Capital Intelligence (CI Ratings), the international credit rating agency based in Cyprus, announced that it has lowered the Financial Strength Rating (FSR) of The Saudi Investment Bank (SAIB), based in Riyadh, Saudi Arabia, to ‘BBB+’ from ‘A-’ due to the deterioration in both asset quality and liquidity. The current ‘BBB+’ rating is underpinned by the bank’s solid capital profile, sound and liquid investment portfolio (which somewhat mitigates the liquidity issue), and continued successful limitation of growth in the balance sheet and in operating expenses. The rating is constrained by declining profitability at several levels and by the high dividend payout ratio, which impedes capital growth. Official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Rating remains at ‘2.’
For the same reasons, the Long-Term Foreign Currency Rating (FCR) is lowered to ‘A-’ from ‘A’, and the Short-Term FCR is lowered to ‘A3’ from ‘A2.’ The Outlook for the FCR and FSR is ‘Stable’.
SAIB has been targeting the upper-middle part of the consumer sector in order to increase earnings and reduce concentration risk. It had been having a degree of success until the change in the operating environment last year. The previous progress in demand and savings (CASA) deposits continued, albeit at a slower pace, but time deposits left the bank – as was the case throughout the sector – in search of better yields elsewhere in the Gulf. At the same time, the impending maturity of a term loan, moving the balance into short-term liabilities, further negatively impacted the bank’s liquidity in terms of the net loans to stable funds ratio and reliance on short-term funding. On the other hand, the bank’s sound and liquid investment portfolio provides it with a very sound quasi-liquid asset ratio.
The operating environment further impacted the bank, as asset quality suffered from a large increase in 90+days past due not impaired (PDNI) loans. That increase was accompanied by reduced loan-loss provisioning and received limited assistance from the bank’s capital position, which was affected by a dividend payout ratio that can be considered high given the circumstances. That said, the bank’s capital ratios and its effective non-performing loan (NPL) coverage are both sound in a global context.
Despite continued control of operating expenses (OPEX) and of growth, operating profit declined in 2015 and operating profitability dropped sharply. While the decline was largely the result of a one-off positive factor in the previous year, the metric was nonetheless low. It was exacerbated at the net profit level as total provisioning (but not loan-loss provisioning) increased substantially and both net profit and return on average assets (ROAA) fell for the year.
Of the twelve locally incorporated banks in the kingdom, SAIB ranked ninth as measured by either total assets or total capital or as of year-end 2015. On that date its assets totalled SAR93.6 billion (equivalent to US$25.0 billion), representing a market share of 4.4%. At year-end 2015 it operated a system of 48 domestic branches (including twelve with ladies’ sections), almost all of which are Shari’a-compliant, and a network of more than 400 ATMs.