Ladies and gentlemen, good evening. I will now hand you over to your host, Mr. Iyad Ghulam. Mr. Iyad, please go ahead.
Good afternoon. On behalf of SNB, I would like to welcome you to this conference call with SNB management regarding the bank's Q3 2026 results. Today's call is being recorded. Please note that this call is open for analysts, investors, and shareholders only. Any media personnel, please disconnect at this point. Today's speakers are Mr. Tareq Al-Sadhan, Group CEO, Mr. Fawaz Althumairi, Deputy CEO, Mr. Hussein Eid, Group CFO, Mr. 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, and thanks to SNB Capital for hosting. Before we begin, a quick reminder that today's call includes forward-looking statements along with discussions of financial performance and projections. I will remind everyone to please refer to page two of our earnings presentation for the disclaimer notice. Also included in this notice are clarifications around reproduction of any SNB material and/or today's discussions in line with applicable laws and regulations. Access to this presentation and access to this earnings call constitutes express acceptance of these terms. Please note that supporting materials for this call and for prior periods, including the presentation, are available on the Investor Relations page of the SNB website. With that, I will hand you over to our Group CEO, Mr. Tareq Al-Sadhan. Please go ahead.
Thank you, Abdulbadie, and good evening, everyone, and thank you for joining our third quarter earning call. I am delighted to welcome my colleague, Fawaz Althumairi, our Deputy CEO, who assumed that role starting from September this year, and he will be a great addition to the success of the execution of our strategic aspiration in SNB. So welcome, Fawaz. We delivered the record SAR 19.5 billion net income for the first nine months of 2026, with an attractive return on tangible equity at 16.8%. Looking at our balance sheet and funding, our total assets grew by 4%, reaching SAR 1.3 trillion. Our customer deposits also grew by 5%, reaching SAR 670 billion.
On the financing side, as we expected, there was an improvement on the third quarter, where we witnessed the growth of 4%, reaching SAR 758 billion, with an excellent growth on our focus area, MSME, of 19% year to date, reaching SAR 95 billion. Without losing an oversight on our operational efficiency, our size is helping us while we are still investing and heavily investing, we are still maintaining our cost-to-income ratio to 25.1% at a group level and at domestic level, 22.6%, and we will continue looking for opportunities to enhance our operational efficiency without losing sight on investing on the areas that we believe it is very important to invest to cater for a continuous operational efficiency, especially when we look at AI and data.
Looking at our capital and our buffer to continue the growth, I think our capital adequacy ratio is in a very healthy situation. Our SAMA LDR also gives us an ample room for a continuous growth on our lending activities. Before going to the progress on our strategy, as you all know, 2026 will complete the second year of our three-year strategy that communicated to you back in 2025, and this is the time where we do our budgeting exercise for 2027, and we do refresh our strategy. But I think this exercise took more than just a refreshment of our strategy.
When we looked at the external factors that we keep looking at year after year, I think there is a lot happened since we announced our strategy in 2025, and that drove our normal refresh exercise to be a bigger exercise and developing a new strategy for the bank for the coming years. We are undergoing now a new strategy exercise that will be finalizing, hopefully, toward the end of this year, and inshallah, we will communicate to you at the right time the highlights of this strategy. Many variable, many external factors that took place from the beginning of 2025. As you all know, the liquidity situation, we anticipated that. I think that is also an important factor that we need to keep an eye.
The real estate reform that took place toward the end of last year, I think that's a very important factor that we need to capture in our new strategy. The new strategy for PIF, the new Ministry of Finance investing and strategy for spending is also an important factor. The global dynamics and the interest rate behavior is also an important factor that we are capturing in our new strategy. The regulatory framework as well. We've seen the regulatory intervention during the last two years related to fee, related to the countercyclical buffer intervention. I think that's also an important factor that we need to take in consideration in refreshing or coming up with our new strategy. Not to mention, of course, the geopolitical situation that also took place at the beginning of 2026.
All these consideration plus the aspiration that we have in growing and strengthening the balance sheet of SNB is the heart of what we are doing today in finalizing our new strategy that will be predominantly focused on value creation driven by innovation and differentiated by a customer experience. Saying that, with all the external factors that I alluded to, I think we are still delivering in many of our KPIs that we set for ourself and communicated with you at the beginning of 2025. If we look at our financing, our financing has grown since the baseline of 2024 by 9%. We communicated that we aspire to achieve a low double digit. Today, in the first nine months of 2026, we are achieving 9% growth. Our CASA growth, our guidance, why a high single digit? Today, we are at a 3% growth.
Our NSCI growth, a high single digit, and we are achieving that so far on an 8% year-on-year growth. Banking fees growth, as I alluded, some regulatory intervention has impacted that. We expected because we are focusing on growing our non-funding income, we were hoping that we will achieve a mid-teens. Today, it stands at 6% year-on-year, and we will continue finding ways and means to grow our non-funding fee income. Cost-to-income ratio, I think is one of the success stories that we are continuously monitoring and coming up with areas of potential cost optimization and operational resilience and efficiency to maintain our cost-to-income ratio below the 24%, and we believe we are heading toward that aspiration, both on the group level and then the domestic level, where we are close to our aspiration to 2027.
Cost of risk, I think it is a good success story of achieving better than expected, and I think Hussein Eid will comment in that when we talk about our guidance. Tier 1 capital, I think we are achieving also a good momentum of 19.8% in the guidance that we talked about. Return on tangible equity is the same story that we are continue to achieve on our aspiration for 2027. Looking at the non-financial KPIs, I think a great achievement on the digital front where we see we are ahead of our KPI for 2027, and I think we will be exceeding that by far, especially looking at our focus on the innovation in the coming few years.
SNB NEO, I think there is a, in our new strategy, there is a good look for the SNB Ventures and SNB NEO to look at how can we capture the best out of it. Today, we have 2 million active customers compared to our target of 5 million and 1 million, the baseline that we started with. AI and data and the innovation at large, I think we are achieving our KPIs when it comes to what we communicated in 2027, but our goal and our aspiration now as part of our new strategy is much, much higher than that, and hopefully at the right time, we will communicate that to you. OHI and the culture and the people sits on the heart of our new strategy, and we want to improve that to an even higher aspiration, inshallah, to what we communicated in 2027.
On the SNB Capital elements, SNB Capital sits on the group strategy refresh exercise, and we will definitely look into the areas that create value from SNB Capital. We are still the number one AUM market share. On the investment banking, as you know, 2026 was a very slow year from an investment banking activities, whether it is an IPO or issuances, so that really impacted our strategy and achievement on that front. The brokerage business, I think we are progressing well despite the fact that also the brokerage activities has been impacted by the 2026 slowdown and the capital market activities in Saudi. With that, and I know that you have a lot of questions, I will hand over to my colleague, Hussein Eid, and I will be joining you with my colleague, Fawaz, on the Q&A session. Thank you.
Thank you, Abu Khalid. Assalamu alaikum and greetings, everyone. Let me begin with our outlook and guidance. In Q3, we had a clear change in the interest rate environment. The September rate hike was first in more than three years, and in turn, SAMA raised the repo rate to 4.5%. Local funding markets moved even more. The three-month SIBOR increased from 4.75% at the start of July to above 5.5% at the end of September, an increase of 79 basis points. On the economy, regional disruption continued to weigh on oil output. Headline real GDP contracted by 3.8% year-on-year in the second quarter. Nevertheless, the non-oil economy expanded by 1.9% year-on-year, while bank credit to the private sector was still up 6.2%, and inflation remained low at 1.9%. We explained in the last call that the expected one more rate increase before the year end.
That has happened already, and our best case is for the additional rate increase before the end of the year. Against this, and with the nine months behind us, we are making one upgrade to guidance. As you can see, the nine-month cost of risk is close to zero, so we are expecting the full-year cost of risk to be between 5 and 15 basis points. All other guidance remains unchanged. It is also worthwhile to note that the NSCI is up 8% for the nine months compared to last year. However, we are maintaining the NSCI guidance mainly due to the expected funding cost increases from the rate hikes as mentioned. As you will see, our strategy for optimization of funds remain agile. We continue to pursue profitable growth and disciplined pricing. Next page, please.
Now turning to our nine-month performance, there are few key points that I would like to highlight. First, earning asset growth has picked up. Financing grew by SAR 18.5 billion in the quarter, or 3%, our strongest quarter this year, taking year-to-date growth to 4%. Second, despite headwinds from higher interest rates and competition in deposits, our funding position is holding up well. Customer deposit grew 5% year-to-date, which can see is faster than financing and supporting our overall cost of fund management. Third, we can continue to leverage the diversified business model and agility afforded by our comprehensive risk appetite and strategy in order to adapt to market condition and drive higher profitability. We achieved 5% operating income growth, higher than the 4% increase in OpEx, while maintaining solid asset quality, robust capitalization and liquidity, and delivering 5% net income expansion.
Importantly, return on tangible equity remains within guidance. Next page. The balance sheet expanded by 1.4% in the quarter and 4% year to date, with the most important highlight of the asset being the quarterly growth in financing, up around SAR 24 billion year to date, and well-balanced between wholesale and retail. On the liability side, our response to change in interest rates and customer deposit helped manage them and grow NSCI. Customer deposit declined by SAR 28 billion in the quarter, and we used interbank to fund the strong financing growth and replace the transitory deposit outflow. Also, within liabilities, term loans were reduced by almost SAR 9 billion. It is worth noting that year to date, customer deposits are up SAR 34 billion in line with our strategy, while interbank funding is broadly unchanged from year-end, up 2%.
We will discuss the implication of the cost of fund and margins a little better. Finally, total equity expanded 3% year to date. Moving to next slide, please. Financing reached SAR 758 billion after a major first half. Growth picked up clearly in the third quarter as we captured opportunities that meet our risk appetite and support continued balance sheet diversification. Year to date, both retail and wholesale financing grew by 4%. Within wholesale, corporate and MSME increased by SAR 23 billion, or 7%, mostly offset by SAR 8.7 billion reduction in the financial institution portfolio. The direction of our financing mix remains the same as we described last quarter. Steady retail growth and wholesale expansion in lucrative segment and MSME, which also support wholesale revenue streams from payments, transaction banking, and other banking services businesses. Going into fourth quarter, it is normal to expect some degree of repayments.
We also expect to keep the origination momentum in corporate and continue to pursue value growth in attractive area, including MSME. Our overall focus remains on pursuing the most attractive opportunities in domestic market. On balance, this gave us the confidence to maintain the financing growth guidance unchanged. Next page. The investment portfolio was stable in the quarter, up 1% sequentially, and also up 1% year to date, to reach SAR 324 billion. The mix was also generally stable quarter over quarter. The portfolio remains high liquidity and liquid, and continues to support NSCI through the cycle. Next slide. Customer deposit reached SAR 670 billion, up 5% year to date, but 4% lower than the second quarter, reflecting some transitory deposit movement. Year to date, the growth came from the time and others, up SAR 54 billion, while CASA balance declined by SAR 20 billion, bringing CASA ratio to 66.2%.
This is consistent with our approach we described in the first half. We used strong deposit inflows to replace interbank funding. The point here that we continue to be agile, and we manage the entire funding base for cost and stability, not deposit in isolation. This is all contributes to healthy cost of funds story, as we will see a bit later. That said, customer deposit in general and CASA specifically remain critical element of our funding franchise, and growing them is still a priority. We are doing this through our broad reach across retail segments supported by our technology infrastructure and the strength of our wholesale relationships across corporate and SME, where we are capturing payroll accounts, cash management, and transaction banking. Next slide. Moving to the income statement. At the group level, nine-month net income grew by 5% to record SAR 19.5 billion. The return profile is healthy.
It is supported by core business growth and expanding operating income, alongside investment for growth combined with careful cost management and healthy asset quality profile. The operating income grew 5% to SAR 30.6 billion, driven by 8% higher NSCI. This was partly offset by 6% decline in fees and other income. Operating expenses grew more slowly than operating income at only 4%, and the net impairment charge were close to zero. As a result, the return on tangible equity for the nine month came at an attractive 16.8%. Next page. Net special commission income grew 8% in the first nine month to a record level. Our asset repricing has continued to deliver throughout the year. The clearest way to see this is against last year. Our cost of fund is down 33 basis points, while our asset yield is down by only 20 basis point.
Our funding costs came down faster than our yields, and that is what drove our net income growth. In the third quarter, the margin came down from the second quarter. This was expected on the last call. We said the second quarter would be the high point and that we would balance the volume growth with the value from here. That is what we are doing. We are growing the balance sheet, but at the right price and the right quality. Even after this quarter, our margin remains above where it was a year ago. For the fourth quarter, we expect some further pressure. Our liability reprice faster than our assets, so funding cost will move first. Even so, we expect our full-year margin to stay above the first quarter level of 2.85%.
To next year, we expect this gap to narrow as more of our asset reprice in the first half 2027. Yield should catch up with funding cost, and the margin should benefit from that. Our rate sensitivity in NSCI remain two to three basis point negative for the rate hikes, and it takes two to three quarters to come through fully. As always, the outcome will depend on SIBOR, competition for liquidity, and our balance sheet mix at that time. Next. Fees and other income for the nine month was SAR 7.2 billion, down 6% year-on-year. The decline came mainly from investment-related income, as last year included exceptional positive revaluation that didn't repeat this year. However, our core fees business continued to grow, supported by international and FX income. Banking fees grow 6% to SAR 4 billion for the nine month.
The strongest contributor was financing and cards, where fees grow 41%. Cash management, MSME, and recovery in capital markets fees also added to the growth. In the third quarter, banking fees reached SAR 1.4 billion, up 12% from the same quarter last year and 14% from the second quarter. For the quarter itself, total fees and other income was SAR 2.3 billion, down 14% from the second quarter. This reflect investment income. It was low in the first quarter, recovered strongly in the second quarter, and returned to the normal base in the third quarter. Our focus remain growing banking fees and build new income stream to make our revenue more diverse. Next page, please. We are delivering strong cost discipline. Operating expense, excluding the amortization of intangibles for the nine month, came at SAR 7.7 billion.
This was contained to 4% year-over-year growth, slower than the 5% pickup in operating income. Sequentially, OpEx improved for the second quarter in the row, and in Q3 came down by 3%, reflecting our ongoing optimization initiatives. We continue to maintain positive operating jaws . The group cost-to-income ratio was 24.2% for the quarter and 25.1% for the nine month, with improvements both year-over-year and sequentially. We see a similar trend in domestic cost-to-income ratio, and both are now within reach of our full-year guidance. We continue to sharpen the cost base by looking carefully at vendor contracts, optimizing premises, tightening procurement spend, and deepening the use of technology and AI in our operations. At the same time, we will keep investing in technology, data, and customer-facing growth, where those investment strengthen future revenue and productivity. Next page.
The net impairment charge for the nine month was only SAR 5 million, 95% lower than last year, giving a nine-month cost of risk of zero basis point compared with two basis point last year. This reflects the strong recoveries we achieved earlier in the year, which mostly offset the proactive and prudent provisioning levels that we have been charging during the year, together with the continued quality of our portfolio. In the third quarter, the impairment charge was SAR 322 million, a cost of risk of 17 basis points, compared with 14 basis points in the second quarter and 13 basis points a year ago. This is a normal level as the book grows. We continue to apply prudent and proactive provisioning.
Given the nine-month results, we are upgrading cost of risk for the second time this year, and now we expect to be between 5 and 15 basis points. Of course, we will continue to be vigilant and adhere to our prudent risk management discipline. Next page, please. Credit quality remains strong. The NPL ratio was 0.68%, up just 1 basis point in the quarter, and 12 basis points lower than a year ago. Over a longer view, our NPL ratio has more than halved since early 2023. NPL coverage remains strong and has improved. Stage 2 coverage is now 9.2%, up 134 basis points sequentially. Also, stage 3 coverage rose to 77.7%, up 104 basis points quarter-over-quarter. The overall NPL coverage ratio also expanded quarter-over-quarter to reach 152.7%. Keep in mind that we regularly assess our ECL model to ensure that they remain adequately appropriate.
We are confident that our models are up to date and capturing the relevant risks associated with our asset mix. We already benefit from being very well diversified. Next page, please. We are confident that our models are fit for the purpose. At the same time, we believe we are being adequately selective at origination to support quality of the book. We are not immune, of course, and this is why we provide a range on the cost of risk guidance. Nevertheless, we believe we are being adequately prudent in our origination and provisioning. To highlight again, our stage coverages are strong and improving. Overall, this combination of low NPL ratio, strong coverage, and prudent charges, combined with healthy recoveries and stable forward indicators, altogether give us confidence that our earnings are being delivered on a solid and sustainable basis. Next page, please.
The capital ratio stood at 21.1% compared with 22% in the second quarter. The CET1 capital ratio remains robust at 17.3%. In the third quarter earnings, we were more than offset by the interim dividend of SAR 1.15, fair value movements in the investment portfolio as rates rose, and risk-weighted asset growth from the strong financing growth during the Q3. Nevertheless, capital remains well above regulatory requirements, and the Tier 1 ratio at 19.8% is comfortably within the guidance. Liquidity remained robust, with every ratio within the regulatory threshold. This ratio came down a little from their very high level in the second quarter, as we put liquidity to work in financing and optimized our funding mix, and they still leave us with ample room to support growth.
To close, the first nine months delivered record net income, record NSCI, and record fees income from banking services, together with stronger financing growth and solid credit quality. We will continue to optimize the funding mix and pricing in order to preserve NIM. At the same time, we will work to manage the cost and asset quality prudently. Our aim is to invest in our ability to capture future opportunities and profitable growth in line with our strategy in order to sustain shareholder value creation. With that, we are ready to take questions. Back to operator. Thank you so much.
Thank you. Ladies and gentlemen, we will now start the Q&A session. If you wish to ask a question, please raise your hand through the webcast so that we can unmute you. Before sharing your question, please state your name and company, and 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 the line of Reem Alkhulayfi from Riyad Capital. Your line is now open. Please go ahead.
Hi. Am I audible?
Yes, you are.
Thank you, management, for the presentation. Just one question from my side. A debt instrument held at fair value OCI reported fair value losses of approximately SAR 3 billion during the 3Q. Could you share the debt portfolio current duration and quantify its OCI sensitivity for 100 basis point parallel upward shift in yield? Are you considering shortening the duration or increasing the hedge ratio to limit further capital volatility? Thank you.
Thank you for your question. With regards to the duration, I do not think we can disclose this publicly. However, I can confirm to you that our book duration is shorter than the benchmark. With regards to the OCI movements, indeed, it was a result of the spike in rates that we have observed over the end of September. I think we reached the highest level with the US Treasury traded at around 5.35, which we did not see for a long time. That naturally would result in some valuation impact to the OCI. Good news is that was short-lived. I think we have seen a rally in the market, and as we stand now, we have seen a strong recovery from that end of September. Two additional points to highlight with regards to the OCI and the hedging that we put in place.
Definitely, we are very active in managing the portfolio from a duration and from on adding of balance sheet hedging and also taking economical hedge. You can see, for example, if we go back to previous cycles when 2022, when we saw seven hikes coming to the market, despite long end of the curve, was trading lower than where we are today. I think the OCI reached to a valuation of SAR 7 billion. Today, we are trading at higher levels, and our OCI is contained with 50% of that valuation, which is an indicator of the hedges in the place. Also, if you can notice that the trading line in this quarter really did very well because we have sometimes taking opportunity to have an economical hedge toward that movement. In overall, yes, we are very active in managing the book.
We have done several hedges that paid off to contain that, and some of them reflected on the trading line. If we move forward now, following the normalization of the market, it is well below the closing of September.
Thank you so much.
Thank you. Our next question today comes from Abdullah Al Buraidi from Emirates NBD. Your line is now open. Please go ahead.
Hello. Thank you very much. This is Abdullah Al Buraidi from Emirates NBD Capital. Thank you very much for the presentation. Congrats for the great result. My first question regarding the cost to income. We noticed that the cost to income is a little bit above guidance, but that reaching closer to the guidance is not driven by efficiency in the expenses rather than the positive jaws and the increasing in the operating income. More so, we have seen that the non-funding expenses has increased year-over-year by around 10%, and that is mainly driven by the other G&A that has been volatile over the past few quarters. We note that last year in the fourth quarter, there was a one-off. Should we expect some type of provision reversals in the fourth quarter this year as what happened last year or not? My second question is regarding the zakat.
Year to date in the first nine months, we have noticed that the zakat provision is well above the historical norm. How should we think of this continuing and going forward? Thank you very much.
Thank you, Abdullah. As explained in the previous calls and in today calls, we always continue to invest in technology and AI that support optimization of the OpEx. I think the improvement in the cost-to-income ratio is driven, yes, correctly by both, the positive jaws coming from higher operating income, but in the same time, if you look at the quarterly OpEx, you can see that we are in the second quarter in the row, we are making an improvement, and we expect this to continue. Inshallah, by year-end, we are confident that we will meet our guidance and beat it, inshallah. This is coming from both, from better core income and from more efficiency when it comes to cost optimization. If you look deeper at the breakdown of the OpEx, you would see clearly that we have a spike in the depreciation..
That reflect our commitment to investments in IT, in technology, that would generate future value. In the same time, you can see that we are making an optimization in the premises category, utilities, and other G&A. Quarter-over-quarter, we have improving the results, and we expect this to continue. When it comes to last year, one of reversal of provisions, we have indicated last year that this was a long-standing case and got resolved, and we do not expect this to happen. So on a normalized basis, actually, we believe that we managed to contain the cost to the minimum level and helping our cost-to-income ratio accordingly. For the second question, when it comes to the zakat, I think it is based on the calculation. So, the increase is immaterial. It depends basically on it is a complicated calculation.
You need to compare the zakat pool based on the ZATCA regulation, then compare it to the net income and take at least minimum 10%, unless your zakat pool resulting in a higher amount. So we expect this to normalize, and the range will move between 10% and 11%, which is acceptable from our side, and it is resulting from our growth in loans and change in the asset mix that impact the calculation. Thank you.
[Foreign Language]
Thank you. Our next question today comes from Shabbir Malik from Morgan Stanley. Shabbir, your line is now open. Please go ahead.
Hi. Thank you very much for this presentation, and congrats on a good set of results. I have a couple of questions, please. The first one, your comment sounded a bit cautious relative to the medium-term targets. I just wanted to hear your thoughts on potentially which area do you think there could be scope for revision? I think one of the areas I'm keenly interested in is the cost of risk outlook. I think this year has been pretty strong for SNB, but I think if I remember correctly, your medium-term guidance is 20 to 40 basis points. Do you see that level still holding up considering how the external environment has changed? That would be my first question. My second question is around loan growth. We saw a good pickup this quarter after a relatively subdued first half. Typically, we've seen repayment in the fourth quarter.
Do you think this year is going to be something similar where we see repayments pressure coming through in the fourth quarter? Or because of the different circumstances, you think credit growth is likely to still hold up going into fourth quarter? Those are my two questions. Also, Fawaz, who's also on the line, wish him all the best on the new role. Thanks.
Thank you, Shabbir. If your first question is alluded to the quality of assets, I think the performance of the companies that's been announced already shows you that business as usual. I mean, the companies are growing in Saudi, making profits, business as usual, cash flow is happening. We haven't witnessed any stress or pressure on the ability of these companies on repaying the normal dues for banks. The activities is really in the normal stage, and we anticipate our cost of risk to be on the same range, slightly better. Again, that's driven by our conservative approach that we took over the past years on going after high-quality assets.
Business as usual, we haven't witnessed any stress on our. Actually, we've been very proactive in reaching out to our clients in certain sectors that we thought that they might be impacted by the closure of the Strait of Hormuz, and they said, "No, business as usual. Cash flow is at the normal levels, and we will commit to. If any needs, we will reach out to you." On the growth of assets that we have witnessed on the third quarter, we anticipate that the fourth quarter, looking at the pipeline, to continue on the healthy stage. We don't anticipate that the repayment that usually some of the companies try to do by the end of the year just to show better financials by year-end to impact our growth aspiration. We see the pipeline is healthy.
I think the commitment from SNB to the events that's taking place, whether it's the Expo 2030, the World Cup in 2034, has seen an acceleration on the second half of this year. We think this will continue, inshallah, on the fourth quarter and the next years, inshallah.
Thank you.
Thank you.
Thank you. Our next question comes from Tryfonas Spyrou from Römer Capital. Your line is now open. Please go ahead.
Oh, hi there. Good afternoon, and thank you for the presentation. I have two questions. The first one is on NIM. I was hoping if you can give us some additional color on how you expect this to evolve from here over the next couple of quarters, given the sharp movement in the SIBOR rates. Are we right to think that NIM could contract sequentially for the next few quarters until the asset side starts pricing? The second one is on fee income. The SAR 1.4 billion Q3, there was a nice bounce sequentially from Q2. Are there any one-offs in this number, or is this a sustainable run rate that we can consider going forward? Thank you.
Thank you for the question. Let me first tackle the fees. There is really immaterial one-offs. One-offs always happen, and one-offs actually becoming business as usual. We can assure you that our growth is organic, coming from collaboration, nothing really material when it comes to the fees, and we expect to continue that momentum. We are investing heavily in many streams that reduce actually the fees expenses to offset any impact coming from the new fees structure or any impact coming from other regulatory requirements. Fees, I think, from banking service is doing good. If we see a rebound or a major improvement coming from the capital market and investment income from the capital arm, that is really supporting the overall fees improvement when compared to last quarter. We are doing great in the card business.
A lot of cost optimization when it comes to loyalty point programs and other fees expenses that pay to Mastercard, and we will continue investing in that, and we will continue with our effort to increase the non-funded income. It is a core focus for the management. The first question was about-
NIM.
NIM. Last quarter, we indicated clearly that last quarter, I think we were around 3% NIM for the quarter stand-alone, and we indicated clearly that this would moderate slightly during the coming quarter as a result of our strategy to balance between value and growth, where we can ensure that we are generating strong positive margin, but at the same time, we don't let lucrative and high-quality transaction go. That's what was indicated, and we were expecting this from the last quarter. Now, with the pressure on the cost of fund, definitely that will have a pressure on the NIM going forward as the liability repriced faster than the assets. But as explained during the first half of the session, our asset will reprice, but it will take a longer time, approximately three months.
I think going forward, when it comes to the first half of 2027, we are aiming to maintain the same level of NIM that we have. We might face slight moderation in the second quarter, not material, but again, we are planning to bring this up back to this level during the first half of 2027. Thank you.
If I may add, Hussein, if you recall at the beginning of the year, we talked about our repricing initiatives to ensure that we always maintain a healthy and growing NIM, and that has been impacted by slowdown in the growth on assets in the first half of the year. I think with the cost of funding increasing now and also the increased demand on lending, that would bring us back to the ability to start repricing the cost of funding. The funding is our raw material, and if it increase, we have to shift that cost to our end users.
Very helpful. Thank you.
Thank you. Our next question today comes from Aybek Islamov from HSBC. Your line is now open. Please go ahead.
Yes. Thank you for your answers so far. I believe I'm audible. Two questions, if I may. The first one is on the regional competition from the GCC banks in Saudi Arabia. How do you see the intensity now post-conflict? Is it the same as it used to be, or is it lower? Related to that, when it comes to your corporate lending, how much of your corporate lending is in FX rather than Saudi Riyal in the first nine months of this year? That's my first question. The second question, what are the strategies in place to materially lift the share of non-funded income, let's say, above 25% on a sustainable basis? Because I think that's where I see a kind of lack of performance given the SNB scale in the market, strong corporate franchise. Non-funded income can be better than it is now.
What are your thoughts here? Thank you.
Thank you very much. I'll take the first part of the question, and then my colleague Fawaz will take the second. I think from the beginning of Vision 2030, we knew that the capacity of the Saudi banking system would not be enough to cater for the aspirational growth, and we were hoping that to see actually the GCC bank participating with us in supporting Vision 2030. But I think the competitiveness of the Saudi banks was tough for GCC banks to come and compete. I don't see the GCC banks really competing on the Saudi market. If you look at today, and you know better than me, the UAE situation, the banks are struggling for liquidity actually to cater for also the growth that's happening in the UAE. I think the whole GCC is growing, and the banks will be focusing on their jurisdiction.
We do not mind seeing and participating jointly with GCC banks in supporting projects in Saudi. I think that definitely will come. I do not recall really seeing any competition from the GCC banks. I will hand over now to my colleague Fawaz to tackle the second part.
Thank you. With regard to the corporate lending, I think the vast majority for the nine months was in SAR. I think the opportunity here within the wholesale market with the Vision 2030 and the demand for quality credit really support that, and it has been mainly in SAR. When it comes to the non-funded income, definitely this is a major component of our strategy, and we are really putting a lot of investment as we refer to the strategy that Tareq mentioned earlier on the fee income and the non-lending side. Of course, this is more on the transactional side, the platforms, et cetera, and these are going under a massive upgrade to ensure that we are really above the market when it comes to these activities, which naturally will generate the income. Actually, our target is above what you suggested as an 85 basis point.
We are planning to move higher, Inshallah, with the execution of our strategy in the future.
Thank you.
Thank you. Our next question today comes from the line of Naresh Bilandani from Jefferies. Your line is now open. Please go ahead.
Thank you. Hi, Tareq, Fawaz, Hussein. It's Naresh from Jefferies. Thank you very much for the presentation. Three quick questions, please. Tareq, in your opening comments during the presentation, you alluded to working on new targets for the medium term in light of the new reality. Would this be a strategy or a targets timeframe that includes the year 2027, or the current targets currently in place for 2024 to 2027 remain intact as they were last published? I'm just keen to get a clarity on where would the aims for 2027 sit? Would this be in the new strategy, or would they be in line with the old strategy? That's the first question. My second question is on asset quality. I mean, clearly your asset quality charges continue to remain among the best in the sector, and you're clearly surpassing your own targets.
I sense you mentioned, Tareq, earlier in the presentation that you're confident to hold good metrics into the next year. Did I get that right? I'm sorry, because we just came off the call of one of your smaller peers who have guided pressure on their cost of risk outlook, very much in contrast to what you are highlighting. I'm just keen to get a sense of how we should be thinking of the cost of risk into the next year and the extent to which the benefits of recoveries that you've seen in this year would continue into next year. Some thoughts going into the next year on recoveries and the risks that you see on this line would be appreciated. That's the second question. My third and final question is the NIM sensitivity.
In light of the new rates reality and clearly with the way how the CASA mix has moved, Hussein, would you kindly be able to please provide what is the current NIM sensitivity on your balance sheet as compared to what you reported in the previous quarters? Thank you so much.
Thank you, Naresh. I think what I alluded to at the beginning qualifies to say that we are building a new strategy. We are talking about a new strategy that is built on what we started in 2025, but definitely it is not a refresh exercise. It is bigger than a refresh exercise. We are looking at a new strategy and a new aspiration, and we will, Inshallah, at the right time, communicate the aspiration that we are finalizing as we speak. On the quality of assets, I will hand over to Hussein to comment on, but I would not compare us to other banks. We have been, and you know that, post-merger, we have been always a conservative bank. We talked about-
Yes
how much conservative we are compared to our competition. If you remember, we talked about the contracting business, we talked about the real estate business, which SNB was shying away from. Even when we come to this sector, we came very slowly and with a very prudent approach. There was a big real estate reform, and I would anticipate certain banks with a big exposure in real estate in the previous years will be impacted much, much bigger than SNB. I am not sure if the real estate was the cause of their cost of risk rising, but in our situation, as I mentioned, our quality of assets is really good. In our talks and the stress testing scenarios that take in all the external factor situation that we run, we came to be in a very healthy situation, and the update of our guidance confirms that as well.
It varies from risk appetite between banks and other banks. I cannot comment on our colleagues in other banks, but the situation in SNB looks very healthy. Looking at the stress testing that we have been doing, the communication that we continuously have with our clients, we are in a very good situation when it comes to quality of assets. Hussein, do you want to add on the quality of assets, or you want to jump into the
Thank you, Tareq. I think it is well said when it comes to the quality of the assets. The assets or the mix from bank to bank, it is definitely different. We have a diversified mix between retail and corporate and across several industries, and we were very prudent and selective in accepting deals. We always look for the value and consider all aspects of that. That really helped us enable to contain the cost of risk. Nonetheless, the recovery for us is a business as usual. There will be some volatility in corporate, and that is the nature of the business, but also retail, it is becoming business as usual month-over-month, and it is really a strong support to have close to zero cost of risk.
Nonetheless, despite that you see in the P&L that zero cost of risk, still we managed to increase our coverage ratio up to 152% and increasing our stage-wise coverage to 9.2% for stage 3 and 7.7% for stage 2. I think this is among the best coverage ratios in the industry. I think that's the key. It's to look about the coverage rather than the net P&L impact, which is being managed by efficient recovery and prudent selection of our assets. NIM sensitivity, yeah, still to be 2- 3 basis point, more closer to the 3 basis point. Just to note that our liability will reprice faster, and that will put temporary pressure on the NIM. But within a six-month period, we will see the pass-through in our yields and pricing of assets to offset that.
We are aiming to maintain the more or less the current level of the NIM we have.
Also, maybe to add on this, I think you asked about the outflow on deposit and the impact on the sensitivity. It's also worth to highlight that SNB is one of the main active banks when it comes to putting macro hedges in place. That's really managed the sensitivity as well when we see some movement here and there in different balance sheet items. Probably if you go back to the previous few months before the sell-off in rates, a lot of hedges has been added there to mitigate this move. We have a very active ALCO that monitor the entire interest rate risk from all line item, and they are really active in mitigating any unfavorable risk.
Got it. Thank you very much. Just to reconfirm, this 3 basis points sensitivity is an inverse sensitivity, so acting inverse in the direction of the rates. Is that right?
Correct, Naresh. Correct.
Thank you very much. That is very clear. Thank you so much for your responses.
Thank you. Our next question comes from Talal Alradan from Alistithmar Capital. Your line is now open. Please go ahead.
Assalamu alaikum, management. Thank you. Just a follow-up to our previous question regarding the NIM. Your CASA ratio has fallen from 76% to 66% today, and time deposits have rose around 64% in a year. Now a third of the deposit space are now rate sensitive and repricing quickly. You said 2- 3 basis points negative NIM sensitivity to the hike. It looks very light to me. Is that figure based on today mix of the deposits or historical deposits, or do you expect a recovery when it comes to the CASA? If you can share on this one.
It is based on the balance sheet as is, assuming every other variable is constant. Definitely, this can change as the balance sheet mix moves. It is important to highlight not all TDs that we have been adding are short-term in nature. We have been focused on attracting long-term time deposit, which also supporting the sensitivity to interest rate. This is based on the current balance sheet as is today, assuming all other variables are constant.
Thank you. Thank you, management.
Thank you. Ladies and gentlemen, we have reached the end of today's call. Please note that for any remaining questions, you may kindly reach out to SNB's IR team. With that, I will hand over to SNB Capital for the concluding remarks. Thank you.
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. Wish you a pleasant day. Thank you.
This concludes today's webinar. Thank you all for joining. You may now disconnect.