Fitch affirms Bank Aljazira at 'BBB+'/Negative; assigns 'AA-(sau)'

BAJ's IDRs are driven by sovereign support as reflected in the bank's SRF of 'BBB+'


Fitch Ratings - Dubai: Fitch Ratings has affirmed Bank Aljazira's (BAJ) Long-Term Issuer Default Rating (IDR) at 'BBB+' with Negative Outlook. Fitch also assigned a National Long-Term Rating of 'AA-(sau)' with a Stable Outlook. A full list of rating actions is below.



BAJ's IDRs are driven by sovereign support as reflected in the bank's SRF of 'BBB+'. The Negative Outlook on the bank's Long-Term IDR reflects that on the Saudi sovereign rating.

BAJ's SRF and SR reflect Fitch's view of a high probability of support for BAJ, if needed, from the Saudi authorities. Fitch's assessment considers the authorities' strong ability to support the banking system, given large, albeit decreasing, external reserves. It also reflects a long record of support for Saudi banks, irrespective of their size, franchise, funding structure and level of government ownership. We see high contagion risk among domestic banks given that the market is fairly small and inter-connected. We believe this is an added incentive for the state to support any Saudi bank, if needed, to maintain market confidence and stability.

We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. A Long-Term IDR of 'BBB+' can correspond to a Short-Term IDR of either 'F2' or 'F1'. The 'F2' Short-Term IDR of BAJ reflects that a significant proportion of Saudi banks' funding is related to the government and that they would likely need support at a time when the sovereign itself is experiencing some form of stress.


BAJ's VR reflects the bank's limited company profile, weaker and more vulnerable asset quality than peers', only acceptable profitability and a funding profile at the weaker end of Saudi peers'. It also reflects the bank's sound core capitalisation and strong liquidity buffers. The VR further factors in our view that pressures from the economic environment, due to the coronavirus crisis and lower oil prices, have eased and are now less likely to affect the bank's financial profile significantly.

BAJ has a limited franchise as one of the kingdom's smallest banks with its niche retail franchise (47% of gross financing at end-1Q21). This translates into a weaker funding profile and earnings generation relative to peers', as well as more vulnerable asset quality given a higher exposure to corporates with weaker credit quality.

The bank's stage 3 financing ratio rose to 6.3% at end-1Q21 from 5.6% at end-2020 on the back of additional stage 3 inflows and moderate growth relative to the sector. The bank's stage 2 financing ratio declined to 5.2% at end-1Q21 from 7.7% at end-2020 as a result of financing migration to the stage 3 category. Given improving economic conditions and supportive financing growth, we expect the bank's stage 3 financing ratio to remain stable in 2021-2022.

Fitch's core profitability metric, operating profit/risk-weighted assets (RWAs), declined sharply in 2020 to 0.1% from 1.9% in 2019 as the bank booked high financing impairment charges (FICs), mainly against stage 3 exposures. The core metric recovered to 2.3% in 1Q21 as FICs declined sharply and revenue rose. We expect this recovery to continue in 2021-2022, helped by high financing growth, recovering non-financing revenue and lower - albeit still large - FICs.

BAJ's capitalisation remains a rating strength, underpinned by a common equity Tier 1 (CET1) ratio of 19.5% at end-1Q21 which is at the top-end of the domestic peers', in part reflecting BAJ's lower RWA density. BAJ's strengthened total reserve coverage of stage 3 financing (63.2% at end-1Q21) reduced capital encumbrance with unreserved stage 3 financing to 11% of CET1 at end-1Q21 (17% at end-2019). This provides the bank with solid loss-absorption buffers against weaker credit conditions.

BAJ's gross financing/customer deposits of 81.3% at end-1Q21 was one of the lowest among domestic-rated banks'. During 2020 the bank took advantage of lower profit rates as well as profit-free deposits received from the Saudi Central Bank (5% of total funding at end-2020) to shed expensive term deposits. This enabled the bank to reduce its cost of funding, albeit still higher than most domestic-rated banks'.

BAJ has a high reliance on time customer deposits (42% of total funding at end-1Q21). Deposit concentration is large with the top 20 depositors representing 40% of total customer deposits at end-2020. This is mitigated by a sound liquidity position with Basel III high-quality liquid assets, covering total customer deposits by a strong 41% at end-1Q21.

In assessing BAJ's ratings, we consider important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.


The National Rating of BAJ reflects its creditworthiness relative to that of other issuers in Saudi Arabia and is driven by its SRF. It is the lower of two options - 'AA(sau)' and 'AA-(sau)' -mapping to a 'BBB+' Long-Term Local-Currency IDR, which reflects BAJ's weaker company profile, asset-quality and profitability metrics.

The Outlook on the National Long-Term Rating is Stable. While a downgrade of Saudi Arabia (A/Negative) would be negative for the bank's Long-Term IDRs, it would most likely be neutral for the National Long-Term Rating. This is because its creditworthiness relative to that of other rated issuers within Saudi Arabia would most likely be maintained.



Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of BAJ's Long- and Short-Term IDRs would be driven by a downward revision of the bank's SRF.

BAJ's SR and SRF are sensitive to an adverse change in the sovereign's ability to support the banking system, as reflected by a change in its rating, which is currently on Negative Outlook.

A weaker propensity from the authorities to support the banking system would also lead to a negative rating action, but this is unlikely in Fitch's view given the strong record of supporting domestic banks.

Saudi Arabia is an FSB/G20 member country. Bankruptcy legislation has been introduced, followed by resolution legislation in 4Q20. However, we do not believe the authorities will use this over sovereign support. Should this view change, we will review Saudi banks' SRFs, which could result in downward revisions of the SRFs, even to 'No Floor'. However, this is not our base case.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of BAJ's Long-Term IDR would come from an upward revision of the SRF, although this is unlikely in the near term, given the Negative Outlook on the IDR mirroring that on the sovereign, and the already high level of the SRF relative to the sovereign rating, reflecting a high propensity to support the banking system.


Factors that could, individually or collectively, lead to negative rating action/downgrade:

We could downgrade the VR if sharp deterioration in economic conditions inflates the stage 3 financing ratio to above 10%, putting heightened pressures on the bank's profitability and capital. This would likely be driven by sustained high levels of FICs.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the VR is unlikely without a sustained improvement in the operating environment allowing for a strengthening of asset-quality and profitability metrics.

An upgrade of BAJ's VR would also likely require an improvement in the bank's company profile, which could be achieved through a significant increase in market shares, or more likely through a greater diversification in the business model. This would include improved performance of the corporate segment and reducing reliance on earnings from the treasury book.


The National Rating of BAJ is sensitive to a change in its Long-Term Local-Currency IDR and its creditworthiness relative to other Saudi Arabian issuers'.


International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit


The principal sources of information used in the analysis are described in the Applicable Criteria.


BAJ's IDRs, SR and SRF reflect Fitch's view of a high probability of support for BAJ, if needed, from the Saudi authorities.


As an Islamic bank, BAJ needs to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a governance structure relevance score of '4' (in contrast to a typical relevance influence score of '3' for comparable conventional banks).

In addition, Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations imbedded in their operations and obligations, although this only has a minimal credit impact on the entities.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit 


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