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CI affirms ratings of Al Rajhi Banking & Investment Corporation

Capital Intelligence (CI), the international credit rating agency, today 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 capital ratios, its strong franchise and stable customer deposit base, consequent benefits to its liquidity and ongoing robust profitability at all levels (despite its declining trend), Al Rajhi’s Financial Strength Rating is affirmed at ‘AA-‘.

The rating is constrained by the continued high rate of accretion to its non-performing Islamic finance facilities (NPIFFs), a low rate of internal capital generation and the downward trend in its profitability. For the same reasons, the Long-Term Foreign Currency Rating is maintained at ‘AA-‘, while the Short-Term Foreign Currency Rating is maintained at ‘A1’. All ratings carry a ‘Stable’ Outlook. 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.’

Al Rajhi posts the sector’s highest capital adequacy ratio (CAR), but ratios of total capital to total assets or to net IFFs are slightly lower than those of the Bank’s peers. While the latter, combined with the Bank’s high profitability, might ordinarily indicate a high level of internal capital generation, that is not the case (the rate is slightly below average) due to a high dividend payout ratio. Nevertheless, capital in general can be termed very strong.

ARB has traditionally posted the sector’s best profitability at all levels. In recent years, that advantage has been getting smaller, as profitability at all levels weakens. Nevertheless, the Bank’s gross income, operating profit and net profit all remain strong and the best in the peer group. A slowdown in Net Financing and Investments Income (NFII) in 2013 and 2014 has had an effect on profitability at all levels.

Al Rajhi’s franchise and branch network engender a loyal customer base, which translates into a high level of stable demand deposits, with positive effects on the Bank’s liquidity. Moreover, the consumer-oriented business model promotes granularity and diversification in both the IFF and deposit books.

The Bank’s consumer-oriented business model produces high stocks of NPIFFs, which are written down after 180 days. This characteristic results in a high non-performing loan (NPL) net accretion rate and a high risk expense. While the latter does affect the Bank’s ROAA, that ratio remains the sector’s best.

Whether by total capital or by total assets at 31 December 2013, ARB ranks as the kingdom’s second-largest bank. On that date, assets totalled SR280bn (equivalent to $74.6bn and a market share of about 15 per cent) and total capital was SR38.4bn (equivalent to $10.2bn). At year-end, ARB operated a network of 528 domestic and foreign branches.