Moody's assigns A2/P-1 deposit rating to Bank AlBilad

First time ratings

Limassol, May 20, 2014 -- Moody's Investors Service has today assigned to Bank AlBilad (BAB) local and foreign currency deposit ratings of A2/Prime-1 and a standalone bank financial strength rating (BFSR) of C-, which is equivalent to a baseline credit assessment (BCA) of baa2. All ratings assigned to BAB carry a stable outlook.

BAB's solid standalone BCA reflects its (1) young and growing Islamic banking franchise supported by a strong and resilient remittance business in the Kingdom of Saudi Arabia (KSA), (2) strong asset quality and coverage metrics and (3) solid capitalization levels underpinned by strong profitability metrics and associated profit retention. These strengths are moderated by (4) BAB's still relatively weak, but improving, efficiency metrics and a high dependency on key personnel.

"Moody's assessment of Bank AlBilad's franchise takes into account the growing importance of Islamic finance and associated franchise opportunities in the Kingdom of Saudi Arabia (KSA)", commented Khalid Ferdous Howladar, Global Head of Islamic Finance at Moody's Investors Service.

"Bank AlBilad's baa2 standalone credit profile is driven by its strong financial fundamentals coupled with the strong profits generated by its remittances business" notes Nitish Bhojnagarwala, Local Market Analyst for Bank AlBilad. "The final A2 deposit rating benefits from a three-notch uplift from the standalone profile due to our assumptions regarding the high level of systemic support from Saudi authorities in case of need".

RATINGS RATIONALE

-- SMALL AND YOUNG ISLAMIC BANKING FRANCHISE SUPPORTED BY STRONG AND RESILIENT REMITTANCE BUSINESS

BAB is a relatively young bank that started operations in May 2005 and has grown its market share to 1.9% of total assets as of December 2013 from 1.2% as of December 2009. This increase in market share is supported by the bank's growing branch network (102 branches), which is currently the 5th largest in the KSA. As a result of the bank's branch network, it has also successfully grown its retail financing book (40% of the total financings) and zero cost deposits. The corporate franchise, although relatively unseasoned, is well diversified across numerous sectors.

Although BAB is the smallest bank in the system in terms of total assets, it is a market leader in the remittance business in the KSA. The bank's strong network of 151 outlets (in addition to its 102 bank branches) and its long legacy of remittance operations support its entrenched and resilient franchise in this segment, which the bank operates under the brand 'Enjaz'. This profitable business is a key element in BAB's standalone credit profile as it generates stable fees and commission income without consuming any additional capital. Total fees and commission income accounts around 35% of BAB's total revenues compared to the KSA average of around 23%.

-- STRONG ASSET QUALITY AND COVERAGE METRICS

BAB's asset quality is strong with a non-performing financing (NPF) ratio of 1.9% as of December 2013, down from the peak of 5.7% as of December 2009. The decline in the NPF ratio has been largely driven by the writing-off of legacy exposures to large Saudi conglomerates and asset growth (CAGR of 20% since 2009) which has a denominator effect. At 1.9%, BAB's NPF ratio is higher than the KSA average of 1.5% but stronger than the 2.3% median of global banks with a BCA of baa2.

Similarly, the bank's coverage metrics have improved significantly to 194% as of December 2013, from 60% as of December 2009. At these levels, BAB's coverage metrics compare favourably to local and global peers. While the bank's rapid growth may pressure the bank's risk management and associated underwriting infrastructure, we nonetheless expect asset quality to remain solid going forward - particularly given the strong operating environment in KSA.

-- SOLID CAPITALIZATION METRICS UNDERPINNED BY STRONG PROFITABILITY METRICS AND ASSOCIATED PROFIT RETENTION

As a result of the bank's strong income base (financing and fees and commissions) and very low overall funding cost (0.10% compared to 0.50% KSA average), BAB displays good profit margins (2.8% as of year-end 2013) with commensurate net profits. The bank's net income to risk weighted assets (RWAs) of 2.3% is higher than the 1.4% median of global banks with baa2 BCAs.

This strong profitability, coupled with 100% profit retention, underpins the bank's solid capitalisation levels with a reported Tier1 ratio under Basel III standards at 16% as of December 2013. At 16% the bank's Tier 1 ratio, compares favourably to both the KSA average of 15.7% and the 12.6% median of global banks with baa2 BCA. Going forward, despite the high asset growth, we expect the bank to maintain its profit retention rate and hence internally generate the capital needed to maintain its Tier 1 ratio around current levels.

-- WEAK EFFICIENCY METRICS AND KEY PERSONNEL RISKS

Although on a declining trend, BAB's 53% cost-to-income ratio remains high when compared to the KSA average of around 35% for the year 2013. With the near completion of its branch network expansion programme and an increase in productivity from existing branches, we expect continued top-line growth and expense ratio declines. This will further support reductions in BAB's cost-to-income ratio.

Since the losses suffered in 2009 (primarily driven by the provisioning related to two distressed large Saudi conglomerates) the bank appointed a new CEO who has brought in new senior management and driven the transformation process. However, we consider that the bank still remains highly dependent on the CEO for strategic direction despite ongoing steps to create an additional executive management structure. Such efforts while positive will take time to implement and integrate into the bank's operating culture.

-- SUPPORT ASSUMPTIONS

BAB's A2 deposit rating benefits from a three-notch uplift from its baa2 BCA. This reflects Moody's assessment of a very high likelihood of systemic (government) support in case of need. This is based on the Saudi government's strong track record of supporting banks in times of stress.