Al Rajhi Bank Primary Credit Analyst: Nicolas Hardy, Paris (33) 1-4420-7318; [email protected]Secondary Credit Analyst: Paul-Henri Pruvost, London (44) 20-7176-7210; [email protected]Table Of Contents Major Rating Factors Rationale Outlook Profile: The World's Largest Islamic Bank With Systemic Importance To The Kingdom Support And Ownership: Family Ownership Is A Neutral Rating Factor Strategy: Challenging Diversification Out Of Domestic Retail Banking Risk Profile And Management: Adequate And Improving Risk Architecture Designed For A Stable Business Model Profitability: Stellar Financial Performance With Improved Quality Of Core Earnings, But Which Are Set To Decline Capital: Among The Strongest In The Gulf Region December 24, 2008 www.standardandpoors.com/ratingsdirect 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page. 693205 | 300119756
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Al Rajhi BankPrimary Credit Analyst:Nicolas Hardy, Paris (33) 1-4420-7318; [email protected]
Secondary Credit Analyst:Paul-Henri Pruvost, London (44) 20-7176-7210; [email protected]
Table Of Contents
Major Rating Factors
Rationale
Outlook
Profile: The World's Largest Islamic Bank With Systemic Importance To
The Kingdom
Support And Ownership: Family Ownership Is A Neutral Rating Factor
Strategy: Challenging Diversification Out Of Domestic Retail Banking
Risk Profile And Management: Adequate And Improving Risk
Architecture Designed For A Stable Business Model
Profitability: Stellar Financial Performance With Improved Quality Of
Core Earnings, But Which Are Set To Decline
Capital: Among The Strongest In The Gulf Region
December 24, 2008
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693205 | 300119756
Al Rajhi Bank
Major Rating Factors
Strengths:
• Strong customer franchise in the retail sector
• Superior and sustained profitability
• Lower-than-peer concentration risks in loans and deposits
• Strong capitalization
Counterparty Credit Rating
A/Stable/A-1
Weaknesses:
• Low business and geographic diversification
• More difficult environment due to lower oil prices
• Increasing competitive pressure
• Large maturity mismatch
Rationale
The ratings on Saudi Arabia-based Al Rajhi Bank reflect the bank's healthy customer franchise in the domestic retail
sector, superior and sustained profitability, concentrations in loans and deposits that are lower than peers', and
strong capitalization. The ratings are constrained by the bank's low business and geographic diversification and
large maturity mismatch. In addition, the bank will have to operate in a more difficult environment due to lower oil
prices and increasing competitive pressure.
Al Rajhi is the third-largest bank in terms of assets in the Kingdom of Saudi Arabia (AA-/Stable/A-1+). With the
most extensive distribution network in the kingdom (about 430 branches), the bank has built up the widest demand
deposit base. Given its size and retail entrenchment, Standard & Poor's Ratings Services considers Al Rajhi to be a
systemically important bank in Saudi Arabia, which we classify as "interventionist" toward its banking sector.
Reflecting our opinion that extraordinary government support would be likely in case of need, we uplift the
long-term rating on the bank one notch above its stand-alone creditworthiness.
Al Rajhi is among the most profitable banks in the Gulf. Its robust profitability has been largely driven by increasing
business volumes, high margins, and low labor costs. The bank has benefited from strong momentum in the Saudi
economy and is well positioned to weather expected pressure due to its historical focus on its core retail domestic
market.
Asset quality is satisfactory, with a ratio of nonperforming loans (NPLs) to gross loans of 2.6% on Sept. 30, 2008.
Coverage by provisions is high at more than 130% on the same date. The NPL ratio is set to decline in
fourth-quarter 2008 to a level close to the average for peers, as a result of active write-offs. Al Rajhi relies mainly on
short-term retail deposits for funding and therefore maturity mismatches are material, as for most banks in the
region. Business and geographic diversification remains limited, despite a recent foray into Asian Muslim markets
through its Malaysian subsidiary established in 2006. Al Rajhi faces the challenge of widening the scope of its
business lines by enhancing its corporate and investment banking capabilities in a more competitive market, while
maintaining its strong financial profile and performance. Capitalization is among the strongest in Saudi Arabia and
Standard & Poor’s RatingsDirect | December 24, 2008 2
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the whole Middle East. The bank intends to keep its dividend payout policy conservative, to alleviate further
pressure on capital coming from the recent rapid growth of risk assets and the likely deterioration of the economic
environment.
Outlook
The stable outlook reflects our expectation that Al Rajhi will retain its strong financial profile and leading
commercial position in retail banking, despite increasing competition. We could raise the ratings if the bank
materially improves business diversification out of retail lending, geographic diversification proves successful, and it
further widens the funding mix to reduce maturity mismatches. The ratings may come under pressure if asset quality
or capitalization weakens dramatically.
Profile: The World's Largest Islamic Bank With Systemic Importance To TheKingdom
With Saudi Arabian riyal (SAR) 163.3 billion ($43.5 billion) in assets on Sept. 30, 2008, Al Rajhi is the third-largest
Saudi bank and the world's largest Islamic financial institution (IFI). Particularly strong in retail banking, Al Rajhi
operates the kingdom's largest domestic branch network, allowing excellent access to individuals and small and
midsize enterprises (SMEs). The large amount of nonremunerated sight deposits captured through its domestic
network accounts for one of the bank's main strengths. As a former moneychanger, it also manages a large portion
of foreign workers' remittances to their home countries, a very profitable business. Al Rajhi has a limited but slowly
expanding international network. Recent developments include the opening of a bank subsidiary in Malaysia in
2006. It also received in 2008 a branch license in Jordan and Kuwait.
Support And Ownership: Family Ownership Is A Neutral Rating Factor
Al Rajhi has operated with a full banking license since 1987. The bank is listed on the Saudi stock market. The Al
Rajhi family has a stake of about 45% in the bank's capital and the General Organization for Social Insurance
9.9%. Seven out of the 12 board members are family members. Although the family ownership structure brings its
own risks, Al Rajhi's shareholding structure is neutral for the ratings since the Al Rajhi family has until now
supported a conservative provisioning policy and the Saudi Arabian Monetary Authority (SAMA) strictly controls
related-party lending. In addition, family members are now less involved at all managerial levels than in the past.
Given its size and retail entrenchment (with a market share in excess of 15%), we consider Al Rajhi as a systemically
important bank in Saudi Arabia (considered interventionist to its banking sector). Therefore, the long-term rating on
the bank is one notch higher than the stand-alone creditworthiness.
Strategy: Challenging Diversification Out Of Domestic Retail Banking
Al Rajhi's main strategic objective is to protect its retail franchise and domestic entrenchment. The bank's potential
to further develop its retail business and franchise is limited. Indeed, retail lending growth has been slowing down in
the country following regulatory tightening and the sharp drop in stock prices in 2006 and 2008. Moreover,
competitive threats to retail-focused banks have become more obvious since the distinctive benefits of being an
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Al Rajhi Bank
Islamic bank started to vanish after most Saudi banks turned their conventional retail business lines into Islamic
ones. Al Rajhi still benefits from a first-mover advantage and strong brand name recognition, however.
The bank has placed more emphasis on corporate banking in the past two years and has ambitious plans for further
growth. It remains to be seen if the slowing economy will allow the bank to achieve its growth target while
maintaining its asset quality. The bank has managed to rapidly capture a growing market share of corporate
banking and nearly triple the size of its portfolio within three years, targeting mostly the top-end and the
middle-market segments, with an initial emphasis on the kingdom's infrastructure projects and now on a more
diversified base by economic sector. The bank's corporate book, including mutajara with corporates, now accounts
for about half of the overall lending book, compared with a third only a year ago. This strategic move has proved
successful thanks to a very supportive environment and growing demand for Islamic products. Al Rajhi's business
profile and financial results remain skewed toward retail banking, though. A slowing business environment and the
resulting tougher competition in the corporate segment, where the bank is not an historic player, could limit any
further forays if the bank is to maintain strict and conservative lending policies.
Al Rajhi's asset management capabilities remain underdeveloped compared with peers'. The bank plans to
strengthen its position and focus on this segment, however. Al Rajhi Financial Services has since January 2008
grouped the bank's investment-banking business lines into a separate legal entity. Although some Saudi banks have
chosen to benefit from foreign expertise through joint ventures--as these labor-intensive, high-value-added, and
technically complex services are better delivered within a global group--Al Rajhi decided to wholly own this
specialized subsidiary and build it organically.
Geographic diversification will come slowly from the bank's foray into Asian markets, starting with the operations it
launched in Malaysia in 2006. The bank had about $800 million of deposits on Sept. 30, 2008, and operated 19
branches, with plans to increase this to 50 within the next five years. On the asset side, the main focus has been on
the corporate segment. We understand that Malaysia is the first step of a more ambitious expansion program in
Asia. The bank will adapt the speed of implementation with changing market conditions.
Risk Profile And Management: Adequate And Improving Risk ArchitectureDesigned For A Stable Business Model
Al Rajhi's risk profile is average in the Saudi context. The bank's risk architecture has improved and is falling in line
with what we would expect from a financial institution of such a stature in the Saudi market. The bank is subject to
the same regulatory oversight despite the specificities of its business model as an Islamic bank. The bank's disclosure
is therefore as stringent as it is for other domestic banks. Further to the implementation of Basel II requirements, Al
Rajhi was the first Islamic bank in the region to publicly disclose according to Pillar 3 in 2008. Credit risks are
mitigated by lower-than-average concentration; market risks remain limited despite some vulnerability to an interest
rate decline. Funding remains short-term by nature, while asset tenors are widening. Limited access to liquidity
management tools, as for any Islamic bank, requires the bank to maintain a large portion of its balance sheet in
simple liquidity products. Al Rajhi's financial statements are consolidated and prepared under IFRS. Financial
statements are audited by internationally recognized auditing firms and to date remain unqualified.
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Al Rajhi Bank
Enterprise risk management: adequate
Al Rajhi's enterprise risk management is adequate and has been strengthened significantly in recent years. The risk
management function is independent, and recently spearheaded the overhauling of risk policies, procedures, and
tools across business lines. The risk culture has been actively enhanced from its former below-average profile, with a
specific emphasis on hiring new staff to meet higher risk governance standards and developing new risk management
tools. The new risk architecture remains nevertheless untested by a prolonged economic downturn.
Credit risk: the bank's currently solid asset quality is set to be tested by weakening economic conditions
Al Rajhi's loan leverage has remained relatively stable in the past four years at about 65%-70%, following a
significant increase due to its dominant position and strong momentum in the retail segment. The loan portfolio
continued to increase rapidly in recent years, reflecting Al Rajhi's relatively late arrival to the corporate lending
segment, the main driver of growth in the past two years. The total portfolio of mutajara with SAMA, banks, and
corporates stood at SAR63.9 billion on Sept. 30, 2008. It is actively managed, hence the significant volatility of its
components from one quarter to another. Mutajara transactions with corporates have a longer average maturity
than placements with SAMA and banks, and we consider them as Islamically acceptable equivalents to loans and
advances under our methodology.
The bank has an average credit risk profile. This is linked to the fact that it is serving the entire Saudi economy,
including a wide range of retail-banking segments (with about 3 million individuals) and SMEs (in excess of 90,000
customers). The bank does not show the concentration risk usually found among domestic peers. The 20 largest
nonbank exposures represent less than 20% of total nonbank loans. On the other hand, since the corporate
portfolio has increased only recently and the bank's focus is on top-end names, these top 20 exposures account for
about 45% of the corporate book. Nonperforming assets were limited to 2.6% of gross loans on Sept. 30, 2008,
and are expected to decline before year-end to a level that is similar to peers' as a result of active write-offs. The
bank has also put in place a seasoned, dedicated team to boost the recovery of past-due lending facilities. Coverage
by provisions is high at more than 130%. Consumer loans are usually secured by salary transfers, which provide
further comfort. The bank's car loan portfolio, about SAR4.0 billion on Sept. 30, 2008, is significant and shows a
higher risk profile. In corporate credit, the bank overcomes the uncertain legal environment prevailing in Saudi
Arabia through a very centralized credit culture.
Market risk: limited
Saudi banks have to deal with the strong endowment effect caused by unremunerated deposits. They usually suffer
when rates come down. This is particularly true for Al Rajhi, as it pays almost no remuneration on about
three-quarters of its customer deposits. Moreover, the bank does not have a fixed-rate bond portfolio, meaning it
cannot currently hedge its interest rate risk in a straightforward way. Foreign exchange risk is very limited. Al Rajhi
holds a very small equity portfolio in the form of investments in mutual funds. Al Rajhi reported no exposure to
subprime assets or other structured products, since Sharia compliance requirements prevent the bank from investing
in these assets.
Funding and liquidity risk: difficult to manage effectively given Islamic banks' constraints
Al Rajhi features a strong funding profile. The bank benefits from a huge pool of customer deposits, which funds
loans and enables the bank to maintain significant liquid short-term placements. Concentration in deposits is very
limited. Customer deposits amount to 74.9% of liabilities and equity. The remainder is made up of on-balance-sheet
"direct investments" by customers (effectively similar to time deposits), which are in fact the only funds carrying a
cost, as well as some long-term debt. Although most customer deposits are short-term but are effectively rolled over,
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Al Rajhi Bank
the bank remains exposed to the transformation risk from funding long-term loans with current and short-term
deposits. The rapid increase of the corporate loan book has expectedly triggered wider maturity mismatches. The
bank has barely started to address the issue of wider access to long-term funds. In addition, market conditions have
halted this strategy for the foreseeable future.
Liquidity is strong but not easy to manage for IFIs, because they lack access to diversified alternative asset classes to
absorb excess liquidity. Prohibited from dealing in fixed-income securities, the bank instead holds a portfolio of
short-term special placements with SAMA, about SAR15.5 billion on Sept. 30, 2008, as part of its "mutajara"
book. Al Rajhi is allowed to withdraw from SAMA up to 75% of the volume of such placements for short-term
liquidity needs, a percentage equal to the one allowed for conventional repo transactions, thus limiting dependence
on the interbank market. Al Rajhi had an additional liquidity cushion in the form of short-term bank placements of
close to SAR11.7 billion on the same date.
Profitability: Stellar Financial Performance With Improved Quality Of CoreEarnings, But Which Are Set To Decline
Al Rajhi is one of the most profitable banks in the Gulf. After stellar performances in 2005 and 2006, with return
on assets (ROA) of 6%-7%, which notably included contributions from exceptionally high brokerage fees, earnings
have returned to more sustainable but still excellent levels in 2007 and 2008. ROA and return on equity for the first
nine months of 2008 stood at 4.7% and 28.3%. However, like peers, earnings are set to decline due to the economic
slowdown, tough competition, and lower business growth. Robust bottom-line profitability should continue to
benefit from low funding costs, limited provisioning needs, and good efficiency. The capacity of the bank to
maintain a very low cost of funding (largely related to its nonremunerated deposits) is a key driver of the bank's
future profitability. One of the bank's challenges remains further diversifying revenue sources out of the pure
intermediation margins that it generates in Saudi Arabia. Ancillary business in corporate banking, investment
banking, and overseas operations should help the bank achieve this goal in the medium term and improve the
quality of core earnings.
Capital: Among The Strongest In The Gulf Region
Al Rajhi's capitalization remains among the strongest in the Gulf region. The continued and rapid growth of assets
during the past 12 months has not been matched by an equivalent rise of capital, however, despite a conservative
dividend payout policy.
Adjusted total equity amounted to SAR25.6 billion on Sept. 30, 2008, representing 15.7% of total assets, versus
18.9% at year-end 2007. On a positive note, the bank is to keep its dividend payout policy conservative in the
future. The Tier 1 capital adequacy ratio is unlikely to decline substantially, reflecting our expectation that the bank
will also maintain an equity base of very high quality.
Standard & Poor’s RatingsDirect | December 24, 2008 6
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Al Rajhi Bank
Table 1
Al Rajhi Bank Balance Sheet Statistics
--Year ended Dec. 31-- Breakdown as a % of assets (adj.)
Total liabilities and equity 163,256 124,886 105,209 95,038 77,855 64,678 100.00 100.00 100.00 100.00 100.00 100.00
Equity Reconciliation Table
Common shareholders'equity (reported)
25,608 22,382 19,181 12,878 8,536 7,249
Adjusted common equity 25,608 22,382 19,181 12,878 8,536 7,249
Adjusted total equity 25,608 22,382 19,181 12,878 8,536 7,249
*Data as of Sept. 30, 2008. Ratios annualized where appropriate. Year-end data are audited, consolidated, and prepared according to IFRS. SAR--Saudi Arabian riyal.
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Al Rajhi Bank
Table 2
Al Rajhi Bank Profit And Loss Statement Statistics
Average customer loans 92,818 74,568 64,213 49,124 30,396 23,609
Average earning assets 126,671 102,880 90,811 78,337 64,752 55,637
Average assets 144,071 115,048 100,123 86,446 71,267 61,896
Average total deposits 111,936 87,181 77,424 70,230 59,179 50,084
Average interest-bearing liabilities 113,811 89,056 78,361 70,230 59,179 50,084
Average common equity 23,995 20,782 16,030 10,707 7,893 7,043
Average adjusted assets 144,071 115,048 100,123 86,446 71,267 61,896
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Al Rajhi Bank
Table 2
Al Rajhi Bank Profit And Loss Statement Statistics (cont.)
Other data
Number of employees (end ofperiod, actual)
7,982 8,036 7,534 6,681 5,711 5,514
Number of branches 423 403 389 385 383 381
Total assets under management 374 451 1,894 1,561 5,009 6,253
Off-balance-sheet creditequivalents
22,746 18,729 10,902 11,259 8,186 24,671
*Data as of Sept. 30, 2008. Ratios annualized where appropriate. Year-end data are audited, consolidated, and prepared according to IFRS. SAR--Saudi Arabian riyal.
Net operating income before provision/revenues 72.81 73.95 79.44 77.28 73.20 70.17
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Al Rajhi Bank
Table 3
Al Rajhi Bank Ratio Analysis (cont.)
Net operating income after provisions/revenues 64.52 69.19 76.78 70.57 56.62 49.26
New loan loss provisions/revenues 8.29 4.76 2.66 6.71 16.59 20.91
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Loan loss reserves/NPA (gross) 135.66 127.64 169.03 146.93 243.93 192.46
*Data as of Sept. 30, 2008. Ratios annualized where appropriate. Year-end data are audited, consolidated, and prepared according to IFRS. SAR--Saudi Arabian riyal.
Ratings Detail (As Of December 24, 2008)*
Al Rajhi Bank
Counterparty Credit Rating A/Stable/A-1
Certificate Of Deposit A/A-1
Counterparty Credit Ratings History
30-Jan-2006 Foreign Currency A/Stable/A-1
05-Oct-2005 A-/Stable/A-2
30-Jan-2006 Local Currency A/Stable/A-1
05-Oct-2005 A-/Stable/A-2
25-Jan-2000 BBBpi/--/--
Sovereign Rating
Saudi Arabia (Kingdom of) AA-/Stable/A-1+
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard
& Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
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