Moody's upgrades Bank Al Jazira's financial strength rating to D

The bank's foreign currency deposit ratings remain unchanged at A3/Prime-2, Saudi Arabia's country ceiling for foreign currency deposits, with a stable outlook.

In upgrading BaJ's FSR to D, Moody's has taken into consideration the significant improvement in the bank's financial fundamentals, as well as
the strengthening of its (small) franchise. BaJ's strategy of converting into a full Shari'ah-compliant bank and diversifying its product range and customer reach away from stock market-related activities has allowed
it to build a niche and strengthen its funding franchise while extending its corporate and consumer banking reach. An accommodative operating environment, triggered by the high oil prices and announcements of infrastructure and development projects, has also boosted the economy and the banking sector in general. As a result, BaJ recorded a strong improvement in its earning power, asset quality (NPLs down to 2.8% in 2005 from 11.7% in 2002) and capitalisation (with shareholders' funds to total assets of 25% as of March 2006), even though we acknowledge that the earnings incorporate a significant proportion of stock market-related income, a portion of which may be considered as non-recurring.

Despite the progress, the bank still faces a number of challenges that constrain its ratings. BaJ remains heavily dependent on the Saudi Arabian stock market, with brokerage fee income equivalent to approximately 70% of total income in 2005, as well as a sizeable proprietary equity trading book and margin lending portfolio. However, this exposure has been
gradually reduced: as of May 2006 margin lending had dropped to 12% of gross loans compared to 50% in 2003, while by the end of March 2006 the
bank had significantly reduced its direct equity exposure to the local market by 45%. The bank's FSR rating also incorporates its small size
(which implies a low single-lending limit) and increased competition from existing and newly licensed banks, while its funding base displays a high level of dependence on large deposits.

Headquartered in Jeddah, Saudi Arabia, Bank al Jazira reported total assets of SAR13.4 billion (US$3.6 billion) as of March 2006. This rating
was initiated by Moody's. The issuer does not have an active participation in the rating process.