Saudi Awwal Bank : SAB 2Q23 Webcast transcript

SAB 2Q2023 Results

Thursday, 3rd August 2023

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SAB 2Q2023 Results	Thursday, 3rd August 2023

Introduction

Sirish Patel

Head of Investor Relations, SAB

Operator: Welcome to the Saudi Awwal Bank Second Quarter 2023 Results Webcast and Call. With us today, we have the CEO and Managing Director Tony Cripps, Chief Financial Officer, Lama Ghazzaoui, and the Head of Investor Relations, Sirish Patel.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one, one on your telephone, and you'll then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I'll now hand you over to Sirish.

Sirish Patel: Thank you. Hello and welcome to the Results Call for the second quarter and first half of 2023 for Saudi Awwal Bank. As mentioned by the phone operator, we have our CEO and Managing Director, Tony Cripps and our CFO Lama Ghazzaoui with us on the call today.

As usual Tony will kick off the call summarising the key updates for the quarter followed by Lama who will provide a summary of our financial performance. We aim for the presentation element to be roughly 15 minutes, and then we shall open up the floor for Q&A, which will take place over the phones.

Slides are available to download from our website and our webcast. So without further ado, I'll hand you over to Tony to start the presentation.

Overall Performance

Tony Cripps

Managing Director & CEO, SAB

Tony Cripps: Thanks Sirish and good morning, good afternoon, good evening and thank you very much for joining the call. I'll just start with a few comments on overall performance, and then hand over to Lama for the financials.

Our first half revenues were pleasing SAR6.3 billion up 48% on 2022, and our profits before tax of SAR4 billion, up 61% on last year. Costs are in line with plan, and what is pleasing I think mostly in the first half is that loan growth has been very consistent both in Q1 and Q2. 8% year to date and our portfolio is over SAR200 billion for the first time in our history and being the leading trade bank in the kingdom with an off-balance sheet commitment exceeding SAR100 billion.

So our strategy is on track. The digital transformation continues at pace, and examples such as our mortgage proposition, our international affluent global view, global transfer, connecting SAB's retail business to the HSBC network globally is unique in the Kingdom, and our MSME application which we launched has really driven real financial progress in our SME strategy and results.

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SAB 2Q2023 Results	Thursday, 3rd August 2023

We also published our first ESG report during the quarter detailing our commitments for the short and the long term.

So the list of achievements I'm personally pleased with, the progress we've made not just in the first half, but over the last two years since we launched the strategy, and more recently our senior management group got together to refresh the strategy, and we hope to be announcing that in the second half, guiding new financial targets and a three to five-year horizon as I said, which we hope to update in the third or fourth quarter.

So back to the 2023 performance so far, our planning assumptions at the start of the year of Fed funds around five to five and a quarter hasn't really changed. We had an increase in rates, whether or not there's another increase is up to the market, but we are where we are.

Our growth plans are intact and we don't feel that there are headwinds for that growth plan in 2023. The economy has slowed a bit. The global outlook is a little bit unclear, but we're confident in our own growth in the second half.

SIBOR levels are around 6%, and have had an effect on our cost of funds during the quarter as you've seen, and we've elected to support key strategic customers on the deposit side and paid up for some deposits with certain relationships.

These actions have resulted in this quarter in a lower NIBs ratio up until the 30th of June where we closed at 61%, which is still industry leading. It is a lumpy position on NIBs for us because we are 75% a corporate bank, and so we see very large inflows and outflows associated with some of the giga projects.

At the end of June, we are where we are, and that NIBs ratio in the corporate space did jump a lot in early July, but it could again be drawn down later in the month. So it is a bit up and down, but we're quite confident that we have the levers in the second half to manage with a low loan deposit ratio. We don't have to chase high yielding deposits necessarily, but we do so on the basis of our strategic long-term plans. But the effect has been material on the cost of funds in the quarter, but that does not necessarily create a trend; I just want to highlight that.

And NIM sensitivity, which is a key question for all of you. We highlighted that we were taking steps this year with a view that rates would be peaking this year at some point, but we wanted to reduce our NIM sensitivity for when rates possibly started falling in 2024. And our sensitivity has dropped materially in the quarter, and is neutral at the moment.

And this is by design although, perhaps it's happened a little earlier than perhaps we previously guided. It's not a science and we manage this day to day. But with that, overall, I am pleased. I know that NIM is a hot topic and we'll do our best to assure you that we are managing this, and the second half guidance hasn't changed at this point in time, but we will update, of course, as the market materialises and with that, the Fed funds rate peaking or not is something that we are watching very closely.

So the strategy is on track. Financial performance is very solid. And Lama, I'll now hand over to you and you can give the guidance on our financial results. Thank you very much.

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SAB 2Q2023 Results	Thursday, 3rd August 2023

Lama Ghazzaoui: Thank you, Tony. We start at slide three.

On a year-to-date basis, we generated SAR4 billion of net income before the zakat and income tax which was up 61% or SAR1.5 billion on the first half of 2022. This was driven by higher revenue both increased NSCI and higher non funds income. And these factors were partly offset by higher impairment and higher operating expenses although these are in line with plan and translate into solid cost of risk and cost efficiency ratios. These key movements can be seen in the bottom left chart, again a pleasing first half.

Cost efficiency stood at 32% as a result of the strong revenue performance and absolute cost expenditure is in line with the plan. Cost of risk of 37 basis points for the half was within our expected range, and asset quality remains strong, and there are no indicators of additional stress in the portfolio.

On a quarterly basis, we generated SAR2.0 billion of net income before zakat and income tax. In the second quarter, this was up 53% on the second quarter of 2022, and mainly driven by higher revenue and notably higher net special commission income from both the shift in rates and also higher average volumes.

Compared to the first quarter of 2023, net income before zakat and income tax was down 2%, and this was from lower non-funds income which in part reflects the seasonality of the second quarter and the higher trading and the total gains in the first quarter. Impairments were also considerably lower in the second quarter as we benefited from higher writebacks and recoveries.

Net special commission income was stable quarter on quarter as volume growth broadly offset the contraction in NIM, which despite an increase in yield saw a greater increase in cost of funds. The higher cost of funds has resulted in a contraction of NIM of 9 basis points in the second quarter, and during the quarter our spot NIBs ratio fell to 61% and the average NIBs balances fell to 62%.

From the central bank data published earlier this week for June, banking sector NIBs ratio fell to 54% so we remain well above the sector. Much of the banking sector has experienced a drop in NIBs as customers look for higher return on their deposits and given where SIBOR levels are currently.

Where appropriate and as Tony mentioned and dependent on relationships, we have catered for some requests, which have driven up our overall cost of funds and our NIBs balances can be lumpy like our corporate lending balances, but we're very focused on building up these balances in the second half of the year.

Our net income after zakat and income tax was SAR1.6 billion for the second quarter. During the quarter, we took a provision of zakat and tax that actually relates to 2019 and 2020, which was approximately SAR100 million. Excluding this our net income post zakat and income tax would be closer to SAR1.7 billion which would be more in line with the first quarter performance. Excluding this provision, our first half underlying growth was 15.2%, and we remain very pleased with the build-up of the returns since the launch of the strategy.

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SAB 2Q2023 Results	Thursday, 3rd August 2023

Moving on to balance sheet, loans were up 4% in the quarter and 8% year to date driven by strong performance across both businesses, corporate and retail. And the June Central Bank data suggest that we've grown significantly faster than the market, and we expect to build on this position for the second half. Our customer deposits were up 4.%, and our NIBs ratio as mentioned fell to 61%.

Lastly, of course, on capital, our CET1 closed at 16.5 as growth in loans accelerated.

On to slide four, the left-hand chart shows the usual quarterly revenue built by segment. Corporate and institutional business revenues remain at a solid SAR1.7 billion for the quarter, but came down 1% Q-on-Q reflecting the increased cost of funds mentioned earlier.

Our wealth and personal banking business revenues continued to build as the business continues to show strong momentum in growing its asset book. Our treasury revenues remained robust at SAR477 million for the quarter. This was in line with the second quarter of 2022, but showed a fall compared with the trailing quarter of Q1 because Q1 benefited from higher than usual gains from our investment portfolio.

The bank also grew its investment portfolio to SAR94 billion, which is a key part of the strategy to manage interest rate risk when rates start to fall, which we expect to occur anytime during 2024. This strategy will enable us to cushion the bank for excessive fall in NSCI compared with previous periods when rates have fallen.

The top right-hand chart shows our NSCI build, where the second quarter was stable at SAR2.5 billion. Our gross yields improved in the quarter to 4.9%, but this was more than offset by a steeper increase in cost of funds, which led to a fall in NIM to 3%. This can be seen in the bottom right-hand chart, and as is often the case, cost of funds do tend to rise faster than on the asset side. Our year-to-date NIM remained at around 3.1%.

On to expenses, costs increased 18% year on year, and were down 1% Q-on-Q. The year- on-year movement largely reflects the continuation of our investment phase. Mostly people- related, but also including digital investment spend whilst also absorbing 100% of our subsidiary SAB Invest, formerly known as the Alawwal Invest.

Cost efficiency for the half was 31.9% which is significantly better than the 37.8% for the full year of 2022.

On slide six for credit quality, our cost of risk for the quarter was 28 bps and 37 bps for the half, and cost of risk fell in the second quarter as we expected from the increase in recoveries during the quarter.

Following the strong growth in loans, our NPL ratio fell to 1.9% excluding POCI which is closer to recent Saudi banking sector averages, and also a significant improvement on the ratio directly after merger. Our asset quality remains strong, and there are no indicators of

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