Fitch Ratings has downgraded Bank Aljazira's Individual rating to D from C/D and changed the rating Outlook on the bank's Long-term rating to Negative from Stable.
At the same time, the bank's Long-term, Short-term and Support ratings have been affirmed at BBB-, F3 and 3, respectively.
The downgrade of the Individual rating and the change in rating Outlook reflect a rapid increase in risks in the bank's loan portfolio. Lending nearly doubled in 2003, with most of the growth coming from margin lending to upscale retail customers to fund local stock market investments. Around half of the total loan book is now made up of these facilities, creating a high degree of concentration.
Though the bank maintains very comfortable levels of collateral against these exposures, Fitch, nevertheless, regards that such lending carries greater risks than other forms of lending in the region. Management placed a freeze on further expansion of the margin lending portfolio at the end of 2003.
Growth in lending outpaced capital generation in 2003, causing the bank's Tier 1 ratio to decline to 15 percent from 24 percent. The margin lending portfolio is now more than twice the size of the bank's equity, which is a concern given the risk concentration.
In addition, reserve coverage of existing non-performing loans is low by domestic peer comparison, at 62 percent at end-2003, implying that capital might be diluted by this reserve shortfall. The bank intends to have an injection of new equity in mid-2004, in order to bolster the capital position.
Bank Aljazira's Long-term rating has been placed on Negative Outlook to indicate that the next rating action may be a downgrade if there is no improvement in risk diversification, reserve coverage and in the relationship between risks and capital.
One of the smallest banks in Saudi Arabia, Bank Aljazira has established a niche for itself in a competitive market by offering innovative Islamic banking products and a range of specialized personal banking services.
Though the bank has a minimal market share of loans and deposits, it has around 15 percent of the brokerage dealing business in Saudi Arabia, which includes activity with both borrowing and non-borrowing customers. Expansion of these activities led to strong fee-based income growth in 2003. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
