Thursday 13, July 2017 by William Mullally

Bank AlJazira’s ratings affirmed with a ‘Stable’ outlook

The rating is constrained by the challenging economic environment, which holds the potential for further increases in credit risk, by a high cost structure, the relatively weak profitability at several levels, and to some extent by the limited disclosure.

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, announced that it has affirmed the Financial Strength Rating (FSR) of Bank AlJazira (BAJ) at ‘BBB’, supported mainly by the Bank’s continued very sound liquidity, which improved by most measures last year. The rating is further supported by the Bank’s solid capital profile, particularly its high Basel III capital adequacy ratio (CAR), and its overall sound asset quality, notwithstanding recent deterioration.

The rating is constrained by the challenging economic environment, which holds the potential for further increases in credit risk, by a high cost structure, the relatively weak profitability at several levels, and to some extent by the limited disclosure.

For the same reasons, the Long-Term Foreign Currency Rating (FCR) is affirmed at ‘BBB+’ and the Short-Term FCR 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 Rating remains at ‘2’. All ratings carry a ‘Stable’ Outlook.

For the second consecutive year BAJ suffered a sharp deterioration in its overall asset quality. However, the lens through which to view that deterioration includes several very positive factors. The Bank had previously spent several years improving its asset quality so that entering the period of the past two years the Bank had posted the peer group’s lowest non-performing loan (NPL) ratio. Consequently, even given the sharp increase in NPLs, the Bank’s overall asset quality can be termed sound.

Moreover, a very large part of the increase in NPLs was in the category of ‘past due not impaired’ loans over 90 days past due. While those are clearly past due loans, the Bank for undisclosed reasons views them as not impaired. CI Ratings does not have the benefit of the Bank’s reasoning in this regard. Of concern in this respect is the possibility of further asset quality deterioration in view of the worsening economic environment.

Over the past decade the Bank has struggled with profitability issues, and in 2016 a previously slowly improving trend at the gross income, net operating, and net profit levels was reversed. Much of the reason for that reversal can be attributed to a slower-growing loan portfolio, a declining estimated net special commission margin, and reductions in net fee and commission income. Nonetheless, the fact remains that the Bank continues to display a high cost structure – a structure which became more apparent during the current economic slowdown. In 2016 profit declined at all three levels.

BAJ’s capital profile includes a very high Basel III CAR, but a low ratio of total capital to total assets. The discrepancy is explained by the issuance of a subordinated Sukuk in 2016, which is due in 2026. That issue qualifies as Tier 2 capital under Saudi Arabian Monetary Authority’s (SAMA) guidelines, but is not treated as capital by CI.

For the past ten years, as the Bank has sought its niche in the market, it has displayed very sound and sometimes strong liquidity. During that time it has been able to deploy some of that liquidity to improve profitability, but it has not yet achieved critical mass in its efforts. Nonetheless, the Bank’s liquidity remains very sound by most measures. Moreover, the Sukuk issue further enhanced what was already a bright spot in the Bank’s balance sheet.

At year-end 2016 the Bank’s assets totalled SAR 66.3 billion (equivalent to $17.7 billion), representing a market share of 3.0 per cent, and its capital totalled SAR 8.2 billion (equivalent to $2.2 billion), making it the kingdom’s second-smallest bank by either measurement.

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