Supported by the Bank’s consistently strong capital profile and high effective non-performing loan (NPL) coverage ratio, solid liquidity profile, and continuing good cost control, the Financial Strength Rating (FSR) is affirmed at ‘A+’ with a ‘Stable’ Outlook. The rating is constrained by the recent deterioration in asset quality, declining gross income and the current operating environment.
For the same reasons, the Long-Term Foreign Currency Rating (FCR) is maintained at ‘A+’ with a ‘Stable’ Outlook and the Short-Term FCR at ‘A1’. The FCRs are further constrained by the ratings assigned to the sovereign (‘A+’/ ‘A1’/ ‘Stable’). In view of the Bank’s prominent position in the Saudi banking sector, official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Rating remains at ‘2’.
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 similar 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’.
RB’s successful expansion of its retail business slowed again in 2016, in line with the movement of the other operating segments at RB and of the kingdom’s banks generally. The long-term trend of increase in the Bank’s retail business has done a great deal to reduce the Bank’s concentration in both loans and non-bank deposits.
Having suffered significant levels of impairment in 2015, the Retail segment rebounded to be the only segment of the Bank to post an increased net profit in 2016. It was the Corporate segment which was negatively impacted by a deterioration in asset quality last year, and the Bank’s overall NPL net accretion rate was among the highest in the sector. While the result was an increase in the NPL ratio last year, the Bank stepped up its loan-loss provisioning to maintain and in fact increase the already full coverage of NPLs by loan-loss reserves (LLRs).
The higher NPL ratio is further ameliorated by the Bank’s strong capital ratios. When combined with the full LLR coverage, RB’s free capital results in a very high effective NPL coverage ratio – the peer group’s second-highest.
The increased loan-loss provisioning has come at a price to the Bank’s bottom line. While operating profitability is sound in a global context, it has been declining in the past two years and is a function of a gross income metric which has also fallen for two consecutive years. In turn, the drop in gross income is partly a function of the operating environment (which has hurt the Bank’s fee income and other non-special commission income) and of the Bank’s caution in lending in that environment. That caution – which is in line with RB’s overarching objective of protecting the balance sheet – had the effect of slowing the growth in the Bank’s net special commission income (net SCI).
Although a reduction in customer deposits (entirely in time deposits) and an increase in the use of short-term market funding tightened the Bank’s liquidity profile, liquidity remains sound. The movements were made from a very sound base, so that the Bank has had plenty of room to decrease its liquidity profile without evoking concern. Loan-based ratios remain solid, and the Bank’s net liquid asset ratio was still sound at year-end 2016.
At year-end 2016 RB ranked fourth of twelve locally incorporated banks in the kingdom, both by total assets and total capital. On that date its assets totalled SAR 217.6 billion (equivalent to $58.0 billion), representing a market share of 9.8 per cent by total assets.