Fitch affirms Bank Aljazira at 'A-'; outlook stable

The IDRs and Support rating reflect the extremely high probability of support from the Saudi Arabian authorities, if needed. Fitch's opinion of likely support is based on the long history of support for banks in Saudi Arabia. Its Individual rating reflects sound capitalisation, solid liquidity and good asset quality ratios, but also takes into account BAJ's relative size and franchise, and concentrations in the loan portfolio and deposit base.

Recent profitability for all Saudi banks has suffered following the significant decline in stock market-related revenues (mainly brokerage from local equities) in 2007. Although BAJ was one of the worst hit it was still able to report an operating return on average equity of 17.8% for the year. This decline was expected by Fitch and was partly compensated by continuing growth in core lending at a stable margin and higher core fee income. The deterioration in profitability has continued into 2008 with higher funding costs also negatively impacting the net margin, while the cost/income ratio rose to a high 58% for H108.

Asset quality ratios remained good, reflecting the continuation of a favourable domestic economic environment. Concentrations exist within corporate lending by exposure and sector although the overall portfolio is increasingly diversified as BAJ builds its franchise. The bank has no exposure to US sub-prime investments, SIVs, CDOs or hedge funds. Capital ratios remain amongst the highest in the bank's peer group despite their significant erosion in H108 by rapid loan growth and the introduction of Basel II. BAJ's capital ratio under Basel II was 15.8% at end-H108, above its target of 15%.

BAJ is one of the smallest of the established Saudi commercial banks, with a market share of loans and deposits of around 2%. It is active in corporate lending, trade finance and share brokerage. In recent years BAJ has increasingly focused on Islamic banking, offering a number of innovative products to its customers. The bank's activities became fully Shari'ah-compliant at the start of 2007.