Fitch Ratings has affirmed
Fitch has also affirmed BAJ's Viability Rating (VR) at 'bb+'.
Key Rating Drivers
BAJ's 'BBB+' Long-Term IDR reflects a high probability of support from the Saudi Arabian authorities, as underlined by a Government Support Rating (GSR) of 'bbb+'. Its 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'BBB+' as a significant proportion of Saudi banks' funding is government-related and BAJ would likely need support at a time when the sovereign itself is experiencing some form of stress. The Positive Outlook reflects that on the sovereign.
BAJ's VR reflects the bank's limited company profile, weaker and more vulnerable asset quality than peers', reasonable profitability and a funding profile at the weaker end of Saudi peers'. It also reflects the bank's sound core capitalisation and strong liquidity buffers.
BAJ's National Rating reflects the bank's creditworthiness relative to that of other issuers in
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 if needed, so as to maintain market confidence and stability.
Operating Environment Sees Strong Rebound: Pressures from the pandemic have largely eased and higher oil prices stimulate a strong rebound of the Saudi operating environment. Strong financing growth continues to underpin solid financial metrics for the sector in 2022.
Limited Franchise: BAJ is one of the kingdom's smallest banks with a 3% market share in domestic financing at end-2021. This translates into a weaker funding profile and lower earnings generation than peers', as well as more vulnerable asset quality.
Weaker Corporate Financing Book: BAJ's financing book is almost evenly split between corporate and retail at 56% and 44%, respectively, at end-1Q22. The bank's main credit weakness lies in its corporate book given a higher focus on corporates with weaker credit quality.
Weaker Asset Quality: The bank's stage 3 financing ratio increased to 5.8% at end-2021 from 5.6% at end-2020 despite strong financing growth. BAJ's stage 3 financings ratio remains the highest among Fitch-rated banks', reflecting, in our view, higher exposures to corporates with weaker credit quality. Its stage 2 financing ratio declined to 5.3% at end-2021 from 7.7% at end-2020.
Recovering Profitability: Profitability recovered strongly in 2021, though from a low base, as financing impairment charges (FICs) fell 57% y-o-y. Accordingly, Fitch's core metric, operating profit, increased to 1.6% of risk-weighted assets (RWAs) in 2021 from 0.1% in 2020.
Sound Capitalisation: The bank's CET1 ratio continued to decline to 18.3% at end-2021 from 19.4% at end-2020 on the back of strong financing growth despite a strong improvement in profitability. We expect the bank's CET1 ratio to further decrease to 17%-17.5% by end-2023.
Weaker Funding Than Peers': BAJ's funding profile is weaker than most peers' due to a smaller franchise and high reliance on time deposits (50% of total deposits at end-2021). The deposit base is concentrated, albeit mitigated by a sound liquidity position with Basel III high-quality liquid assets covering customer deposits by 39% at end-2021.
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 its GSR. The latter would be triggered by a sovereign downgrade, which is unlikely given the Positive Outlook on
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the IDR could come from an upgrade of the bank's GSR. 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, or more likely through a greater diversification in the business model. Improving asset quality and profitability would also likely lead to a VR upgrade.
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, visitwww.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
BBB+
Affirmed
BBB+
ST IDR
F2
Affirmed
F2
LC LT IDR
BBB+
Affirmed
BBB+
Natl LT
AA-(sau)
Affirmed
AA-(sau)
Viability
bb+
Affirmed
bb+
Government Support
bbb+
Affirmed
bbb+
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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