Global Arab Network | Fitch Ratings: Strong profitability for Saudi-based Al Rajhi Banking & Investment

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Fitch Ratings: Strong profitability for Saudi-based Al Rajhi Banking & Investment

Posted by Mokhtar Thabet

Monday, 08 March 2010 17:31

Fitch Ratings has today affirmed Al Rajhi Banking & Investment Corp's (Al Rajhi) Long-term Issuer Default Rating (IDR) 'A+' with a Stable Outlook, Short-term IDR at 'F1', Individual Rating at 'B/C', Support Rating at '1' and Support Rating Floor at 'A+'.

The affirmation of the Individual Rating reflects Al Rajhi's large domestic franchise, wide margins and strong profitability, whilst also considering some deterioration in asset quality and some name concentration within the corporate portfolio in line with other Saudi banks. The affirmation of the IDRs and Support Ratings reflects Fitch's view that, given Al Rajhi's franchise, there is an extremely high probability of support from the Saudi Arabian authorities.

Al Rajhi's return on equity has remained strong at 24.5% in 2009 (2008: 25.7%). However, impairment charges increased slightly relative to pre-impairment operating profit to 20.7% in 2009 (2008: 15.8%). Since the vast majority of customer deposits are non-remunerated, Al Rajhi benefits from very low funding costs. The net margin of over 6% is substantially higher than its Saudi peers. Al Rajhi's cost-to-income ratio is exceptionally low due its strong revenue generation (2009: 25.9%). Fitch expects renewed growth of the Saudi economy in 2010, which should lead to an improvement in the operating environment. A moderate downside risk to profitability is the size of impairment charges due to the concentration in the corporate portfolio, although the expected improvement in the economy may alleviate some asset quality concerns.

Al Rajhi's asset quality has weakened and the impaired loans ratio deteriorated to 3.3% at end-2009 (end-2008: 2.5%). Al Rajhi is predominantly funded by customer deposits supported by its large branch network. Fitch views Al Rajhi's capitalisation as sound with a Fitch Core Capital ratio of 18.1% at end-2009.

Al Rajhi is the largest Islamic bank globally and operates the largest branch network in Saudi Arabia. The main shareholders are members of the founding family. The bank commenced operations in Malaysia through a wholly-owned Islamic banking subsidiary in 2007.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.

Global Arab Network