Fitch Ratings has affirmed 11 Saudi Arabian banks as part of a peer review of the Saudi banking sector. A complete list of rating actions on the banks and their related entities is provided at the end of this commentary.
Fitch has also affirmed and withdrawn SAMBA Financial Group’s (SAMBA) EMTN Programme rating. The programme no longer exists and there is no outstanding issuance.
Key Rating Drivers: Support Ratings and Support Rating Floors for All 11 Banks; IDRs OF AL RAJHI, NCB, RIYAD, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC
The affirmation of the banks’ Support Ratings and Support Rating Floors reflects the extremely high probability of support available from the Saudi authorities if required. Fitch’s opinion of support is based on the strong ability and willingness of the authorities to support the banking sector.
Support has been demonstrated by the Saudi authorities’ long track record of supporting domestic banks, as well as close ties and ownership links with the government at a number of banks. Fitch’s view of support is also underpinned by the sovereign’s strong capacity to support the banking system, underpinned by its sovereign wealth funds and ongoing revenues mostly from its hydrocarbon production, and the moderate size of the Saudi Arabian banking sector in relation to the country’s GDP.
The banks’ Support Ratings are all ’1′, reflecting the extremely high probability of state support.
Fitch identifies domestic systemically important financial institutions (D-SIFI) based on its view of each bank’s systemic importance relative to other banks in the banking system, and considering, amongst other things, market share, franchise and government ownership. The ‘A+’ Support Rating Floor of the four Saudi banks, Al Rajhi Bank (ARB), National Commercial Bank (NCB), Riyad Bank (RB) and SAMBA, are at the Saudi banks’ D-SIFI Support Rating Floor of ‘A+’, reflecting their high systemic importance.
The ‘A-’ Support Rating Floors of the four JV banks, Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB) and Saudi Hollandi Bank (SHB), are two notches below the Saudi D-SIFI Support Rating Floor. This reflects Fitch’s view that these banks are less systemically important based on their slightly smaller sizes, franchises and market shares, but also the large stakes held in these banks by foreign financial institutions, which could also slow support in the event of need.
The ‘A-’ Support Rating Floors of the three remaining banks, Saudi Investment Bank (SAIB), Alinma Bank (Alinma) and Bank Aljazira (BAJ), is two notches below the Saudi D-SIFI Support Rating Floor. This reflects Fitch’s view of their lower relative systemic importance, due to smaller sizes, market shares and franchises.
The Issuer Default Ratings (IDRs) of ARB, NCB, RB, SAMBA, SHB, SAIB, Alinma and BAJ are driven by support from the authorities.
Aljazira Capital’s (AJC) IDRs and Support Rating reflect the extremely high probability of institutional support, if needed, from its 100 per cent owner, BAJ (A-/Stable). Although AJC’s operations and management are separate, Fitch views AJC as a core subsidiary and aligns its IDR with that of BAJ.
BSF Sukuk Ltd’s trust certificate issuance programme and the senior unsecured notes issued under this entity and the notes issued directly through the bank are rated in line with BSF’s IDRs and are therefore subject to the same rating drivers.
RATING SENSITIVITIES – SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL 11 BANKS; IDRs OF ARB, NCB, RB, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC
The banks’ Support Ratings and Support Rating Floors are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector. Given the robust economy and the authorities’ strong track record of support for local banks, Fitch considers downward pressure is low. Where the banks’ IDRs are driven by sovereign support, these would be sensitive to a change in their Support Ratings or Support Rating Floors.
AJC’s IDRs and Support Rating are sensitive to a change in BAJ’s ratings or in Fitch’s view of BAJ’s willingness to support AJC. However, Fitch notes the high level of strategic and financial importance of AJC to BAJ and the latter’s 100 per cent ownership. BSF Sukuk Ltd’s trust certificate issuance programme and the senior unsecured notes issued under this programme and those issued directly through the banks, are subject to the same sensitivities.
Saudi Arabia (AA/Stable/F1+) is an FSB/G20 member country and has implemented Basel III. As such, resolution legislation is being implemented. We will review the Support Rating Floors once the legislation has been fully enacted, although we currently do not expect any changes to the Support Rating Floors.
KEY RATING DRIVERS AND SENSITIVITIES: VRs FOR ALL 11 BANKS; IDRs FOR ANB, BSF AND SABB
Saudi Arabia is the largest economy in the Gulf Cooperation Council (GCC), with solid growth prospects supported by significant government spending on infrastructure projects, high, but decreasing, oil prices and an expanding non-oil private sector. All banks benefit from a favourable operating environment, high barriers to entry, a strict and hands-on regulator, sound liquidity, capital ratios, and pre-impairment operating profit levels, which enables them to absorb high credit costs, if necessary.
A weakening of the operating environment is the most likely driver of negative rating action, especially if this is combined with rapid loan growth and an increase in risk appetite leading to asset quality deterioration or a reduction in capital ratios. Reduced concentration in loans and deposits could be beneficial for the VRs.
The IDRs of ANB, BSF and SABB reflect the intrinsic creditworthiness and financial strength of each issuer, as underlined by their respective VRs. Where an issuer’s VR is equal to or above its Support Rating Floor, the IDRs reflect the VR.
KEY RATING DRIVERS AND SENSITIVITIES: ARB’s VR
ARB’s VR reflects the bank’s leading domestic retail franchise, strong profitability and capital ratios, lower balance sheet concentrations than peers, sound asset quality, and large and stable retail deposit base. The VR also considers higher loan impairment charges and less sophisticated risk management compared to peers, given its retail focus.
Upside to ARB’s VR is limited, given its current high level. The VR could be downgraded if there is a notable deterioration in asset quality indicators, capitalisation, or profitability to a level that significantly affected internal capital generation. Fitch does not view this as likely at present.
KEY RATING DRIVERS AND SENSITIVITIES: NCB’s VR
NCB’s VR reflects the bank’s leading domestic franchise, strong profitability, and stable funding, but also considers its high lending concentrations to large corporate borrowers and higher leverage than peers owing to a large investment portfolio. It also considers a higher risk appetite for international investments.
An upgrade of NCB’s VR is unlikely, given its already high level and its high loan book concentration. Pressure on NCB’s VR could come from a sharp deterioration in capital, and/or asset quality as a result of rapid loan growth, especially in NCB’s Turkish subsidiary.
KEY RATING DRIVERS AND SENSITIVITIES: RB’s VR
RB’s VR reflects the bank’s strong commercial franchise with leading market shares in some business lines, solid core earnings generation and diversification, and sound asset quality and capitalisation. It also reflects moderate concentration risks in assets and liabilities.
Upside to RB’s VR is limited, considering its current high level. Downside could result from deterioration in asset quality, if this leads to a significant decline in profitability and an erosion of the capital base. However, revenues from its core banking businesses should be ample to cover any future loan impairment charges.
KEY RATING DRIVERS AND SENSITIVITIES: SAMBA’s VR
SAMBA’s VR reflects the bank’s resilient franchise and stable business model. It also reflects strong financial metrics, including its sound capital position, and strong and stable earnings. The rating is constrained by high concentration risks in both assets and liabilities (by sector and name) and higher risk appetite for investments.
Negative pressure on SAMBA’s VR could occur if there is deterioration in the bank’s asset quality, both in loans and investments, or if there is a sharp reduction in capital levels. An upgrade is unlikely considering the already high level of the VR.
KEY RATING DRIVERS AND SENSITIVITIES: ANB’s VR
ANB’s VR reflects strong liquidity, consistent sound profitability, and the benefits of being an associate bank of Arab Bank Plc (BBB-/Negative). The VR also considers some concentrations on both sides of the balance sheet and weaker asset quality than similar rated peers, particularly due to the higher level of impaired but performing loans. ANB’s loan growth has been limited in 2013 and 1H14 and, as a result, its capital ratios have strengthened.
ANB’s IDR is sensitive to any change in its VR. However, any downward movement would be limited to one notch due to its Support Rating Floor of ‘A-’. Support is not factored into ANB’s IDR. Negative pressure on ANB’s VR would be driven by significant weakening of the bank’s capital ratios compared with larger peers. This would be most likely through a deterioration in the bank’s loan quality or renewed loan growth. Upside is limited, given the current high level of the rating.
KEY RATING DRIVERS AND SENSITIVITIES: BSF’s VR
BSF’s VR reflects its low risk appetite compared with peers. This is driven by the bank’s corporate banking franchise working with predominantly large corporates. Risk appetite also benefits from an investment portfolio almost entirely comprising domestic government securities and also considers the benefits of being an associate bank of Credit Agricole Corporate and Investment Bank (CACIB; A/Stable), with whom BSF has a technical services agreement. The VR also reflects BSF’s lower capital ratios compared with larger peers in Saudi Arabia, and lower diversification of earnings outside of corporate banking, achieved by many peers.
BSF’s IDR is sensitive to any change in its VR. However, any downward movement would be limited to one notch due to its Support Rating Floor of ‘A-’. Support is not factored into BSF’s IDR. Negative pressure on BSF’s VR could be driven by significant weakening of the bank’s capital ratios, compared with larger peers. If the technical services agreement between BSF and CACIB is terminated, this could also put pressure on the VR, but this is not the agency’s base case. Upside is limited, given the fairly low capital ratios and high concentrations.
KEY RATING DRIVERS AND SENSITIVITIES: SABB’s VR
SABB’s VR reflects its consistently strong profitability and core earnings generation, and comfortable liquidity. The ratings also consider SABB’s strong franchise and the benefits of being an associate bank of HSBC Holdings plc (AA-/Stable) with a technical services agreement with the HSBC group. The VR also reflects SABB’s lower capital ratios compared with larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and SABB’s high large customer exposures relative to equity compared with larger Saudi peers.
SABB’s IDR is sensitive to any change in its VR. However, any downward movement would be limited to one notch due to its Support Rating Floor of ‘A-’. Support is not factored into SABB’s IDR.
Negative pressure on SABB’s VR could be driven by significant weakening of the bank’s capital ratios, compared with larger peers, together with a significant increase in large customer exposures relative to equity. If the technical services agreement between SABB and HSBC is terminated, weakening its franchise, this could also put pressure on the VR but this is not our base case. Upside is limited, given the fairly low capital ratios compared with larger peers and high concentrations.
KEY RATING DRIVERS AND SENSITIVITIES: SHB’s VR
SHB’s VR reflects its smaller, but growing, franchise, weaker Tier 1 capital ratio than peers, recent fast loan growth and high concentrations on both sides of the balance sheet. The VR also considers the bank’s sound asset quality, healthy profitability and strong funding and liquidity. The uncertainty relating to its future ownership, if remained unresolved, could constrain its ability to raise new share capital and therefore could affect SHB’s ability to execute its strategy in the long term, thereby constraining its competitive position. Royal Bank of Scotland N.V. currently holds a 40% stake in SHB. This stake is considered non-strategic and is likely to be sold in due course.
An upgrade of SHB’s VR would stem from greater diversification of the franchise and a stronger capital cushion that is more in line with its domestic peers. An end to the uncertainty surrounding SHB’s ownership and future strategy could also positively affect the VR. The VR could be downgraded as a result of high loan growth having a negative impact on asset quality and capital ratios.
KEY RATING DRIVERS AND SENSITIVITIES: SAIB’s VR
SAIB’s VR reflects the bank’s rapid loan growth as it deploys its new strategy to make up market share on peers. Profitability metrics now compare well with similarly sized peers. These factors are counterbalanced by SAIB’s smaller capital buffers than peers, particularly in light of the bank’s fast growth. Fitch believes that impaired loans will gradually rise as the new book seasons. Other factors constraining its VR include the bank’s smaller size and its high concentration in loans and deposits.
Upside for SAIB’s VR could result from more revenue diversification into retail and commercial banking activities, whilst maintaining healthy capitalisation, strong asset quality and sound funding and liquidity positions. Downward pressure on the VR could arise from a sharp deterioration in asset quality, earnings capacity or a continuing erosion of capital ratios.
KEY RATING DRIVERS AND SENSITIVITIES: ALINMA’S VR
Alinma’s VR reflects the bank’s low, but growing market share as the sector’s youngest bank. It also reflects the bank’s fairly high loan growth as part of its expansion strategy, as well as concentrations on both sides of the balance sheet and a short track record. The expected expansion of the bank’s operations will inevitably reduce the bank’s currently strong capital ratios. The VR also considers the bank’s improving profitability and sound liquidity and asset quality metrics.
Alinma’s rating is currently constrained by its short track record. Diversification on both sides of the balance sheet, increasing and extending its funding profile, as well as improving internal capital generation, could result in an upgrade. Rapid growth leading to asset quality deterioration could put pressure on Alinma’s VR, as would a sharp deterioration in profitability.
KEY RATING DRIVERS AND SENSITIVITIES: BAJ’s VR
BAJ’s VR is constrained by its weaker company profile and lower capital ratios from rapid financing growth. The VR also considers BAJ’s improving asset quality (although its impaired loan ratio is still among the highest in Saudi Arabia).
Downward pressure on BAJ’s VR could come from a further deterioration of its Fitch core capital and Tier 1 capital ratios, most likely attributable to fast financing growth. BAJ’s capital ratios are at the lower end of the peer group range. Deterioration in asset quality and earnings could also put downward pressure on the VR. Upward potential is likely to come from a sustainable improvement in BAJ’s below-average capital ratios.
KEY RATING DRIVERS AND SENSITIVITIES: AJC’s VR
AJC does not have a VR because of its strategic importance to BAJ. As an integral part of BAJ, it cannot be assessed on a standalone basis.