ALINMA BANK
Fitch Ratings has affirmed
Key Rating Drivers
The 'A-' Long-Term IDRs of Alinma are driven by potential support from the Saudi Arabian authorities, as reflected by its Government Support Rating (GSR) of 'a-'. The 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' because a significant proportion of Saudi banks' funding is related to the government and Alinma would likely need support at a time when the sovereign itself is experiencing some form of stress.
Alinma's VR reflects the bank's strong government links and Islamic status, conservative risk appetite, sound asset quality, solid profitability metrics, sound funding and liquidity profile and acceptable core capital ratios. The VR also considers a less diversified business model than some domestic peers', as well as significant single-name and sector concentrations.
Alinma's National Rating is driven by potential support from the Saudi Arabian authorities.
Sovereign Support: The Saudi authorities have a strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership. High contagion risk among domestic banks is an added incentive for the state to provide support to any Saudi bank to maintain market confidence and stability. Alinma's 'a-' GSR is in line with other Fitch-rated Saudi banks'.
Favourable Operating Environment: High oil prices, reduced risks from the pandemic, the government's strategy to diversify the economy as part of its Vision 2030, and solid GDP (including non-oil) growth provide Saudi banks with solid business-growth opportunities.
Balanced Risk Profile; High Concentrations: The bank has a higher appetite than peers for large single-name financing and high reliance on the property and construction sector, in turn exposing it to event risk. Nonetheless, we view underwriting standards within Alinma's chosen segments as generally reasonable but its cost of risk is higher than the sector average; however, that is well compensated by higher margins.
Sound Asset-Quality Metrics: Asset-quality metrics are healthy, reflecting the bank's focus on lower-risk government projects and prime real-estate projects. Its Stage 3 financing ratio was 1.9% at end-2022, slightly up year-on-year. The total reserves-to-financing ratio was strong at 2.6%. We expect the Stage 3 financing ratio to remain around 2% in 2023.
Solid Profitability: Profitability is comparable with other medium-sized Saudi banks'. Return on average equity increased to 13.7% in 2022 from 10.8% in 2021, due to lower financing impairment charges. The net financing margin increased 20bp to 3.6% (the sector average was 3.2%) in 2022 as the bank was positively positioned for higher interest rates due to a high share of non-interest-bearing deposits.
We expect its operating profit to improve to above 2.5% of risk-weighted assets (RWA) in the next two years, from 2.3% in 2022.
Sound Funding Profile: Alinma's funding profile is sound despite its smaller size and modest retail franchise than peers'. The bank benefits from a low cost of funding that is in line with the sector average. This is supported by its Islamic status (which helps attract a large share of funding in the form of non-profit and less price-sensitive deposits) and by its strong links to the government.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of Alinma's IDRs would require a downgrade of its GSR. The latter would be triggered by a sovereign downgrade.
Alinma's VR could be downgraded on a combined sharp and sustained deterioration in asset quality (impaired financing ratio exceeding 4%) and profitability (operating profit below 1.5% of RWAs), leading to the bank's CET1 ratio being sustainably below 14%.
The bank's National Rating is sensitive to a negative change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of Alinma's IDRs would require an upgrade of its GSR. The latter would be triggered by a sovereign upgrade.
An upgrade of the bank's VR is unlikely without a material and sustained improvement in the Saudi Arabian operating environment.
The bank's National Rating is sensitive to a positive change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers'.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Alinma's IDRs are linked to
ESG Considerations
As an Islamic bank, Alinma needs to ensure compliance of its entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of '4' (in contrast to a typical relevance influence score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profile, in combination with other factors.
In addition, Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3' - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visitwww.fitchratings.com/esg.
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