September 14, 2017 / 2:36 PM / a year ago

Fitch Affirms Bank Aljazira at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 14 (Fitch) Fitch Ratings has affirmed Bank Aljazira's (BAJ) Long-Term Issuer Default Rating (IDR) at 'BBB+'. It has also affirmed the bank's Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this rating action commentary. The Outlook on BAJ's Long-Term IDR is Stable. At the same time, Fitch has also affirmed the ratings of Aljazira Capital Company (AJC), BAJ's fully-owned capital markets subsidiary, at 'BBB+'. The Outlook of AJC's Long-Term IDR is also Stable. KEY RATING DRIVERS IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR (SRF) BAJ's IDRs, Support Rating (SR) of '2' and SRF of 'BBB+' reflect a high probability of support from the Saudi authorities in the event of need. Fitch's assessment takes into account a long track record of support for Saudi banks, continued government willingness to maintain stability in the domestic financial system and a strong ability to support the bank, given large external reserves and good access to external markets. The SR and SRF also reflect the lower systemic importance of BAJ relative to the larger banks, due to its smaller size, market share, and franchise. The SR and SRF also take into account the domestic ownership of the bank. The Stable Outlook reflects that on Saudi Arabia's 'A+' sovereign rating. AJC's IDRs are driven by the entity's SR. Its SR of '2' reflects Fitch's view of a high probability of support for AJC, in the event of need, from BAJ. This view factors in AJC's integral role in the group as one of Saudi Arabia's leading brokers. Although AJC only contributed 5% of BAJ's net income in 2016, it remains an important part of the bank's overall strategy. AJC's SR also reflects BAJ's full ownership, common branding and small size, making support less onerous for BAJ. VR The largest influences on BAJ's VR are the bank's limited franchise and vulnerable asset quality. BAJ is the 11th largest of 12 domestic licensed banks in Saudi Arabia with a market share of domestic loans and deposits of around 3% at end-2016. The bank's earnings have limited diversification with the treasury function generating over half of the 2016 net income. BAJ's asset quality metrics are sound. However, the bank's non-performing loans ratio of 1.3% at end-1H17 did not account for a high proportion of loans exhibiting signs of weakening credit quality. Including impaired exposures, almost 7% of the loan book was delinquent at end-2016 and a further 8.5% was classified as "special mention" indicating, heightened risk. BAJ's VR also considers improved capitalisation, generated by one-off gains on real estate sales, slowing loan growth and a conservative dividend policy. BAJ is looking to further boost core capital via a rights issue, although this has been delayed, raising some doubt over access to external capital. Liquidity is sound, helping to mitigate the risks of a less stable deposit base than peers. BAJ's VR also reflects a depressed operating environment in Saudi Arabia, in which all of the bank's operations sit. Economic growth is likely to slow further to 0.1% and 0.8% for 2017 and 2018 respectively, from of 1.4% in 2016, as the kingdom proceeds with fiscal tightening. Opportunities for banks to finance infrastructure projects will therefore be reduced and Fitch forecasts overall sector loan growth of around 5% for 2017, marginally higher than 2016. RATING SENSITIVITIES IDRs, SUPPORT RATING AND SUPPORT RATING FLOOR As BAJ's IDRs reflect the bank's SRF, revision to the latter would drive changes in the bank's IDRs. BAJ's SR and SRF are sensitive to a change in the Saudi Arabian sovereign rating. As this is currently on Stable Outlook, changes are unlikely in the short-term. A change in propensity from the authorities to support the bank could also lead to a rating action, but this is not Fitch's base case. As AJC's ratings are equalised with those of BAJ, changes in BAJ's IDRs would be mirrored by a corresponding change to AJC's IDRs. AJC's IDRs are also sensitive to Fitch viewing the subsidiary as a less integral part of the bank. This may be demonstrated by a consistently low contribution of earnings or statements by BAJ that AJC is no longer part of its core strategy, although this is not Fitch's base case. VR BAJ's VR is mainly sensitive to a material weakening of asset quality, which would significantly erode the bank's capital buffers. Fitch views BAJ as more susceptible to asset quality weakening than many other Saudi banks due to its weaker target market of mid-market corporates and retail borrowers. Deterioration in the bank's large stock of low-rated loans would cause a material increase in non-performing loans. An upgrade of the bank's VR would require consistently stronger earnings metrics, particularly from core retail and corporate banking, which would help earnings diversification. The rating actions are as follows: Bank Aljazira Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Support Rating Floor affirmed at '2' Support Rating Floor affirmed at 'BBB+' Viability Rating affirmed at 'bb+' Aljazira Capital Company Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Support Rating Floor affirmed at '2' Contact: Primary Analyst Andrew Parkinson Director +44 203 530 1420 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Nicolas Charreyron Analyst +971 44 24 1208 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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