Capital Intelligence affirms ratings of The National Commercial Bank

In view of the Bank's strong liquidity, continued cost control and ongoing improvement in asset quality, the Financial Strength Rating (FSR) is maintained at 'AA-' with a 'Stable' Outlook.

The rating is constrained by the Bank's higher than average cost structure, the weakening of its capital ratios, and to a certain extent the levels of concentration in its loans and in its funding.

Supported and constrained by the same factors, the Long-Term Foreign Currency Rating of 'AA-' and the Short-Term Foreign Currency Rating of 'A1+', both constrained by the Sovereign Rating, are affirmed with a 'Stable' Outlook. Because of the Bank's prominent position in the Saudi banking sector and its majority government ownership, official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support level remains at '1.'

The National Commercial Bank has historically displayed a robust ability to gather demand deposits, and that continues. At least in part because of its strong franchise, NCB continues to outperform all other Saudi banks in the area of liquidity, as it posts the sector's soundest liquidity ratios.

Last year, the Bank relented somewhat on its previous cautious approach to loan growth, and its loan portfolio grew at the same rate in 2012 as it had over the period from 2009 to 2011.

While increase in NPLs unfortunately accompanied that increase, the rate of growth was slower than that of gross loans, and the NPL ratio inched downward.

While that ratio is still above the average for the peer group, it is a sound one and represents another step in the recent steady improvement in the Bank's asset quality.

NCB continues to make more than adequate provisions against its NPL portfolio, and in 2012 its more than full coverage by loan-loss reserves was near the best in the sector. Although most capital ratios are below average for the sector, and have been trending downward, they are still very sound in a global context and provide additional support. While there is some concentration in the loan book (as well as in the customer deposit base), it is not inordinate given the banking environment in the region, and from an asset perspective the concentration risk is mitigated by the quality of those borrowers.

Although the strong liquidity has hurt the Bank's special commission income, the level of operating profit remains sound, if slightly below average. The good cost control of previous years was not as much in evidence in 2012, but a strong performance in fee and commission income served as the catalyst for increases in both operating profit and operating profitability. Dampened somewhat by a higher risk expense, that operating profit nevertheless translated into an increase in net profit, while the larger balance sheet resulted in a small dip in ROAA.

As of 31 December 2012, the Bank's assets totaled SAR345.3bn (a market share of more than 20%), and its capital totalled SAR39.4bn, making it the kingdom's largest bank by both measurements.

At year-end 2012, NCB served almost three million clients through its network of 299 branches (including nine corporate service centres), over 1,800 ATMs and over 15,000 POS terminals.