In view of the Bank’s strong capital profile, sound asset quality despite recent deterioration, its high NSCM and rising operating profitability, strength in customer deposit-gathering (notwithstanding recent declines in that headline item) and strong franchise, the Financial Strength Rating (FSR) is maintained at ‘A+’, with a ‘Stable’ Outlook. The rating is constrained by the recent tightening in liquidity, the low level of non-special commission income, and particularly by the current operating environment.
Because of the Bank’s prominent position in the Saudi banking sector and its majority government ownership, official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Rating remains at ‘1.’ Supported and constrained by the same factors as for the FSR, and further supported by the majority government ownership, the Long-Term Foreign Currency Rating (FCR) of ‘A+’ is affirmed with a ‘Stable’ Outlook, as is the Short-Term FCR of ‘A1’, both constrained by the Sovereign Rating (‘A+’/ ‘A1’/ ‘Stable’).
In March of this year the Bank’s Long-term FCR was lowered to ‘A+’ from ‘AA-’ while the Short-Term FCR was lowered to ‘A1’ from ‘A1+’. At the same time, the Outlook for the FCR was changed from ‘Negative’ to ‘Stable.’ This action was taken because of a change in the Sovereign Ratings of the Kingdom of Saudi Arabia; any further downgrade in the Sovereign Ratings would have a negative impact on the Bank’s FCRs. The change in the Sovereign Ratings also affected the Bank’s FSR, which was lowered to ‘A+’ from ‘AA-’. The Outlook for this rating was affirmed at ‘Stable’.
Over the past few years NCB has worked to improve its asset quality, and it had done so quite successfully before the latest economic downturn began. Fortunate that the downturn began while asset quality was in a very sound condition, the Bank has weathered the past two years with minimal – but nonetheless some – negative effect on its asset quality. Coverage by loan-loss reserves remains very sound, and the non-performing loan (NPL) portfolio is further supported by very high capital ratios – including one of the highest Basel III capital adequacy ratios in the sector. The effective NPL coverage ratio, while lower than the very high peer group average, is a very strong one.
Another strategy of the Bank in recent years has been to utilise some of its historically strong liquidity. Over the years until 2015 very comfortable loan-based liquidity ratios had been moving up to nearer the average of the Bank’s peers. In the current economic environment that movement has been slowed – but not reversed or stopped. Balance-sheet growth has been minimal and modest loan growth continues to exceed even more modest customer deposit growth by small amounts. Although there has been some tightening of the Bank’s liquidity ratios, in such ways as higher loan-based liquidity ratios, NCB’s overall liquidity profile is arguably the best in a very liquid banking sector. The Bank also benefits from a loyal customer base, a high percentage of funding from retail deposits, and a consequent lack of concentration in funding.
The deployment of liquidity has helped to maintain and in fact boost the Bank’s bottom line. A very sound cost profile combined with continually growing gross income is sufficient to overcome recent increases in loan-loss provisioning requirements to allow net profit to continue to grow. The Bank’s gross income continues to grow – both absolutely and as a share of average total assets – because of a strong and rising net special commission margin (combined with continued loan growth) and despite a relatively low level of non-special commission income.
As of 31 December 2016 the Bank’s assets totalled SAR 441.5 billion (equivalent to $117.7 billion) – a market share of almost 20 per cent. The Bank’s capital totalled SAR 59.9 billion (equivalent to $16.0 billion), making it the kingdom’s largest bank by both measurements.