Saudi British Bank : SABB 1Q22 Results webcast transcript

1Q 2022 Results

Wednesday, 18th May 2022

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SABB 1Q 2022 Results

Wednesday, 18th May 2022

Operator: Welcome to the Saudi British Bank First Quarter 2022 Results Webcast and Call. With us today we have the Managing Director, Mr Tony Cripps; the 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 speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, Wednesday, 18th May 2022. I'll now hand you over to Sirish.

Introduction

Sirish Patel

Head of Investor Relations, Saudi British Bank

Thank you, Operator. Hello and welcome to our results call for the first quarter of 2022. As mentioned by the telephone operator, we have our Managing Director, Tony Cripps, and our Chief Financial Officer, Lama Ghazzaoui, with us on the call today. Tony will kick off the call, summarising the key updates for the quarter, followed by Lama, who will provide the usual summary of our financial performance for the quarter. We aim for the presentation element to be circa 10 to 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 via the webcast.

Without further ado, I'll hand you over to Tony to start the presentation.

Q1 Highlights

Tony Cripps

Managing Director, Saudi British Bank

Great, thanks Sirish. Welcome everybody. I'll provide a brief summary introduction, then straight into the financial results, handing over to Lama. So the quarter, in a nutshell, continues the trends that we talked about last year of getting SABB to industry growth in Retail and maintaining our growth trend in Corporate, or even above growth in lending in Corporate. And so slide one just summarises the main highlights of the strategy.

So on loan growth in particular, it was a pleasing start. Our portfolio growth was 5% across the whole bank. Even though not all banks have published, you can safely say that was in line across the industry, possibly slightly faster on the Corporate side.

We continue to play our rightful part against the Vision 2030 commitments, highlighting the funding of the Red Sea development in green format, and SAR5 billion project financing deal and to manage the utilities' infrastructure. And also another highlight was financing the construction of the Avenues-Riyadh, which is one of the region's largest shopping, tourism and entertainment projects. And the pipeline remains strong on the lending side in Corporate.

Retail growth accelerated in the quarter, with 7% growth. And as we highlighted in the fourth quarter last year, once the product range completion was in place, which happened at the start of the year, we were very confident that we would see our growth in line with the

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market, and that's exactly what's happened. On our Retail book in particular, I'll just comment that the proportion of our book which is non-subsidised is about 50% or thereabouts, which is higher than many of the other banks. And on the softening that we saw in mortgage lending in the first quarter, more of it was on the subsidised part of the market, so our overall growth is held up because of our non-subsidised lending.

Looking forward, we think the momentum will continue and our forecasts for the year remain positive, and we expect that there will be still strong demand in the final part of the year on the Corporate side. And despite, kind of, the high levels of origination and corporate repayments, as there is still considerable liquidity in the system, we expect to achieve our growth targets, as we've previously highlighted.

On revenue, we saw 4% growth year-on-year and 6% growth quarter-on-quarter, with a flattish NSCI base and an improvement in non-funds income. Lama will give you more colour on that. I highlight during the quarter, starting in about February, we started to see a sharp acceleration in rates through SAIBOR, which not only was because of the trajectory of LIBOR in the US, but also because the margin between SAIBOR and LIBOR widened as well. So this will be a positive for us and that's starting to come through in the trend in the numbers, and we expect that to continue as those rates flow through.

As said in the previous call in February, we were not expecting a material improvement this quarter because there is a lag, essentially, but that should start to come through in the second quarter. And we've seen the start of that, which you'll see in the numbers.

Non-funds income also grew, with fee, exchange and trading all performing really well. The cost of risk and asset quality are all in line with the plan, and the sustained improvements are as we forecast post-merger and the tougher approach we took to cleaning up the book. So the cost of the risk on the first quarter was 13 basis points, reasonably low. Our NPL ratio, excluding the POCI balances, was 2.3%.

So all of this leads to the fourth point, which is on the slide, which is we are delivering an improvement on ROTE. In the first quarter it was 9.7%, which compares to the full year last year of 7.8%, and we expect to see that continuing trend as the rate cycle feeds through into income. So clearly there's more to come, especially with the strategic levers we're using as well; and a more normalised, kind of, global benchmark environment with rates; and the growth strategy we've got, leveraging our technology advantages that we're rolling out at pace. And we enjoyed very healthy capital liquidity and funding positions; 18.5% CET1 ratio, 76% NIBs ratio and LCR of 156%.

And the last comment I'll make is that the strategy, from a Board point of view, recognise that we're well on track to deliver on the second year. We're very firm in our investment plans and so our technology upgrades will continue at pace this year, with a strong focus on our affluent capability in Wealth, which is very exciting, in the second half, which we'll be announcing shortly through various initiatives. Our relationship with customers, clients and regulators is strong and deepening, and our partnership and collaboration with HSBC is more structured than it has been in the past and, therefore, delivering on the strategy around Wealth, as I've mentioned, and in other areas as well.

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So the ingredients are there. As Managing Director, or CEO, I am very happy with the performance in the first quarter and it gives us a strong platform to deliver in two, three and four. The markets are obviously volatile and expected to remain a bit jumpy, but we're not forecasting an adjustment to our growth forecast at this point in time. We just expect to manage that volatility as we go forward. So we remain optimistic for the future.

Thank you. And I'll now hand over to Lama.

Financial Results

Lama Ghazzaoui

Chief Financial Officer, Saudi British Bank

Financial Update

Thank you, Tony, and good afternoon to everyone. I'll take you through the regular financial update for the first quarter. We generated SAR1.2 billion of net income before tax, which was around 2% up on the same quarter from 2021, and almost double what we achieved in the fourth quarter of last year. Comparing with the first quarter of 2021, net income before Zakat and income tax was higher, mainly because of higher revenue, although this was partly offset by higher ECLs and higher costs. Revenue was higher and this was driven by increased fee income, exchange income and trading income. Fee income did show a strong rebound, with improved business activities, and also included a handful of one-offs, which won't necessarily repeat. Exchange income was up from increased customer activity, and trading income was up as we took advantage of opportunities from the heightened volatility witnessed in the first quarter.

The ECL charge in the first quarter of SAR60 million represents an annualised cost of risk of 13 basis points; lower than our through-the-cycle guidance of 30 to 60 basis points, but it was higher than the prior period, given some of the extremely low charges we witnessed during 2021. And this metric remains ahead of the market.

Costs were up by 4%, but if you remove the merger-related costs from the prior period, underlying costs actually increased by 8%, which reflects the investment stage we are currently in and is in line with the guidance and the comments we've made in the previous calls.

The graph on the bottom left-hand side shows these movements, and the chart next to it shows the main movements compared to the fourth quarter. We generated a return on tangible equity of 9.7%, which compares favourably to the full-year ROTE of 2021 of around 7.8%. We would expect this to step up as we advance through our strategic plan and as we return to a more normalised rate environment.

From a balance sheet perspective, we grew our loan book by 5% in the quarter and 12% year-on-year. Growth was broadly spread across both Corporate and Retail and is a strong continuation of the growth achieved last year. Our customer deposits grew 6% in the quarter, and we achieved a closing NIBs ratio of 76%. Although this fell away from year-end

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high, yet it remains a significant strength, particularly in an environment where the rates are increasing.

And finally, liquidity and funding remained robust and capital levels remained healthy. Our CET1 did fall in the quarter to 18.5%, but the drop was driven by the accelerated loan growth that we witnessed and also impacted by the proposed final dividend for 2021, which was paid in April.

Moving on to the next slide, revenue analysis. During 2021, revenue was largely stable throughout the year at approximately SAR2 billion per quarter. And in the first quarter of 2022, revenue of SAR2.1 billion marks a step-up from that position and is largely driven by non-funds income in the Corporate business.

Net special commission income was broadly unchanged compared with the fourth quarter of 2021. But the prior period included a small one-offcatch-up in the Retail business. So the underlying trend was actually positive with Corporate NSCI improving quarter-on-quarter and Retail NSCI being broadly unchanged.

Clearly, SAIBORr has increased significantly towards the end of the first quarter. And therefore, we would expect to see the benefits of this materialising more in the future periods, given the re-pricing lag but it was very pleasing to see our monthly NIM improving throughout the first quarter and it continues to do so.

We saw a strong increase in non-funds income driven by increased fee, exchange and trading income. And as we mentioned earlier, fee income showed a strong rebound from improved business activities, but it was also supported by some one-offs that are not recurring in nature. These items are driven by our trade business and merchant acquiring, which can by its nature have some time-relatedone-offs.

Expenses for the quarter increased 4% year-on-year but fell 8% compared to the trailing quarter. Given the move into our investment phase, the first quarter of 2022 costs are not really comparable with the first quarter of last year, and there were also a handful of one-offs items in both quarters. However, the first quarter of 2022 run rate seems like a fair representation of costs for the remainder of the year.

We received a number of questions on our cost to income ratio compared to the market. And we've laid out, on the right-hand side, essentially the change in our cost efficiency ratio, which we've gone through. The two main points I would draw out of this is that cost management has been very robust and the higher-than-history ratio is caused really by the lower revenues largely from the lower rate environment. And second, pre-merger, we had a market-leading cost efficiency ratio and we aim to go back to that position over time.

Moving on to credit quality and impairments. Cost of risk for the quarter was 13 basis points, representing an ECL charge of SAR60 million. This can be further broken down into a charge of SAR190 million offset by recoveries of SAR130 million. We still anticipate cost of risk remain within the 30 to 60 basis points range for the full year. And as can be seen in the chart on the left-hand side, our quarterly ECL profile can vary quarter-on-quarter given the

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