Good afternoon, everyone. On behalf of SNB Capital, I would like to welcome you to this conference call with SNB management regarding the bank's Q2 2026 results. Today's call is being recorded. Please note that this call is open for analysts, investors, and shareholders only. Media, including social media, 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.
Good afternoon from Riyadh. We would like to thank SNB Capital for hosting today's call. Before we begin, a quick reminder that today's call includes forward-looking statements and discussions of financial performance. I will remind everyone to please refer to page two of the earnings presentation for the disclaimer notice. Also included on this page are clarifications around reproduction of any SNB materials and today's discussions in line with applicable laws and regulations. With that, I will hand over to our Group CEO, Mr. Tareq Al- Sadhan. Please go ahead.
Thank you, Abdulbadie, and warm welcome to everyone. I am very pleased to share our results for the first half of 2026. We delivered a strong, balanced, and carefully managed set of results for the group, leading to a record quarter for the bank. As always, we are guided by our strategy, focused on maximizing value for our shareholders while taking a long-term view. Regarding the operating environment, it is encouraging to see that Saudi Arabia continues to demonstrate real resilience. We are now entering the final phase of Vision 2030, and the diversification journey that begins 10 years ago is progressing very well. The non-oil economy now contributes to around 55% of GDP, and non-oil activity continues to grow at a healthy pace.
At the same time, inflation continues to be tame, deposit growth is on the upswing, and credit to the private sector across the system has reached record levels. The picture is one of an economy that is broad-based, supported by strong fundamentals, a business-friendly ecosystem, and very favorable demographics. Yes, the global and regional backdrop remains challenging, and this is why we are maintaining and remaining vigilant and taking a prudent, balanced approach. I will share a few key highlights of the financial performance for the quarter, and my colleague, Hussein, will give you more details as well. For the first time, net income attributable to the shareholders reached SAR 6.6 billion in a single quarter. For the first half, net income came in at SAR 13 billion, up 7% year-over-year. Also, the nature of this growth is encouraging.
Total operating income from the first half exceeded SAR 20 billion, up 6%, with growth in both net special commission income and fee and other income. In the second quarter alone, operating income was up 11% year-on-year. We continue to pursue profitable growth, coupled with careful management of our funding cost and expansion of ancillary revenue stream to diversify our revenue base. As we pursue this growth, we are doing so prudently in line with our risk appetite, maintaining the quality of our portfolios. Credit quality is further supported by our effective collection efforts and supported by the judicial ecosystem in the Kingdom of Saudi Arabia. On cost management, our cost-to-income ratio continues to place SNB among the most cost-efficient banks globally, which is a reflection of sustained discipline, even as we keep investing on our businesses. Our balance sheet is both larger and stronger.
Total assets reach a record of SAR 1.24 trillion. Our diversified financing portfolio has reached the SAR 740 billion mark, supported by our exceptional funding franchise. All of this sits on the top of a very robust capital and liquidity position, providing us a headroom to keep supporting our clients and participating in the Kingdom's opportunities while continuing to deliver for our shareholders. Looking next at our strategy KPIs, I'm pleased to highlight that our progress on the targets is the outcome of consistent execution, where we continue to capture the many Vision 2030-driven opportunities across the SNB Group. In wholesale, we are growing with a focus in the local KSA market and where it creates sustainable value. We are leveraging our scale and strong partnership with public entities and large projects.
As a part of being the biggest enabler for small and medium enterprises in the Kingdom, we have successfully expanded our SME business, upgrading our differentiation services model, and deepening our relationship in key segments. In retail, we continue to grow and serve Saudi Arabia's energized and ambitious population. Our attractive mortgage business remains central to the mission as we work closely alongside our partners in the housing ecosystem. We continue to invest in our service proposition for all client segments, including SNB leading high net worth franchise. As we pursue our growth, we will continue to be selective and prudent, balancing our aspirations around both value and volume. To achieve this, we will aggressively pursue attractive opportunities aligned to our strategic priorities and risk appetite.
Rest assured that our focus remains squarely on delivering this profitable growth and maintaining a customer-centric approach supported by our investment in innovation and efficiency in order to deliver sustainable value to our shareholders and attractive return on tangible equity profile. As you can see, progress on our strategic priority is ongoing. For example, the share of our sales that is fully digital keeps climbing. Through SNB Capital, we remain the leading capital market house in the Kingdom, supporting the deepening of KSA equity and debt market in line with the Financial Sector Development Program, all areas in which SNB Capital shines. One element which I would like to highlight is our accelerating investment in data and artificial intelligence.
Building on the strong foundations we have established through our advanced analytical programs and recognizing the rapid pace of innovation in generative AI and agentic AI, we are taking the next step in SNB's AI journey by scaling our enterprise AI program in order to accelerate AI adoption across the bank. Our approach builds on the AI capabilities already in place and goes beyond deploying individual AI use cases. We are building the capabilities required to scale our AI responsibly across the organization through a comprehensive AI operating model, scalable data and technology foundations, responsible AI governance, and disciplined value realization. This will enable us to embed AI securely and efficiently, effectively across customers' journey, employee workforce, workflows, and core operations. These initiatives will progressively enhance customer experience, empower our employees with AI-enabled capabilities, and enhance our commercial effectiveness and deepening automation in our operations.
We are optimistic about the promising benefits these technologies will bring to the organization and to our key lever to grow in order to support delivery of sustainable long-term value creation. Let me close where I begin. These results reflect the strength of our franchise, our discipline and consistency of execution, and the resilience of the Saudi economy. Each day, our efforts are compounded and getting us closer to our aspirations. We are investing in the right things, in serving our customer, in empowering our people, in innovation, in efficiency, and we are very grateful for the trust of our customers and our shareholders, whose support remains an essential part of our successful journey. Thank you. With that, I'll hand over to my colleague, Hussein, for more details on the financial performance and guidance. Hussein, mic to you.
Thank you, Abu Khalid. [Non-English content] and greetings to everyone. Let me begin with our outlook and guidance. Saudi Arabia's economy continues to demonstrate resilience against a challenging external backdrop. In the first half of 2026, the non-oil economy expanded by 1.8% year-over-year, underscoring the underlying strength and resilience of domestic demand despite regional geopolitical disruptions. Turning to interest rates, our base case remains that the U.S. Federal Reserve will leave policy rates unchanged through the year-end. However, given recent inflation dynamics, we continue to see a credible possibility of one additional rate hike before the year-end. Against this backdrop and having more visibility into the second half, we are making two adjustments to our guidance.
First, we are revising financing growth down to mid-single-digit because we continue to be focused on value-driven growth and also reflecting the current operating environment. It is important to highlight that despite more moderate financing growth, we are preserving on our NSCI guidance. Second, we are upgrading cost of risk guidance to 10-20 basis points, thanks to SNB's strong credit risk management, recoveries, and continued economic resilience, leading to a supportive business environment in the Kingdom of Saudi Arabia. All other guidance remain unchanged, including profitability ratios and return on tangible equity of 16%-17% and adjusted return on tangible equity of 17%-18%. Next page, please. Now turning to our first half financial performance. I will highlight what matters most. First, our measured financing growth did not translate into weaker earnings.
We successfully grew profitability while shifting the financing mix toward retail and SME. With moderation in the FI books, as we continue to focus on attractive opportunities in the domestic market. Second, the funding position is materially stronger. Customer deposits grew by SAR 64 billion year- to- year, more than 6x in increase in the financing. This allowed us to strengthen customer deposit funding. The lower CASA ratio should be viewed in the overall context. CASA balances actually increased while time deposit grew even faster as we replaced interbank funding with domestic customer deposits. The result is more resilient balance sheet overall and improved regulatory ratio. We achieved this together with ongoing repricing [efforts] and active balance sheet management supporting 7% year-on-year NSCI growth and lifting the current quarter margin to over 3%.
However, we expect this to slightly moderate going forward as we are aiming to balance between volume and value. Nevertheless, as we see things currently, we still expect second half NIM to remain uplifted above the Q1 levels. Third, we maintain positive operating leverage. Operating income grew 6% year-on-year, while operating expense increased by only 2%, despite continued investment in technology, talents, and growth initiatives. This combination is improving efficiency, which resulted in a cost-to-income ratio of 25.6% without compromising on our transformation initiatives. Finally, the cost of risk at - 9 basis points and NPL ratio below [inaudible] basis points confirmed that the earnings improvement was achieved with a strong credit quality, showcasing SNB's prudent risk management and Saudi Arabia economic resilience in a challenging first half.
Taken together, these drivers supported 7% in net income growth over the same period last year, a return on tangible equity of 16.9%. The first half performance therefore gives us confidence to return capital to our shareholder with an attractive first half dividend of SAR 1.15 per share and maintain a dividend payout ratio above 50%. Let's now go through the rest of the presentation, focusing on the most important updates. Next, please. The balance sheet expanded 3% year- to- date, where total assets reach almost SAR 1.25 trillion. Strong customer deposit growth, together with issuance of debt securities, allowed us to enhance our funding base and liquidity position. The reduction in other liabilities mainly reflect zakat payments and normal business transactions. Overall, we are closing the first half of 2026 with stronger balance sheet footing, enjoying stronger liquidity profile and improved position to support profitable growth. Next.
The most relevant point on financing is the improvement in the composition year to date. Retail grew across mortgages and high net worth. We continue to meet mortgage demand, but we are also expanding the growth through deeper relationship in our high net worth segments. Within wholesale, MSME financing increased 17% or almost SAR 14 billion year- to- date, while FI exposure declined 26%, representing an almost SAR 10 billion of offset. Financial institutions remain a high-quality business, but as always, it is more opportunistic in nature. In line with our strategy, we are focusing on lucrative segments in the local market. Our expanding MSME relationship have supported improved margins and revenue pools in deposits, payments, foreign exchange, and transaction banking. If we look at corporate lending, excluding MSME and FI, we see a slight moderation of around 50 basis points year- to- date.
As we continue to highlight, our focus remains on focusing on value, and we will target growth opportunities that are aligned to our strategy. Here, it is worth repeating that the financing guidance update reflects few key factors. Our disciplined approach to achieving measured growth with a continued focus on value. We are continuing to deliver a strong and diversified financing mix. Finally, our pricing discipline, which will continue to support income and returns. Next page. The investment portfolio increased by 1% year- to- date and was relatively stable quarter-over-quarter at SAR 322 billion. This is another example of active balance sheet management supporting returns. We selectively grew across other fixed income investment funds and equity, carefully balancing overall portfolio quality with the risk-adjusted returns.
The portfolio therefore remains high quality and liquid, while its diversity helps us to manage rate exposure and support any side through the cycle. Next page. There are two key messages on deposits. First, the overall funding base continue to be very healthy and has been strengthened further by the 10% expansion in customer deposit year- to- date. Second, the substantial time deposit growth has led to year- to- date moderation in the CASA ratio. It's important to note that CASA balances has grown year- to- date. There are few additional highlights that I would like to share on our success in customer deposits. Domestic CASA balances increased by SAR 8 billion. Domestic time and other deposits grew even faster by SAR 53 billion. As mentioned, we took advantage of the strong growth in customer deposits to improve our funding profile and liquidity.
Most important, the resulting impact on funding costs has remained contained despite the competitive environment and ongoing system shift in the mix toward cost-bearing funding. Next page, please. Moving to the income statement. The largest contribution to our record profitability in the first half was stronger NSCI, positive operating leverage, and continued OpEx discipline and lower risk cost. Fee and other income for the group was also up by 1% year- to- date, overall supported by international and down slightly within domestic. We'll explain that later. In line with our strategy, we continue our key focus on returns and deriving sustainable shareholder value, where we delivered return on tangible equity of almost 17% and adjusted return on tangible equity of 18%, both closer to our end of the guidance range. Next page. NSCI increased 7% in the first half and accelerated to 11% in the second quarter year-over-year.
The growth came from several levels. Disciplined repricing in retail and wholesale, active hedging alongside careful assets and liability management, efficient management of funding costs, and the deployment of the liquidity into attractive opportunities. Together, these factors lifted the quarterly margin to 3.02%, higher by 23 basis points compared to the same quarter last year, and uplifted by 17 basis points quarter-over-quarter. While the margin is expected to remain healthy in 2026, it should not be treated as the new run rate as we are balancing between value and growth going forward to ensure attractive returns to our shareholders. Considering how things look at the moment, we expect the margin in the second half to remain above the Q1 levels as our effort on NSCI and SCE continue to deliver the benefits.
On rate sensitivity of the margin, it is returned approximately at 2 basis points- 3 basis points in case of 25 basis point cuts. Of course, this would require between two to three quarters to be fully reflected. However, the outcome also depends on multiple factors, including the rate environment and the balance sheet mix at that time. Clearly, our forecast is on the NSCI engine has been a key success factor when it comes to the margin. Therefore, we are preserving our mid-single-digit NSCI growth guidance. Next page, please. Fees and other income for the first half was up 1% overall, supported by several key lines including international, domestic financing and cards, investment-related income, FX, and others. Looking at the quarterly review, fees and other income improved strongly by 11% year-over-year and up 25% quarter-over-quarter.
Focusing on the second quarter, domestic performance, financing and cards, investment-related income, FX, and other banking services fees such as cash management and point-of-sale all supported the quarterly growth. That progress was offset by softer market activities as we are seeing lower volumes and softer brokerage activities in the system. The lower trade finance fee is affected by the global challenges this year. On the fees and other income front, we will continue to target profitable fee channels development alongside improving fees expenses efficiency. Next page. Operating expenses growth was contained to 2% year-on-year and improved by 0.4% sequentially over the last quarter. Employee-related costs rose due to annual salary increments, business growth, and targeted hiring in specialized areas. We largely offset that increases through savings in premises, procurement, and other non-FTE costs.
Our objective is cost efficiency, where we will continue to invest in technology, data, AI controls, and customer-facing growth, where we believe those investments strengthen future revenues and productivity. At the same time, we are challenging the existing cost base, renegotiating vendor arrangements, optimizing our premises, simplifying processes, and increasing digitization and automation. The first half cost-to-income ratio came at 25.6% for the group and 23.1% for the domestic. We continue to target bringing these ratios to below 25% and 22.5% by year-end. As mentioned, we are achieving these improvements from both sides, targeting profitable growth opportunities aligned with our strategy, complemented by continued cost discipline. Next page, please. The cost of risk came at - 9 basis points with a net recovery of SAR 320 million.
Worth noting that the net charge for the first half of 2026 came at SAR 1.4 billion across both wholesale and retail, up 35% year-over-year, demonstrating that we are applying prudent, proactive provisioning more than offset by strong recoveries. Also, as you will see shortly, we are maintaining very healthy provision coverage levels. Looking at the second quarter, it is worth highlighting that in the second quarter, the impairment outcome was more normalized, with the cost of risk at 14 basis points. Given the first half results and the continued strength of the portfolio, we have upgraded full-year cost of risk guidance to be between 10 basis points and 20 basis points. We will continue to be vigilant and adhere to our prudent risk management discipline. Move to the next page, please. Great quality indicators support the improved cost of risk outlook.
The NPL ratio improved year-over-year to 0.67% and was stable sequentially, while the absolute non- performing balances was broadly stable year-to-date. We continue to maintain strong provisioning discipline. The overall impaired coverage ratio stands now at 150%, and as you can see, the stage-wise coverages are also very healthy. The combination of low NPL ratio, strong coverage, and stable forward indicators give us confidence that our earnings are being delivered on a solid and sustainable basis. Next page, please. CET1 ended the period at a robust 18%, Tier 1 at 20.6%, and total capital at 22%. RWA density was broadly stable year-to-date. Eligible capital increased 6% year-to-date as retained earnings and AT1 issuance more than offset dividend payment and balance sheet growth. Liquidity is equally strong, with all ratios comfortably above regulatory ratios.
During the first half, we distributed SAR 6.9 billion in dividends, more recently announced an interim dividend of the same amount of SAR 1.15 per share, also totaling SAR 6.9 billion as we target attractive distributions balanced against retaining sufficient capital to cater to growth opportunities and meet regulatory requirements. We are very pleased with the financial performance for the first half and continue to target profitable growth opportunities aligned with our strategy in order to sustain shareholders value creation. We are ready to take your questions. Thank you so much.
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 we can unmute you. 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 Reem Alkhulayfi, from Riyad Capital. Reem, please unmute your line locally and proceed with your question.
[Non-English content]. Am I audible?
Yes, you are loud and clear.
Thank you management for the presentation. I have two questions. The first one is regarding your NIMs outlook. Could you please shed some light on the interest rate assumption behind your forecast? Specifically, what policy rate path is assumed in your model? The second one is regarding the ECL. Could you please elaborate on any changes to your ECL model or macroeconomics assumptions, given the softer GDP outlook and volatility in oil prices? Have you updated your assumption to introduce any management overlays or taken any additional provisions? Thank you.
Thank you. Thank you, Reem. Abu Diala, do you want to take these questions?
Yes, Abu Khalid. Thank you, Reem, for the questions. When it regards to NIMs outlook, our assumption in the model, basically, we are assuming no rate cuts. Actually, we believe that we might face a rate hike during the year end, which has no impact on the financial results or guidance and the forecast we are providing, as we believe that the market is already pricing this expected rate hikes, and therefore, we don't see any material impact in case it happens. When it comes to the ECL model, yes, definitely, we always review our ECL models and make sure that it's up to date. The official review usually happen at the end, and we don't expect any material changes in the assumptions. When it comes to overlays, there is no overlays. We have sufficient coverage, resulted from our prudent provisioning.
We believe that we have enough coverage and all exposures are covered, and we don't see any really negative or adverse impact that we might face in future due to model changes or anything like that. I hope this answer your questions.
Thank you. Our next question comes from the line of Mohammed Al-Rasheed from Hassana. Mohammed, please unmute locally and proceed with your question.
[Non-English content] Am I audible?
Yes, you are loud and clear.
Thank you. Thank you, gentlemen, for your time and for the presentation. Congratulations on the results. Two questions from my side. The first question is regarding the increase in the domestic NIM that we witnessed on a quarter-over-quarter basis of around 15 basis points. It seems to be driven from the repricing of your corporates book. Your corporates book net yield has increased by more than 50 basis points. My question is, how much of the repricing initiatives has been reflected on the second quarter results, and how much is left that we might expect to see in the second half of this year? My second question is regarding your loan book growth guidance for both this year and 2027.
If I take the mid-single digit growth target for this year, then the implicit assumption is you will achieve 13%-14% loan book growth in 2027 in order to achieve the low teens growth target by 2027. My question is, what are you incorporating for the year 2027? Is it a recovery in the overall market loans growth, or you expect a continuous massive gain of market share in 2027? These are my questions. Thank you.
Thank you, Mohammed. I'll answer and, Hussein, please feel free to add after I finish. On the NIM and the repricing exercise, if you recall, that from the second half of last year, we start talking about the repricing exercise and to ensure that we take the cost of funding into consideration and we start repricing to maintain our margins and increase our NIM. That really helped in the beginning of this year and, let's say, the first half of this year. Today, we are looking at that and also in line with our loan growth. We don't want to be non-competitive when it comes to the market, but we want also to achieve the right balance between volume and value.
If you ask me, do you expect to see the same incremental repricing exercise, I don't think that it will continue the same what we saw in the last three quarters or four quarters. We will ensure that the contribution to the bottom line is happening, and that's what we do the calculation to achieve. We grow our loans in a profitable way to achieve the bottom line impact. Hussein, you can add if you want, but let me answer the second question on the loan growth. I think when we came up with the strategy two years ago, or less than two years ago, and our assumptions of the growth of the loans, there was a lot of dynamics change in the market, and we continue evaluating that.
As long as we are achieving our return on tangible equity, what we promised to our shareholders, and we do whatever it takes to maintain that return on tangible equity by, let's say, growing value rather than growing volume, then that's the case. That doesn't mean that we will grow mid-single digit this year, and we have to grow significantly higher next year to achieve our aspiration that we had in the initial strategy communication. What we care about is creating value, making sure that we achieve our return on tangible equity to our shareholders. And if the opportunity is there to grow with a value, we will definitely do that. Hussein, please feel free to add if you want.
Well said, Abu Khalid. I have nothing to add.
Very clear. Thank you.
[Non-English content].
Thank you. Our next question comes from the line of Shabbir Malik from Morgan Stanley. Shabbir, please unmute locally and proceed with your question.
Thank you very much for the presentation, and congratulations on a good second quarter. I have two questions, please. The first one is I want to hear your thoughts on liquidity. The central bank data suggests that liquidity has improved. What is your sense in terms of this durability of this liquidity? You think this kind of dynamic is likely to continue playing out in the second half as well? If any comments on that would be pretty helpful. Secondly, you made a very good point about return on equity. That seems to be a priority. The cost of risk trend that we're seeing this year probably are low compared to historical levels, and you also indicated that recoveries have been quite helpful.
Assuming cost of risk normalizes a bit next year, do you think there are enough levers available, let's say, in terms of cost efficiency or growth in fee income to kind of offset that impact, and still ensure that your ROE levels are maintained or your ROE target is still achieved? Yes, more of a question around your ability to maintain ROE, assuming cost of risk normalizes. The first one is about system liquidity. How do you see that playing out? Thank you.
Thank you, Shabbir. I'll take these questions and again, Hussein, feel free to jump in if you need. I think liquidity for the first half of this year came very strong. We've witnessed a slower growth on loans, which again, it was obvious in the first six months. We've seen a significant, I wouldn't say significant, a good improvement on the pipeline of loan demand and we expect the second half to witness an improvement on the growth of loans, compared to the first half. That will definitely impact the liquidity situation. My expectation for that, and Hussein, feel free to jump in and give your view on it, is that we will see a continuous healthy liquidity situation, and a better growth in the loan side.
On the question of the cost of risk that has helped in the previous quarters and whether that is continuing or how we mitigate that, I think the cost of risk and the recovery exercise in SNB's became business as usual. If you recall, Shabbir, in previous calls, we kept saying this will normalize, and in 2024, we said we expect this quarter to be good, but the next one, this should be normalizing. We continue collect and recover good collection that really helps the improvement. Definitely, our focus on AI will enable us to win faster in terms of cost aspects, and we take that seriously in capitalizing on technology and innovation to continue our efficiency operation, while we are investing in other areas that will enable us to capture more of a top line as well.
Capitalizing on all that and hopefully continuously seeing a very healthy cost of risk in the coming year as well. That will enable us to maintain our return of equity or what we promised in our strategy in February 2025. Hussein, if you want to add anything, please.
Thank you.
Thank you, Shabbir.
Thank you. Our next question today comes from the line of [Junjie Liu] from [CSC]. Your line is now open. Please go ahead.
Hello. I have two questions. First about the deposit. The time deposit increased quickly in the second quarter, while the CASA ratio declined. Was it mainly because customers shift into time deposit for the risk management reasons, or was it driven by competition with other banks or other factors? What were the average cost and the maturity of the new time deposits, and how does management expect the CASA ratios trend going forward? Another question about the international business. The international segment delivered a stronger revenue in the first half. Was the improvement mainly driven by Türkiye, Pakistan, or other overseas branches? How did these regions perform in terms of the revenue, profit, and the credit cost? Excluding accounting effects, can the international business deliver sustainable profitability? Thank you.
Thank you very much. I'll answer part of your first question on the CASA, then Hussein, please, you can take the rest. We are growing our deposit and we are growing our CASA, but the faster growth in time deposit is impacting the CASA ratio. Many attribute to that. The higher interest rate makes an impact on people not keeping their money in call or current account. Adding to that, the innovation. It is very easy for people now, whether retail or corporate customers to transfer digitally between their time deposits, call account, saving account, and current account. It is much easier and the accessibility has enabled the retail customer to move gradually from the current account or the call account to more time deposit activities. That's very easy. Can be done in one minute through the mobile application here in Saudi.
That definitely has an impact on the growth of the appetite of people having their money in a time deposit rather than keeping it in current account. Saying that, when we mentioned that in our strategy back in 2025, we keep focusing on attracting lower cost funding, focusing on the right segment, SMEs, private banking, affluent, to ensure that we capture the current account, the low call accounts, to ensure that we always have the lower cost of funding that will enable us to be very competitive in the market and win. Hussein, for you to take the remaining of this question and the others, please.
Thank you, Abu Khalid. [inaudible], as you see, we have a very strong funding franchise, strong ability to diversify our funding sources. If you see there is a decline in interbanks due to banks, an increase in time deposit. We know that time deposit are more expensive, and if you look at the cost of funds, it remained contained despite that move. However, that change to time deposits, it's really improving the overall liquidity profile regulatory ratio. The stickiness of this funding is much better from the interbank, with very competitive cost of funding and efficient management of cost of fund. All in all, this is a win-win situation for us, despite having the ratio declining, which is mainly mathematical impact, not really the performance different. Otherwise, in terms of performance, despite that move, you can see a very contained cost of fund ratio.
When it comes to stronger revenue, I think the levers are mainly coming from stronger NSCI, which is resulted from, as I said just now, efficient management of funding cost. Second, the repricing activities, you can see a really significant improvement in the yields. We have a better investment income rebound of the negative movement we witnessed during the quarter one. Sustainable fees income, despite the change in the fees structure, despite all challenges and lower growth in financing, we still were able to maintain a sustainable fees level, contained OpEx. That's all helped us. On top of that, our international subsidiary, TFKB, they made a great contribution also to the result this year as they have significant improvement from last year.
We heard that previously that we have a new strategy, new board, I think that started to show the positive results, continue Inshallah to provide more and more. To be specific, the major improvements coming from fees and from the FX transaction within the TFKB subsidiary. I hope this answered your questions.
Thank you.
Thank you. Our next question today comes from Naresh Bilandani from Jefferies. Naresh, please unmute locally and proceed with your question.
Thank you. Hi, Tareq and Hussein, it's Naresh from Jefferies. Tareq, you mentioned that the second half loan growth is likely to be better. Should we see the large corporate loan book revert back to growth in the second half after a steady decline in the past few quarters? Or do you feel that the growth will be more driven by the MSME portfolio, which has continued to stay quite strong in the first half? Whether it's going to be large corporate or MSMEs, that would be super helpful. My second question is on liquidity. There is a significant drop in the LCR in this quarter. Could you please share some thought process on what's driving that? Also, just while we are on liquidity, I know you focused less on the headline LD ratio, but this is actually quite important for our modeling.
This is the second quarter that we are seeing roughly about 4 percentage points-5 percentage points drop in the LD. Is this a new base that we should work off in our models, or will the franchise revert back to the levels over 110%? Just on liquidity, once again, this drop in the LCR and how should we think of the LD ratio, which has been dropping for the past two quarters? Thank you.
Hi, Naresh. Naresh, I think what we see in the pipeline is both the large corporate, the mega projects. You know, the Saudi has the Expo and the World Cup, and time is running, and we started meeting with contractors for the stadium build and for Expo. We see both the continuous SME and middle market activities, but also the big projects that complement the Vision 2030 is accelerating in the second half more than the first half. I'll leave the liquidity question to Hussein.
See, the LCR is basically coming from the dynamics of the balance sheet management. As you see, we are way above the minimum. We have enough room to reallocate funding between different funding sources, which by default impact these ratios, however, give us better value, better profitability. As long as we are way above regulatory ratio, I think we have that, let's say, a room, really, to benefit and generate more value, while at the same time we are maintaining still strong LCR liquidity ratios that is way above the minimum regulatory.
Okay. Any color on the LDR ratio, Hussein, which has been dropping in the past two quarters? Is this a new base, or should we see this? Yeah.
We have a faster growth in the deposits than the loans, that's basically the reason. We expect this to increase as today, we are around 1.3% growth in financing. Our guidance is mid-single digit. By default, growing your financing portfolio in the second half, that will slightly increase the headline LDR ratios but we'll have way big room to even go further when it comes to regulatory LDR ratio.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Aybek Islamov from HSBC. Aybek, please unmute locally and proceed with your question.
Yes. Thank you for the conference call. Just one question on your asset quality. You did upgrade the guidance on the cost of risk. That's very helpful. Thank you. To what extent this upgrade driven by your views about provision write backs in 2026, and to what extent these provision write backs are coming from the fair value reserve for [PPA] assets which were booked during the M&A? How should we think about through the cycle cost of risk? Could you give us an idea stripping out this write backs and recoveries, et cetera, what the real cost of risk is? Thank you.
Thank you, Aybek. I think we alluded to that in a previous question. Hussein mentioned how much we booked in the first half of provisioning. Hussein, do you want to comment?
Yes, Abu Khalid. Aybek, we still continue to provide provision every quarter and increasing our coverage ratio over time and even stage-wise coverage. Honestly, write back is nothing material. If you look at the financial disclosures, it's mainly net charge and even higher than the last year. Again, strong recoveries, sustainable recoveries in retail. Month-over-month, we see very good improvement in the recoveries. We have a very strong and efficient engine in retail that reduce business as usual recoveries. Great efforts when it comes to corporate also recoveries. The recovery is the main driver, to be honest. Plus, again, we are prudent when it comes to how we deal with our risk management. We are always providing and being conservative and prudent in our provisioning. We always provide and make sure we have the right coverage.
Honestly, nothing really resulted from, say, provision write-backs. It's basically real cash recoveries. Book is the same, because book, it's embedded loans. If you get a settlement, if you get something, that's again, it's a recovery. It's just an accounting classification, but you should see it in the same manner as your written-off portfolio or embedded.
Thank you. Just one question follow-up. I know you elaborated already on margins in the previous Q&A. I just want to confirm, are there any transitory items components in the second quarter NIM? Quite an impressive performance, by the way. Thank you.
Abu Khalid, do you want me to take that?
Yeah. Go ahead.
Actually, mostly, majority is really coming from the repricing exercise and efforts we are doing. There is immaterial part coming from collection of suspended commission income. By the way, this special commission income that were suspended, now they paid back. This is happening, by the way, every month, every quarter as business as usual. It might not happen next quarter, happen again the quarter after that. Anyway, it's immaterial. Overall, this is really coming from the repricing exercise.
Thank you very much.
Thank you. Our next question come from Jon Peace from UBS. Jon, your line is now open. Please go ahead.
Oh, thank you. Can you hear me okay?
Yes, loud and clear.
Great. Thank you. First question, please, is on the NSCI margin. Do you think we should see that fairly stable in 2027 compared with the second half of this year, even if we see rate hikes, in order to still hit your KPI of high single digit NSCI revenue growth, even if loan growth is a little slower than we first thought? The second question, please, is on the banking fees. You've got that helpful bridge from last year to this year, but what was the main driver as the decline in banking fees between the first quarter and the second quarter of this year? To get back to your target run rate for 2027 of mid-teens banking fee growth, which line items do you think will really accelerate to deliver that? Just a final quick one, please, on cost of risk.
Obviously, a very good number, do you see any pressure relating to gigaprojects and developers for gigaprojects? Thank you.
Abu Khalid, do you want me to take that? Thank you, Jon. On the NIM question, I think that healthy level should continue as we manage both assets and liabilities to generate the maximum value. We are trying also to balance between value and pricing and the growth while our treasury team is efficiently managing the cost of risk, really to maintain that healthy level of the NIM. As we said before, this will moderate slightly due to the reason that we are really trying now to balance and have the right balance between pricing or value and the volume so we can really generate the desired NSCI guidance for this year and for the next year, [Non-English content]. If there's any changes to the guidance for 2027, this definitely will be updated by year-end.
As of now, we see that healthy level will continue, will moderate slightly due to the reason I just mentioned before. When it comes to banking fees, it's mostly linked to the loan growth in retail. You can see a slight decrease in retail when compared to last year that drive some of the impact. Some of the changes in the fees structure or regulatory fees structure, the impact of them had started in February and March, so we didn't absorb the full impact during Q1, and now we are realizing that. That, to the large extent, was offset by other sources of fees generation coming from other services. As an example, the bancassurance business, other products we are offering that's generating additional fees.
On top of that, we are working not only on optimizing OpEx, there are hidden costs within the fees related to these fees that we are hardly working to optimize, also this is supporting that fees line. The last question was about cost of risk. We are a large bank. We have a strong wholesale franchise, definitely will have exposures, whether it's direct to these projects or through the supply chain. All in all, that exposure is immaterial at all to the wholesale book and to the entire financing book. This is number one. Nothing really, majority of it's not related to any project that is really part of the recalibration or [reprioritization]. Immaterial exposure to some of the project that may be delayed. Still, we are receiving payments, and they are performing very well.
All in all, nothing really material we're experiencing, everything is really covered through our current provision coverage. We don't expect any future adverse amounts.
Thank you. Just a very quick follow-up on fees, if I may. On SMEs, have they been a strong contributor to fee income to offset retail, is that part of the growth going forward? Thank you.
Definitely. MSME business is about transaction banking, point of sale, payments. It's not only the NSCI or the NSCI support. They are a strong source of cross-sell and other fee income.
Got it. Thank you.
Thank you so much.
We have now reached the end of our call. For any further questions, please forward these on to the IR team. Mr. Iyad Ghulam, back to you for the conclusion.
SNB Capital would like to thank SNB management for taking the time to conduct this call. We would like also to thank all participants for attending. Please note that for any remaining questions, you may kindly reach out to SNB IR team. We wish you a pleasant day. Thank you.
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