Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed the ratings of Bank AlJazira (BAJ), based in Jeddah, Saudi Arabia. The Financial Strength Rating (FSR) is affirmed at ‘BBB,’ supported by strong asset quality and liquidity, a sound effective coverage ratio and a high rate of internal capital generation.
Ratings are constrained by the Bank’s low capital ratios, high cost ratios and consequent low operating profitability and return on average assets (ROAA), as well as by concentrations in loans and deposits (although this phenomenon is common throughout the region).
However, if the Bank should maintain its now very sound asset quality without significant damage to other aspects of the balance sheet, this could exert upward pressure on the FSR and/or the Outlook at the next review.
For the same reasons, the Long-Term Foreign Currency Rating is affirmed at ‘BBB+’ and the Short-Term Foreign Currency Rating at ‘A2.’ In light of the Bank’s position in the Saudi banking sector, notwithstanding that the Bank is not systemically important to the Saudi banking system, official financial support is expected to be forthcoming in the event it is needed. Consequently, the Support Level remains at ‘2.’ All ratings carry a ‘Stable’ Outlook.
The major development at BAJ in 2013 was the write-off of several large corporate loans, which summarily moved the Bank’s non-performing loan (NPL) ratio from the sector’s highest to its third-best. At the same time, continued sound loan-loss provisioning raised the coverage rate to the peer group average, and despite the lowest capital ratios in the peer group (including the lowest Basel III CAR), BAJ’s effective NPL coverage ratio jumped significantly and is now very sound. Liquidity has remained strong and loan-based ratios improved last year, with only an increased use of interbank borrowing casting a slightly negative light on the overall liquidity picture.
Since the 2006 correction in the Saudi stock market, which had been a profitable source of business by virtue of the Bank’s expertise in brokerage, asset management and the financing of share trading activity, BAJ has been searching for a new niche in the Saudi banking market. The Bank has begun to implement a strategy based on increased retail business – specifically credit cards, housing finance and payroll accounts – and increased business in the mid-sized and SME markets. The development of this market niche has inevitably involved branch expansion, which has increased BAJ’s operating expenses.
However, the rest of the income statement offset this increase as strong growth in net special commission income (net SCI) more than offset a lower non-special commission income (NSCI), which was principally a casualty of lower volumes in the local share market. Consequently, operating profit grew modestly, and reduced risk expense provided for a more significant increase in net profit. Even so, both operating profitability and ROAA continued to be the lowest in the peer group. Given the Bank’s low capital ratios – even this low profitability – when not expended for dividends, provided the Bank with the sector’s second-highest rate of internal capital generation.
Originally a part of the overseas branch network of the National Bank of Pakistan (NBP), in 1976, BAJ became the first foreign bank to comply with the Saudi law requiring a 60% Saudi shareholding in all banks operating in the Kingdom. Since that time, NBP’s stake has been diluted to the current 5.8%. During this time, control of the Bank passed to the Al Rashed Group (22%), and ownership was enhanced in 1997 when a stake was acquired by the Asir Company, which is majority-owned by Saleh Kamel, chairman of the Dallah Al-Baraka Group.
At year end 2013, the Bank’s assets totalled SAR60.0 billion (equivalent to $16.0 billion), representing a market share of 3.2%, and its capital totalled SAR5.7 billion (equivalent to $1.5 billion), making it the Kingdom’s second-smallest bank by either measurement.
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