CI raises financial strength rating of Saudi Hollandi Bank

May 28, 2014 10:21 am

Capital Intelligence (CI), the international credit rating agency, today announced that it has raised the the Financial Strength Rating (FSR) of Saudi Hollandi Bank (SHB) based in Riyadh, Saudi Arabia. The agency noted that in last year’s report a ‘Positive’ Outlook had been assigned to all the ratings based on the continuing improvement in the Bank’s asset quality and profitability. Because of the fact that in 2013 there was further improvement in profitability and in asset quality – albeit less so in the latter – and the fact that this was accomplished with limited change in capital ratios (and in fact an improvement in the Capital Adequacy Ratio, or CAR), the FSR is raised to ‘a’ from ‘a-‘. 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. Overall, the likelihood of support is considered to be ‘high,’ but not ‘very high.’ Accordingly, the Support Level is changed to ‘3’ from ‘2’. The Outlook for all the ratings is revised to ‘Stable’.

SHB continued its recovery from the large increase in its non-performing loan (NPL) portfolio in 2009, although the progress in 2013 was not as clear-cut. Principally because of a high NPL Net Accretion Rate, the stock of NPLs rose, but the NPL ratio improved and remained one of the peer group’s best. Coverage by loan-loss reserves (LLRs) grew and remained well above the average for Saudi banks, but the provisioning expense negatively affected the Bank’s earnings and therefore its free capital, and the increase in the Effective NPL Coverage Ratio was muted.

Continued strength in net Special Commission Income (net SCI) was a key ingredient in another healthy rise in gross income, while continued control of costs provided another increase in operating profit and operating profitability, further bridging the gap between SHB’s numbers and those of its peers. Even with a higher provisioning expense, the same was true of net profit and return on average assets (ROAA). However, the increase in net SCI came as a result of strong loan growth and a steady estimated net interest margin (NIM), with the effect of some weakening of both liquidity ratios and some capital ratios. Nevertheless, the Bank’s Saudi government-centric investment portfolio and the addition of subordinated debt last year (considered by the regulator as Tier 2 Capital) helped produce the fifth consecutive rise in the Bank’s CAR and make it one of the strongest among Saudi banks.

The slight weakening of the liquidity ratios was reflected in an increase in the net loans to customer deposits ratio. The liquid asset ratio remained sound, but was supported to an increased extent by a jump in interbank borrowings so that the net liquid asset ratio was one of the sector’s lowest. Sector concentration continues in the portfolio, notwithstanding recent increases in lending to the consumer sector.

Of all twelve locally incorporated banks in operation, SHB was effectively tied for eighth-largest by total assets and tenth by total capital as of year end 2013. 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 2013, SHB operated 48 domestic branches (2012: 45).

Primary Analyst
Tom Kenzik
Senior Credit Analyst
Tel: +357 2534 2300