ALINMA BANK
Fitch Ratings has affirmed
Key Rating Drivers
Alinma's 'A-' Long-Term IDR is driven by potential support from the Saudi Arabian authorities, as reflected by the bank's 'a-' Government Support Rating (GSR). Alinma's GSR is in line with that of other Fitch-rated Saudi banks, reflecting Fitch's view of the Saudi authorities' strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership.
Alinma's VR reflects the bank's strong government links and Islamic status, conservative risk appetite, sound asset quality, solid profitability metrics, sound funding and liquidity profile and moderate core capital ratios. The VR also considers a less diversified business model than some domestic peers, as well as significant single-name and sector concentrations.
Alinma's National Rating is driven by potential support from the Saudi Arabian authorities.
Favourable Operating Environment: High oil prices, the government's strategy to diversify the economy, increased government spending and solid non-oil GDP growth provide Saudi banks with solid business growth opportunities. We expect Saudi banks to continue growing above banks in other GCC countries in the medium term.
Balanced Risk Profile; High Concentrations: Alinma has demonstrated a higher appetite than peers for financing growth (the level of which has also consistently exceeded its internal capital generation), in turn exposing it to seasoning risks. It is also exposed to single-name financing and real estate and construction concentration risks. Nonetheless, we view underwriting standards as generally reasonable, with a large portion of financing growth in recent years driven by mortgage financing, viewed by Fitch as generally low risk in
The bank's above-sector-average cost of risk is well compensated by higher margins and partly reflects its above-peer-average reserves coverage of non-performing financings.
Sound Asset-Quality Metrics: Asset-quality metrics are healthy, reflecting the bank's focus on lower-risk government projects and prime real estate projects. Its Stage 3 financing ratio was 1.6% at end-2023 down from 1.9% at end-2022 due to the favourable operating environment, write-offs in the retail segment and financing growth (18% yoy). The Stage 2 financing ratio was 6% at end-2023, slightly above the sector average of 5%. The total reserves-to-financing ratio was strong at 2.5%. We expect the Stage 3 financing ratio to remain below 2.0% in 2024.
Improved Profitability: Profitability metrics improved in 2023. The operating profit/risk-weighted assets (RWA) ratio increased to 2.5% from 2.3% in 2022 mainly due to strong financing growth and a higher net financing margin (NFM). The NFM increased by 19bp to 3.8% in 2023 (the sector average was 3.2%) as the bank was well positioned for higher profit rates due to a high share of non-profit-bearing deposits and the high proportion of corporate financing, which is floating rate. We expect operating profit to remain about 2.5% of RWAs in 2024.
Moderate Core Capitalisation: Alinma's common equity Tier 1 (CET1) ratio fell to 14% at end-2023 (down from 15.8% at end-2023), below the sector average of 16.5%, due to strong financing expansion exceeding internal capital generation. High single-name concentration is a risk to capital but impaired assets are fully covered by reserves. We expect the CET1 ratio to be managed at the lower end of the bank's 14%-15% target range in 2024, based on our expectation of some moderation in financing growth to a level more in line with Alinma's internal capital generation and sector average financing growth.
Sound Funding Profile: Alinma's funding profile is sound despite its moderate franchise. The bank benefits from a low cost of funding that is in line with the sector average, supported by its Islamic status (which helps attract a large share of funding in the form of non-profit and less price-sensitive deposits) We expect a Loan-deposit ratio below 100% in the medium term. The regulatory liquidity coverage ratio was a comfortable 147% at end-2023 (up from 134% at end-2022).
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of Alinma's IDRs would require a downgrade of its GSR. The latter would be triggered by a sovereign downgrade.
Alinma's VR could be downgraded on a sharp and sustained deterioration in asset quality (impaired financing ratio exceeding 4%) and profitability (operating profit below 1.5% of RWAs), or if financing growth consistently exceeds internal capital generation, leading to a weakening in the bank's capitalisation and its CET1 ratio being sustainably below 14%.
The bank's National Rating is sensitive to a downgrade of its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of Alinma's IDRs would require an upgrade of its GSR. The latter would be triggered by a sovereign upgrade.
An upgrade of the bank's VR is unlikely without a material and sustained improvement in the Saudi Arabian operating environment.
The bank's National Rating is sensitive to an upgrade of its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' as per our Bank Rating Criteria because a significant proportion of Saudi banks' funding is related to the government and Alinma would likely need support at a time when the sovereign itself is experiencing some form of stress.
Alinma's Long-Term IDR (xgs) is assigned at the level of its VR. Alinma's Short-Term IDR (xgs) is mapped to its Long-Term IDR (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Alinma's Long-Term IDR (xgs) would mirror changes to its VR.
A downgrade of Alinma's Short-Term (xgs) could come from a multi-notch downgrade of its Long-Term IDR (xgs). An upgrade of Alinma's Short-Term IDR (xgs) would likely come from an upgrade of its Long-Term IDR (xgs).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Alinma's IDRs are linked to
ESG Considerations
As an Islamic bank, Alinma needs to ensure compliance of its 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), which has a negative impact on the banks' credit profile, in combination with other factors.
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 embedded in their operations and obligations, although this only has a minimal credit impact on the entities.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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