CI affirms ratings of Al Rajhi Banking & Investment Corp.

May 28, 2014 10:19 am

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the ratings of Al Rajhi Banking & Investment Corporation (‘Al Rajhi’ or ‘ARB’), based in Riyadh, Saudi Arabia. In view of its continuing robust profitability at all levels (despite its declining trend, especially in ROAA), its strong customer deposit base, consequent benefits to its liquidity and its more than adequate capital ratios, Al Rajhi’s Financial Strength Rating (FSR) is affirmed at ‘AA-‘. The rating is constrained by the continued high rate of accretion to its non-performing Islamic Finance Facilities (NPIFFs), a low rate of internal capital generation and the downward trend in its profitability, especially because of weakness in Fee and Other Income (FOI). For the same reasons, the Long-Term Foreign Currency Rating is maintained at ‘AA-‘, and is constrained by the sovereign rating. The Short-Term Foreign Currency Rating is maintained at ‘A1’. All ratings carry a ‘Stable’ Outlook. In view of the Bank’s prominent position in the Saudi banking sector, official financial support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Factor remains at ‘2.’

There was a continuation of a downward trend last year in the still stellar profitability at most levels at Al Rajhi. Due to a slowdown in Net Financing and Investments Income (NFII) growth and the first reduction in FOI in three years, gross income was effectively unchanged. The Bank remains one of the sector’s lowest-cost producers, but because of the stagnant gross income, ARB’s cost/income ratio slipped from its traditional ranking as best in the sector to second-best. The combination also resulted in a reduction in operating profit and in operating profitability, but the Bank continued to post the peer group’s best number for that ratio. Even a higher provisioning expense was not sufficient to dislodge the Bank from its customary position as Saudi Arabia’s most profitable bank, although ROAA did experience a significant decline.

For the year, balance-sheet growth slowed considerably, although the growth in net Islamic Finance Facilities (IFFs) was faster. That expansion was financed only partly by growth in customer deposits, resulting in a tightening of liquidity. Even so, most of the Bank’s loan-based ratios – although higher than peer-group averages – remain sound in a global context. Because of the Bank’s strong retail orientation, CASA deposits are a large and growing component of the Bank’s funding, and deposit concentration is very low.

On the asset side, the Bank continued to accrete NPIFFs at a high rate, but a robust volume of write-offs was able to counteract that and reduce both the stock of NPIFFs and the NPIFF ratio. Although that ratio is one of the highest in the sector, it is sound in a global context. Coverage by loan-loss reserves is about the same as the peer-group average, but the effective coverage ratio is somewhat lower than average because of lower capital ratios.

ARB posts the sector’s highest capital adequacy ratio (CAR), but total capital in relation to total assets or net IFFs is low compared to the Bank’s peers. While that – combined with the Bank’s high profitability – might ordinarily indicate a high level of internal capital generation, that is not the case (the rate is slightly below average) due to a high dividend payout ratio. Nevertheless, capital in general can be termed sound.

Whether by total capital or by total assets at 31 December 2013, ARB ranks as the kingdom’s second-largest bank. On that date, assets totaled SAR280 billion (equivalent to USD74.6 billion and a market share of about 15%) and total capital was SAR38.4 billion (equivalent to USD10.2 billion). At year-end ARB operated a network of 528 domestic and foreign branches.

Primary Analyst
Thomas Kenzik
Senior Credit Analyst
Tel: +357 2534 2300