that took place in the real estate sector, driven by the conservative approach SAMA is going forward. All that was the driver for an expectation for a slower growth on the 2026. Adding to that Ramadan in the first quarter, adding to that the war, I think the level of growth is expected. To answer you, do we have a strong pipeline? Yes, we do. Do we confirm the single high digits? I think it's premature to change that now.
I would be in a better position, or we would be in a better position by the end of the second quarter to evaluate the conversion of the pipeline and see the appetite both in corporate and retail on that growth. Adding to that as well, the value generation. We are very keen to grow in the smaller segment, which doesn't give you the volume, but it gives you the value. Growing like 100 contracts in micro businesses or small businesses equals potentially one transaction in large. You will get a lot of value in these smaller contracts. We are very keen to grow, as we said in our guidance and in our strategy, that we want to move to more of a profitable business. That's definitely the way forward.
On the margins, the fact that there was a slow growth on the lending activities, that naturally impacts the repricing activities. When there's a competition, your ability to reprice is higher. When the competition is slower, then the repricing activities get impacted. We are continuing with our repricing activities, both retail and corporate. Again, the liquidity increase and the slow activity on the lending makes it harder to reprice compared to our aspiration. Hopefully, we will get there. I think on the question of the reversal of the cost of risk or the provisioning, that I think Hussein mentioned that it is indirect lending, which is-
[audio distortion] Yeah. Cancellation of bank guarantee and this is business as usual. It can happen anytime. It's not really impacting the overall stock of the provisions relative to the credits portfolio.
I think we're benefiting from the conservative approach that the bank is taking by being proactive in providing when in doubt and these things. I anticipate that we see also positive outcome in the coming quarters and years as well. When we are in doubt with the client, we just go and provide. We take always the conservative approach when it comes to our provisioning activities. That's why we get lots of reversal. We have witnessed that actually in the last years. Our cost of risk was always lower than our guidance, and we always get very healthy and decent recoveries.
Thank you. That's very helpful.
Thank you.
Thank you. Our next question comes from Abdullah Al Buraidi of Emirates NBD. Abdullah, your line is open. Please go ahead. Abdullah, we're not receiving any audio from your line.
Hello, can you hear me?
We can.
Yeah. This is Abdullah Al Buraidi from Emirates NBD. I have maybe a follow-up question regarding the NIM and the benchmark and the asset yield. We noticed that the NIM has been stable, but when we calculate the asset yield and compare it to the benchmark and mainly the corporate book, we noticed that there is a decline in that corporate book. It might be driven by the way that we calculate things by taking the average at the beginning of the period and the end of period. When we look at the component of the loan book, we notice that there is quite a decline in the corporate book that was offset by an increase in the MSME book. Could you clarify how the evolution during the quarter took place?
I mean, is it distorting the asset yield calculation for us and the cost of funding calculation and how does it look like? The second thing on the other G&A, I mean, in the fourth quarter call, the last call, you've indicated that, the cost-to-income is unusual and it has somewhat often that the normalized level should be looked at the third quarter level. We are back to square one and the same amount of expenses on an absolute basis as the first quarter. If you could clarify on what is the cost efficiencies to be expected and what is the normal run rate on this, and I will ask the third question later after the queue. Thank you.
Hi, Abdullah. Regarding the asset yields, there is a lot of activity during the year, either for both retail and wholesale, and we need to really reprice.
There is also an impact coming from the benchmark rates cut at the beginning of the quarter. 35 basis points were already observed on 70% of that in the first quarter. That, our repricing activities helped to mitigate that negative impact or decline. In the same time, our efforts in optimizing our funding profile, obtaining achievable customer deposits, obtaining around SAR 11 billion of CASA, majority of them really coming from less. That helped also to reduce the cost of funds. I think we are the lowest in the market when it comes to the cost of the funds, and that really mitigate the negative impact coming from the decline in the asset yield. That's why the NIM is really stable, Q over Q, and we expect this to continue or to improve going forward.
There was a question on the.
There was a question on the cost.
Yeah, the other G&A.
The other G&A. That is normal. Always first quarter, you always have additional action for the merit increase, for the adjustments, and that is the main reason for having higher G&A influences. We have a lot of initiatives that we should expect and see the result of them in ongoing, in the coming periods. We are working on productivity, efficiency, digitization, automation, optimization, network optimization, premises optimization, and there are a lot of activities that we need to generate additional cost savings. I think that Q1 is nothing in together, you are going to see better results. It is a combination of the growth of the revenue going forward plus the initiatives and the cost optimization that we are working on.
As I mentioned, I think we are investing because when we focus on the SMEs, that requires a lot of investment in human capital and in technology and other costs as well, that we would like to see the benefits out of this impacting our cost to income. It has a significant impact on the top line or impact on the top line while the impact on the cost side is contained. There would be an investment. To always add at this point, the first quarter is always not a good reflection to see the other G&A activities.
Abdullah, the thing here is, at year-end, we are still committing to achieve our targeted cost-to-income ratio. Looking at the cost alone, I think the cost-to-income ratio is put together, we did not change our guidance. We believe that we are really achieving these guidance, as we mentioned in our various call and disclosures.
Okay, thank you very much. Quite informative [audio distortion]
You have the third question?
Yeah. Regarding the third question, the cost of risk. As we're having a very great cost of risk this quarter coming from the reversal, not changing the guidance does imply that it will be backloaded. I understand it is just a technicality, but would you confirm that nothing has changed because of recovery and the cost of risk is still as decent as it used to be before accounting for the recovery?
I think, Abdullah, I did allude in the previous answer to that. I think the bank is really joining the conservative approach, which we have been witnessing all with the whole improvement of the judicial system, which most of these provisions that we took in the past, now we are concluding these cases and we are collecting our money. I think this is to be the business as usual, at least for this year, potentially next year as well. I recall also in the previous call, we kept saying this. It was exceptional when the next quarter comes and we have a good collection. I'm pushing the team inside the bank to say that this is business as usual now. We expect more collection coming every quarter.
We're pushing our legal and collection team, both retail and corporate, to continuously bring these recoveries to halve the risk cost of risk in the bank, while continuing being very conservative and booking provisions when we see doubt. Alhamdulillah, doing business in Saudi has improved significantly, and in the last few years, the need for these provisionings has reduced. The recovery and the collection has also improved.
Just to add to that, [Abdullah] , the coverage, the embedded coverage ratio, has increased from 148% to 149%. If you look at the stage-wise coverage, the stage three coverage has also improved from 76% to 78.6%. Stage two coverage improved from 5.1% to 6.5%. All in all, despite the strong recoveries, we need for some indirect provisions, especially the coverage ratio remains very good and the guidance remains as is, and we think we will hit the lower end of the guidance for year-end.
Okay. Thank you
Thank you. We'll now move on to our next questioner. Our next question comes from Olga Veselova of Bank of America. Olga, your line is open. Please unmute yourself locally.
Thank you for quite your presentation and for taking my questions. I have several. One is on your CASA ratio. It remains at a very solid level. However, it has been trending down in the past two quarters. This is despite sluggish CASA in the banking sector and even improving CASA in government-related entity segments, according to SAMA data. So what is happening in your CASA mix, and where do you think your CASA ratio will be trending from here in the next several quarters? That is question number one. Question number two is on non-funded income. I understand there were several reasons for weakness in the first quarter. Well understood. But which segments do you think can drive the recovery in the rest of 2026 and maybe 2027? I am wondering why solid MSME expansion is not feeding into better fees. Usually, this is a very fee-generating segment.
Yeah, I will stop on these two questions. Thank you.
Okay. When it comes to CASA, that is a main focus for us. Usually, it is normal to fluctuate. We expect CASA to be within the specified range, more or less. We were successful in increasing our CASA by a little bit during this quarter. But at the same time, if you notice that we have let go a lot of interbank and moved to time deposits. Okay, which is more sticky, more cost-efficient, cheaper, and it is a core for us, when it comes to our funded profile. That is why you see CASA percentage declined a little bit despite the growth in it, because we are also moving, shifting from interbank funding into time deposit, which is more sticky, domestic, and has lower liquidity ratio and also potential ratios as well.
It will support our growth, when it comes to LDR, loans to deposit ratios give us some room really to grow our financing book. On the second question on the non-funding revenue, I think the first quarter have witnessed a slowdown in that. Definitely, the trade finance fee has been impacted significantly. The other fee also on the retail sector has also been impacted. We are very confident that we will catch up in the rest of the year. We see the momentum improving and the plans to recovery on the fee coming from the retail businesses, SME businesses is on track. We have the plan to recover what we missed on the first quarter and ensure that we catch up on that. Absolutely, you are right. The SME doesn't only come with the fee element, it comes with everything positive. CASA, FX, fee, higher margin.
We're pushing for that, we are also becoming more sophisticated in how to collect fee from these segments. The point-of-sale business is very critical, we have a big transformation related to that. We can be the most competitive provider of these services in the market. It took longer time than what we planned, and we are back on track to catch up on what we missed on the first quarter.
Thank you. If I can squeeze in here clarification. You receive approval for SME app and also NEO financing. Do you think these can be instruments to improve fees, or these are more about easier client reach and convenience of product research?
Definitely the SME app is a value proposition to our SME business. It will help us scale the reach to our SME. Naturally, SMEs comes with, as I said, the fee, the CASA and the current account. Yes, we hope that our plan is to grow the acquisition of our small and medium customers and business banking through the application. Also the microfinancing company, it will focus on the micro-lending and smaller and complementary tier businesses. That one will also quite help. These both are, I would say, longer term. If your question, do we expect something impactful to come this year? It will be too early to see the full momentum coming this year. This is a long-term initiative that we will see 2027, 2028 and beyond.
Thank you.
Thank you.
Thank you. Our next question comes from Jon Peace of UBS. Jon, please unmute yourself locally and proceed with your questions.
Thank you. Am I audible? My first question, please, is just a clarification on the cost guidance. You reiterated your cost-income ratio, but just wanted to understand, are the cost initiatives you mentioned, do they mean that the absolute level of costs comes down from the SAR 2.6 billion base, so that's what helps you to achieve the cost-income guidance? Or is it rather the cost initiatives mean that the costs grow very slowly from here and the revenues grow more quickly, and that's what delivers the target? My second question please is just on your 2027 targets slide. Just comparing it with the end of the year, I noticed the dividend payout of 50%-60% wasn't on the slide. Does that guidance still hold as well? Thank you.
Okay. For the cost, usually, we need to invest in order to grow our business and support our ambitions for innovation, digitalization, AI, and to support growth in the segments previously. We are here to maintain and continue to optimize costs, okay, while we still invest in future development and improvements to contain the cost within the same level or a little bit less as we grow revenue at the same time. That's a combination that will drive, basically, the cost-income ratio. You cannot look at the cost on an absolute base. You have to consider the revenues as well, because there has to be some investments in order to support our business growth. On the dividend side, that's always been the guidance and the attempt for us to continue paying dividends on that range.
We will keep monitoring the growth, the opportunity, what makes more value to our shareholders. We'll make the right decision accordingly. Today, we have the buffer to grow and the capital to grow. If we see an acceleration of that growth that might impact our policy or guidance on dividends, and we will communicate that. We'll take the guidance also from the board and communicate that to our shareholders and investors.
Thank you.
Thank you.
Thank you very much. Our next question comes from Mehmet Sevim of JP Morgan. Mehmet, your line is open. Please unmute yourself locally.
Good afternoon. Thanks very much for your time today. I have two questions from my side. One, the irrevocable commitments to extend credit seems like they grew quite notably this quarter to SAR 70 billion. I was just wondering if this is business as usual, or are you seeing any potential pipeline build in certain sectors that would be worth highlighting? On the provisions, if I may, one follow-up. You mentioned in the financial statements that you ran a simulation assigning higher weight to the downside macro scenario, but at the same time, the impact was immaterial. I was wondering if you could please quantify this higher weight and also wondering why would this result in basically no additional provisions. What's the driver behind that? Is there an offsetting factor like higher oil price or anything else that you would like to highlight? Thank you.
Okay. For the first question regarding the irrevocable commitments, that's business as usual. We continue really focusing, as we said before, in the wholesale corporate and the MSME segment specifically. As we said always, we have healthy pipelines that will materialize in the coming quarters. It's normal to have these commitments being increasing. This is basically to allow for the growth for the coming period. I will direct the second question regarding the macroeconomics changes.
Raja, do you want to take the second question? I don't know if you captured it or not.
Yeah. If we could just repeat, I think it was reference to the ECL model and higher price kind of mitigating any sort of adjustments around that. Is that clear?
Yes, indeed. It says you ran a simulation assigning a high weight to the downturn macro scenario, but at the same time, there's no resulting impact on the ECL.
Yes.
I'm wondering why that would be the case.
Look, at this moment in time, the numbers are only coming out now. When we're looking to do these exercises, we're doing them frequently. When we've done these exercises, the availability of data at the moment, as you see in March and April is feeding through, this kind of limits the degree of exercise that we can deploy and implement. We are frequently updating that and looking at that ECL model. I'm sure some of the impact of the oil price does kind of negate the downside to extent. We are continually monitoring this model and redeploying, kind of reassessing this model frequently as the data is released.
Super. That's very clear. Thanks very much.
Thank you. Our next question comes from Naresh Bilandani of Jefferies. Naresh, your line is open. Please unmute yourself locally.
Hi. Thank you very much. It's Naresh Bilandani from Jefferies. Two questions, please. One. It's quite clear that in this quarter, I think the bottom line performance was helped by the positive impairment charge. I am just keen to understand quantitatively, did this afford you any leeway in front-loading the OpEx charges that we are seeing in the first quarter? I know this question has been asked in some sense previously, but I am just keen to understand, if this is the high point of the cost base for the year from a quarterly perspective, and can we see the cost trajectory improve in an absolute term in the future quarters? That's the first question. Second is, could you please quantify what's contributed to this strong 40% year-on-year increase in the exchange income in the first quarter?
I mean, the run rate was just SAR 600 million in each quarter for the past three quarters. Now we are looking at SAR 750 million. Just keen to understand what contributed to this trend, and will this be the new run rate from which we should model? Also equally, within the non-interest revenues, can you please throw some light on the other operating expenses, which are at SAR 543 million, again, are looking higher as compared to the run rate that we've seen in the previous quarter. Some of these clarifications would be super useful. Thank you.
Okay, for the first question, about the OpEx. No, we are not front-loading. As I said earlier, it's normal for the first quarters in order to have are high because mainly of the stock adjustments and all of these things. Okay. In absolute term, yes, we are working hard to have now absolute amounts when it comes to absolute value each quarter. At the same time, we are doing this too to the growth and benefits. Second question is regarding the exchange income. Since last year, we are doing great in exchange income. TFKB, this year they benefited big time from exchange income, and the rest of that increase of 40% is coming from TFKB . Also, within our SNB Capital, they benefit from other currency exchange income in some of the transaction. The bank as well, they are always moving quarter-over-quarter.
It's a good business for us. It's doing great. The 40%, it cannot be used as a run rate going forward.
Understood. Also, please, on the other operating expenses of SAR 543 million.
Other operating expenses, mainly, we had increase of the cost of the life insurance for our retail portfolio, that's basically not all the insurance costs being higher due to inflation and other factors. Now we are in our price strategy that we are working on and implementing. We are trying to absorb that impact through higher special commission income.
Understood. Thank you.
You can see that it, for example, expanded because we are really increasing the prices to cover for this cost and also as a way of doing it.
Sure. Thank you very much.
Thank you. Last question.
Of course. Our last question of today comes from the line of Kunpeng Ma of China Securities . Kunpeng, your line is open. Please proceed with your questions.
Hi. Good afternoon. Thank you for taking my time. It's Kunpeng from China Securities . I have two questions. The first is a follow-up on the credit, on lending, sorry. Yeah, this is quite public during previous questions, but I still want to look at if we look at a bit longer term because there are a lot of things happened since this year.
Sorry. Could you speak because the line wasn't clear? Could you repeat the question?
Oh, sure. Is that better now?
Yes. If you could slow down also.
Oh, sure. Sure. Sure. Sorry. Yeah. The first is on the financing demand. There are a lot of things happened during this quarter, right? The conflict, the OPEC change, and also maybe some longer-term impact on oil price. If we look at some a bit longer term, will all these things affect our financing growth, the speed and also the structure of the loan demand if there are any impact in the longer term? Maybe it's a bit too early to see the real effect, but some color will be quite helpful. Yeah. My second question is on international business. Yeah. We will continue to see Turkey business as a drag of our net profits due to the inflation there. International business is also very important for SNB.
If you can share with us some of your general view on the international business, and especially as there are a lot of companies, foreign companies, moving into Saudi to do business there. Are there any synergies between the Saudi offices and your overseas offices to work together to support those foreign companies? Yeah. Thank you.
Thank you very much. I'll take first part of the first question, then my colleague Raja can comment from an economist point of view. I think the Saudi government made a strong commitment back in 2016 when they announced Vision 2030. That commitment is we want to diversify from being reliant on oil, and we will keep investing to make that diversification. That announcement came when the oil prices were in a very low stage. Since then, 10 years now, we came through cyclical times and the government continued spending and used the debt and other sources of funding to ensure that the continuous spending. Today, as 2026 budget announced by the government, it has SAR 1.3 trillion of committed spending, with yesterday the announcement of the first quarter spending came to be very strong. I think the government is continuously spending.
Oil prices increase will definitely help avail more liquidity to the government. We know that we have major events happening in Saudi and in the prioritization exercise on the PIF strategy that was announced. Clearly, there is a direction focused on spending on each project that's coming and also coming with a good return on investment. We definitely witnessed a slowdown in the first quarter. We might see also slowdown in the second quarter, but we are very confident that spending is coming and going back to business as usual from a demand perspective will come up. Raja , please feel free to add if you want.
Look, the general comment is, as we've highlighted, non-oil growth is still at robust levels, within its levels, for this year, 2.9%. There are various projects and projects still under execution that will drive the momentum, certainly on the industry level. Of course, there is still the story regarding homeownership and on the mortgage side on an industry level. I think the positives are still there to push the sector-wide growth forward. Certainly at this point in time, we still remain confident that any short-lived disruptions should not deter the metric trajectory for at least certainly pick up in the second half of this year. We're still confident in that respect, and that is how we see the progress.
On the second comment, I think SNB have a long-standing presence in mainland China through a representative office in Shanghai. We have a branch in Singapore and Korea. We see the Far East as a strong partner. We've benefited a lot from the relationship that we had on diversifying our funding mix. In fact, our board strategy exercise last year happened in Singapore. We thought of going to China. We see the value of strengthening the relationship and see how can we cooperate more to benefit the SNB businesses in Saudi and on the offices we have on Asia.
Thank you. Thank you so much.
Thank you. Thank you very much. I think before we close, just for Mohammed Al-Rasheed. Mohammed, we looked at your comment, and we couldn't identify where you're coming off on that decline. Hussein will take this offline with you to understand your comments, and we clarify it.
Thank you. Ladies and gentlemen, we have come to the end of today's call. Please note, for any remaining questions, kindly reach out to SNB's IR team. With that, I'll hand back to SNB Capital for any closing or final comments.
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. Wish you a pleasant day. Thank you