(MENAFN- Capital Intelligence (Cyprus) Ltd) 18th July 2019
The National Commercial Bank’s Ratings Affirmed with a Stable Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of The National Commercial Bank (NCB) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has assigned to the Bank a Bank Standalone Rating (BSR) of ‘a-’, a Core Financial Strength (CFS) rating of ‘a-’ and an Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR is Stable.
NCB’s Financial Strength Rating and Support Rating have been withdrawn in line with the changes to CI’s Bank Rating Methodology announced in April 2019. CI will phase out FSRs and Support Ratings for all rated banks this year.
The Bank’s BSR is based on a CFS rating of ‘a-’ and an OPERA of ‘bbb’. As the ESL is set at High, there is a two notch uplift for the LT FCR over the BSR, taking it to ‘A+’. The ESL of High reflects CI’s firm belief that official support for NCB would be forthcoming if needed. As the sovereign is itself rated ‘A+’, financial capacity to support is not in doubt. Given the majority government ownership, willingness to support is also considered to be very strong.
NCB has a strong financial profile. Credit strengths include good asset quality coupled with good risk absorption capacity, comfortable liquidity, and strong capital adequacy. The majority government ownership and reasonably good internal capital generation also gives the Bank good capital flexibility. Profitability is good at both the operating and net level. In terms of non-financial supporting factors, NCB’s size and wide retail funding base give it a low cost of funds and stable liquidity.
The only challenges of a financial nature that are of any significance are the declining proportion of non-special commission income and the concentrations in both financings and customer deposits. These are common to all KSA banks (and across the wider GCC). The level of concentration on the financing side is lower than at some other major KSA banks, while the concentrations on the deposit side reflects large government balances which naturally flow to NCB given its ownership.
The proposed merger with Riyad Bank (RB) would be an important development but is not currently a rating factor as no formal agreement has been reached. In any case, as RB has a similar financial profile and ownership (and a strong government business franchise), the financial metrics of a possible combined bank should not be negatively impacted.
Other current credit challenges are largely from factors external to the bank. Geopolitical tensions have risen in the region in recent months and the possibility of further deterioration remains a possibility. This may have a chilling effect on a KSA domestic economy that is only now coming out of what has been a difficult few years – something that has impacted both asset quality and financing growth for the banking sector. Financing growth going forward will depend on government spending plans (in the widest sense and so include the project plans of the PIF), and the Bank has aligned its business strategy towards the government’s own strategic plan. Should this falter, financing growth is likely to be lower than currently anticipated.
One rating factor that can ‘cut both ways’ is the ownership of Türkiye Finans Katılım Bankası (TFKB). At present, it is more of a credit challenge given the decline in the TRY and strains on asset quality and profitability across the entire Turkish banking system. In the short run this has produced FX translation losses on capital invested and dragged on asset quality and profitability metrics at the consolidated level. Looking ahead however, TFKB offers NCB the potential for wider margins and faster asset growth; TFKB is still modest in size in sector terms with so far only a moderate market share.
With access to the parent for both funding and additional capital if needed, TFKB therefore has competitive advantages in a sector where both are currently in short supply.
NCB has a strong existing domestic business franchise that is mainly based on retail banking. However, it also has a valuable domestic corporate franchise. Despite the large branch network, NCB had a 2018 cost of funds that was exactly on the median. However, the rather higher than average proportion of financings to consumers allowed NCB to post the second highest net financing margin in the sector.
The lower than average proportion of financings in the asset base, coupled with the large holdings of Saudi government securities, has helped to keep risk weighted asset density below that of most other banks. Despite this, the Tier 1 ratio was only average. The Basel III leverage ratio is reasonably strong, as is the ratio of capital to total assets.
The Outlook for both the LT FCR and BSR is currently Stable. On the basis of discussions with management, financial metrics are expected to remain strong. As regards non-financial factors, there is nothing currently present that would suggest a change in the Outlook is likely as a result. The external credit challenges mentioned previously are currently not expected to result in any downward changes to ratings over the next 12 months.
As ratings outlooks have a 12-month time horizon, the proposed merger is currently unlikely to take place soon enough to impact the ratings. However, the merger (if executed well) has the potential to produce one of the largest and strongest banks in the GCC and wider MENA region and may therefore potentially become an important credit strength.
CONTACT
Primary Analyst
Rory Keelan
Senior Credit Analyst
Tel: +357 2526 0000
E-mail: rory.keelan@ciratings.com
Secondary Analyst
George Panayides
Senior Credit Analyst
E-mail: george.panayides@ciratings.com
Rating Committee Chairman
Morris Helal
Senior Credit Analyst
About the Ratings
The information sources used to prepare the credit ratings are the rated entity and public information. CI may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in November 2003. The ratings were last updated in December 2018.
The principal methodology used in determining the ratings is the Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI''s ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2019
MENAFN180720190070411ID1098774229
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.