Capital Intelligence affirms ratings of Saudi Hollandi Bank
Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the ratings of Saudi Hollandi Bank (SHB) based in Riyadh, Saudi Arabia.
The Financial Strength Rating (FSR) is maintained at ‘A’, supported by the continued improvement in the Bank’s asset quality, its consistently rising profitability by most metrics and strong growth in customer deposits, as well as by the Bank’s strong franchise in trade finance.
Ratings are constrained by the relatively tight liquidity and weakening capital profile – both as the result of robust loan growth and to some extent by ongoing (albeit improving) sector concentration in the loan book and a high non-performing loan (NPL) net accretion rate.
For the same reasons, the Long-Term Foreign Currency Rating is maintained at ‘A’ and the Short-Term Foreign Currency Rating at ‘A2’. While official support in some form is expected to be forthcoming if needed, the Bank is not systemically important to the Saudi banking system and the ability and willingness of the foreign parent to support the Bank in extremis is not a certainty. Accordingly, the Support Level remains at ‘3.’ The Outlook for all ratings is ‘Stable.’
SHB continues its recovery from the condition of 2009 when it had suffered a large increase in its NPL portfolio. That increase affected all aspects of the Bank’s balance sheet and income statement, and the Bank has made steady progress in all areas over the past five years.
The NPL ratio has been on a par with that of the peer group for several years now, notwithstanding a high estimated NPL net accretion rate. The Bank has partly (but not yet completely) addressed concentration issues by diversifying from its traditional strength in commerce into upper tiers of the consumer sector. That strategy has resulted in continually increasing stocks of customer deposits.
In 2014, as in most of the past five years, profitability has improved by most measures so that the Bank’s profit profile is very similar to that of the peer group. That profile includes cost ratios, operating profitability and ROAA (return on average assets), all of which are at or better than the peer group averages. Both net special commission income and non-special commission income have been growing sharply, resulting in a steady improvement in the Bank’s gross income, although profitability at that level still trails that of the Bank’s peers.
That said, the strong growth in customer deposits has been needed to fund a rapidly rising loan portfolio. On the one hand, the increase in the loan book has contributed to the falling NPL ratio, but there have been negative side-effects as well. The relatively high share of loans in the balance sheet results in loan-based liquidity ratios which, while generally satisfactory in a global context, are considerably tighter than those seen at other Saudi banks. The robust loan growth has also meant that the Bank has increased its usage of the interbank market for funding, so that a relatively low liquid asset ratio translates into a net liquid asset ratio − which is more than adequate, but very low by Saudi standards. The same can be said of the effect on capital ratios – while they remain more than adequate, they too are low compared to those of the peer group.
Of all twelve locally incorporated banks in operation, SHB ranked ninth when measured by either by total capital or total assets as of year end 2014. Its balance sheet showed total assets of SAR80.5 billion (equivalent to USD21.5 billion and a market share of about 4%) and total capital of SAR9.4 billion (equivalent to USD2.5 billion). At year end 2014, SHB operated 55 domestic branches (2013: 48).