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CI affirms ratings of The Saudi Investment Bank

The Bank continues its investment policy, which includes not only Saudi government obligations, but also the debt of high-grade US corporations and GCC state-owned companies.

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the ratings of The Saudi Investment Bank (SAIB), based in Riyadh, Saudi Arabia.

In view of the strong growth in customer deposits, consequent improved liquidity and continued good growth in profitability at the operating and net levels, the sound and liquid investment portfolio, and the solid capital ratios, the Bank’s Financial Strength Rating (FSR) is maintained at ‘A-’. Ratings are constrained by the Bank’s deteriorated asset quality and possibility that it could deteriorate further if rapid loan growth continues, and to a certain extent by the degree of concentration as to both loans and customer deposits. Official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Level remains at ‘2.’

For the same reasons, the Long-Term Foreign Currency Rating is maintained at ‘A’ and the Short-Term Foreign Currency Rating at ‘A2’. In view of the deterioration in asset quality, the Outlook for all ratings reverts to ‘Stable’.

SAIB has been targeting the upper-middle part of the consumer sector in order to increase earnings and reduce concentration risk. It has been moderately successful in its effort as demand and savings (CASA) deposits have shown strong and steady progress. However, loans have also grown very rapidly, and there are early signs that asset quality may have been negatively affected by that growth. While the Bank’s non-performing loan (NPL) ratio is sound in a global context, a high NPL net accretion rate has increased cost of risk and may continue to do so.

Return to full coverage by loan-loss reserves has been problematic, but that is partly because more than half of the Bank’s NPLs are in the category of loans more than 90 days past due not impaired. CI treats such loans as NPLs, but if they are not considered as such, the Bank’s NPL ratio is one of the sector’s lowest and its coverage ratio one of the highest. While concentration risks exist as to the Bank’s loans (as well as to its deposits), there has been some improvement, and the risk is mitigated by the nature of the borrowers and depositors.

The strong growth of customer deposits and the issuance of a ten-year subordinated sukuk last year have greatly improved the Bank’s liquidity, which a year ago was beginning to look precarious. Dependence on the short-term interbank market for funding has disappeared, and loan-based liquidity ratios are now more on a par with those of other Saudi banks. The sukuk also adds support to the Bank’s slightly low capital base (relative to other Saudi banks) and adds to the other medium/long-term borrowings in the funding of its balance sheet.

The Bank continues its investment policy, which includes not only Saudi government obligations, but also the debt of high-grade US corporations and GCC state-owned companies. The Bank’s quasi-liquid asset ratio is very sound despite the fact that its liquid asset ratio remains low compared to that of the peer group.

SAIB is still principally a corporate bank, and that factor hurts its margin on lending, but the Bank has typically compensated for that with loan growth and a high level of non-special commission income. Despite some increases in costs (a departure from the Bank’s customary cost structure), profitability has held up well at both the operating and net profit levels, but asset growth has resulted in reduced operating profitability and ROAA (return on average assets).

Of the twelve locally incorporated banks in the Kingdom, SAIB ranked ninth as measured by total assets and eighth by total capital as of year end 2014. On that date its assets totalled SAR93.6 billion (equivalent to USD25.0 billion), representing a market share of 4.5%. At year end 2014, SAIB operated a system of 47 domestic branches (including twelve with ladies’ sections), almost all of which are Shari’a-compliant, and a network of over 400 ATMs.