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Capital Intelligence affirms the ratings of Al Rajhi Banking & Investment Corp.

Al Rajhi Banking & Investment Corp.’s Ratings affirmed; ‘Negative’ Outlook assigned to foreign currency ratings

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 strong deposit-gathering capability, loyal and stable customer deposit base, consequent benefits to its liquidity, greatly improved asset quality (including diversification), and strong capital adequacy, Al Rajhi’s Financial Strength Rating is affirmed at ‘AA-’, with a ‘Stable’ Outlook. The rating is constrained by the continually declining net financing margin (NFM) and profitability at all levels, and to some extent by a high dividend payout ratio.

For the same reasons, the Long-Term Foreign Currency Rating is maintained at ‘AA-’, constrained by the ratings assigned to the sovereign and the Short-Term Foreign Currency Rating is maintained at ‘A1’. The Outlook for the FC Ratings is changed from ‘Stable’ to ‘Negative’, in line with the recent change in the sovereign rating. 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 Level remains at ‘2.’

The Bank continues to outperform the rest of the sector in terms of deposit-gathering capability (especially demand deposits). That pattern has in the past provided the Bank with the sector’s best profitability at all levels, but years of low and declining interest rates have been taking their toll on that profitability. As a fully Shari’a-compliant bank which does not pay interest on deposits, the low level of rates has negatively impacted ARB and its NFM more than it has other banks. Nevertheless, the Bank continues to post near the sector’s best profitability metrics at the levels of gross income, operating profit and net profit.

The deposit base provides the Bank with a strong foundation for its liquidity. While liquidity parameters are slightly tighter than average, they are generally sound in a global context and are further supported by strong customer loyalty. Asset quality, which just a few years ago was suspect, has improved so that the non-performing Islamic financing facility (NPIFF) ratio is on a par with the very sound average for the sector and the coverage by loan-loss reserves is one of the peer group’s best. Moreover, the Bank’s consumer-oriented business model results in a very broad diversification in respect of both IFFs and customer deposits.

While ARB no longer posts the sector’s highest capital adequacy ratio, it does rank third in a well-capitalised banking sector, and that ratio – further supported by a strong Tier 1 ratio – is very strong in a global context. While a high dividend payout limits the rate of internal capital generation, that rate is more than sufficient to maintain the Bank’s very strong capital profile.

Whether by total capital or by total assets, at 31 December 2014, ARB ranked as the Kingdom’s second-largest bank. On that date, assets totalled SAR308 billion (equivalent to USD82.1 billion and a market share of about 15%) and total capital was SAR41.9 billion (equivalent to USD11.2 billion). At year end 2014, ARB operated a network of 552 domestic and foreign branches, and employed 11,761 employees (2013: 10,603).