The Long-Term FCR is affirmed at ‘A+’, underpinned by the Bank’s very strong capital ratios, strong liquidity, strong and continually improving asset quality, and sound net profitability. The Short-Term FCR is raised to ‘A1’ from ‘A2’ because of the Bank’s improved liquidity, especially given the current operating environment. For the same reasons, the Financial Strength Rating (FSR) is maintained at ‘A+’.
The ratings are constrained by weakness in fee and other income (FOI), the sovereign rating assigned to Saudi Arabia, and the current operating environment. In view of the Bank’s prominent position in the Saudi banking sector, official financial support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Rating remains at ‘2.’ The Outlook for all ratings is maintained at ‘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 ‘A2’ from ‘A1’. At the same time, the Outlook for the FCR was changed to ‘Stable’ from ‘Negative’. This action was taken because of a change in the Sovereign Ratings 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 Bank continues to post some of the peer group’s strongest profitability ratios, including its best operating profitability and its highest ROAA. The one weakness in the Bank’s profit profile is its struggle to earn FOI (essentially, non-interest income), which has been hampered by weak net fee and commission income, which fell in each of the four years before 2016, and again in H1 2017 year-on-year. However, the bank has historically recorded a very strong net financing margin, which after several years of decline has become even stronger.
Unlike most other banks in Saudi Arabia – and indeed in the region – ARB’s loan book and customer deposit base are characterised by broad diversification. Moreover, the Bank’s business model, which concentrates on consumer lending and consumer deposits, has provided a high degree of stability and liquidity, in addition to that diversification. Deposit growth has slowed recently, as it has throughout the sector, and in ARB’s case that growth has come more from time deposits than from demand deposits. However, because of the overwhelming preponderance of demand deposits in the Bank’s funding, these changes are not a cause for concern or even scrutiny.
The Bank has a minimal need to access the interbank market for funding, notwithstanding a sharp jump in 2016 (which was effectively deployed in liquid assets). In addition, while its IFF-based ratios are slightly tighter than the very sound peer group average, ARB’s ratios are very sound in a global context.
The Bank’s asset quality, having improved in the past eighteen months, is now far superior to that of its peers. Its NPL ratio is the peer group’s second-lowest, and coverage by IFFLRs is its highest. ARB’s capital profile is very sound and includes the peer group’s second-highest Basel III CAR and Tier 1 capital ratio. This provides further support to the Bank’s NPIFF portfolio and in 2016 its effective NPL coverage ratio moved ahead of the strong peer group average.
Whether by total capital or by total assets at 31 December 2016, ARB ranks as Saudi Arabia’s second-largest bank. On that date, assets totalled SAR 339.7 billion (equivalent to $90.6 billion and a market share of about 15.3 per cent) and total capital was SAR51.9 billion (equivalent to $13.9 billion).