BANK ALJAZIRA
Fitch Ratings has affirmed
Fitch has also affirmed BAJ's Viability Rating (VR) at 'bb+'.
Key Rating Drivers
The 'A-' Long-Term IDRs of BAJ are driven by potential support from the Saudi Arabian authorities as reflected by a 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-' as per our Bank Rating Criteria. This is because a significant proportion of Saudi banks' funding is related to the government and BAJ would likely need support at a time when the sovereign itself is experiencing stress.
BAJ's VR reflects the bank's modest franchise, weaker, albeit improving, asset-quality metrics than peers', reasonable profitability and an adequate funding profile, but less stable than that of peers. It also reflects the bank's good core capitalisation and strong liquidity buffers.
BAJ'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. BAJ's 'a-' GSR is in line with that of 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 their 'Vision 2030', and solid GDP (including non-oil) growth provide Saudi banks with solid business-growth opportunities.
Modest Franchise: BAJ is one of
Weaker Corporate Financing Book: BAJ's financing book was almost evenly split between corporate and retail at 57% and 43%, respectively, at end-2022. The bank's main credit weakness compared with domestic rated peers' lies in its corporate book with higher delinquencies.
Weaker Asset Quality than Peers': The bank's Stage 3 financing ratio declined to 4.8% at end-2022 from 5.8% at end-2021 as strong operating conditions supported credit performance. Nonetheless, BAJ's Stage 3 financing ratio remains the highest among Fitch-rated Saudi banks'. We expect the bank's Stage 3 financing ratio to decline further to 4.5% by end-2024 as operating conditions remain supportive of credit performance.
Weaker Profitability than Peers': Fitch's core profitability metric, operating profit to risk-weighted assets (RWAs), declined slightly by 10bp to 1.5% in 2022. BAJ's net financing margins (NFMs) were down 30bp in 2022 as liabilities repriced faster than assets given a high proportion of fixed-rate retail financings and a high reliance on time deposits.
We expect the core profitability metric to improve gradually to 1.7% by 2024 as higher rates feed into the income statement and improving asset quality. However, we see downside risks to this forecast coming from stronger-than-expected RWA growth.
Sound but Eroding Core Capitalisation: The bank's common equity Tier 1 (CET1) ratio declined sharply by 390bp to 14.4% at end-2022 due to strong balance-sheet growth and mark-to-market losses. The bank is exploring capital optimisation initiatives and, potentially, much lower dividend distribution. Assuming no dividend distribution in 2023 and no Other Comprehensive Income (OCI) losses, we expect the CET1 ratio to recover to around 15% by end-2023 based on still strong balance sheet growth.
Adequate Funding and Liquidity: BAJ has a smaller funding franchise and higher reliance on time deposits (53% of total deposits at end-2022) than peers. The deposit base is concentrated but liquidity risk is mitigated by sound liquidity buffers. We expect the gross financing-to-customer deposits (FDR) ratio to increase to 88% by end-2024 from 85.2% at end-2022.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of BAJ's IDRs would require a downgrade of the GSR. The latter would be triggered by a sovereign downgrade.
BAJ's VR could be downgraded on combined sharp and sustained deterioration in asset quality (with the impaired loans ratio exceeding 10%) and profitability (as reflected by operating profit/RWA below 0.25%) leading to the bank's CET1 ratio falling 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 BAJ's IDRs would require an upgrade of the GSR. The latter would be triggered by a sovereign upgrade.
An upgrade of BAJ's VR would likely require an improvement in the bank's company profile, which could be achieved through a significant increase in market shares. Improving asset quality and profitability would also likely lead to a VR upgrade.
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'.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BAJ's Long-Term (LT) Foreign-Currency IDR (xgs) is at the level of the VR. The LT Local-Currency IDR (xgs) is in line with the LT Foreign-Currency IDR (xgs).
The Short-Term (ST) Foreign-Currency IDR (xgs) is in accordance with the LT Foreign-Currency IDR (xgs) and Fitch's short-term rating mapping, while also considering the bank's funding and liquidity factor score.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
BAJ's LT IDRs (xgs) could be downgraded if the VR is downgraded. The ST Foreign-Currency IDR (xgs) is primarily sensitive to changes in the LT Foreign-Currency IDR (xgs) and could be downgraded if the latter is downgraded and the new LT rating maps to a lower ST rating in accordance with Fitch's criteria.
An upgrade of BAJ's LT IDRs (xgs) would require a VR upgrade. The ST Foreign-Currency IDR (xgs) is primarily sensitive to changes in the LT Foreign-Currency IDR (xgs) and could be upgraded if the latter is upgraded and the new LT rating maps to a higher ST rating in accordance with Fitch's criteria.
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
BAJ's IDRs are linked to the IDRs of
ESG Considerations
As an Islamic bank, BAJ needs to ensure compliance of their 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). This has a negative impact on its credit profile and is relevant to the ratings in conjunction 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 imbedded 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, visit www.fitchratings.com/esg
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