13 June 2013
Fitch Ratings has affirmed 11 Saudi Arabian banks as part of a peer review of the Saudi banking sector. Fitch has revised the outlooks on three of these (Arab National Bank (ANB), Banque Saudi Fransi (BSF) and Saudi British Bank (SABB)) to negative from stable.
The negative outlooks reflect Fitch's reassessment of the relative intrinsic strengths and weaknesses of ANB, BSF and SABB in comparison with their peers. The factors considered include relatively lower capital ratios and therefore lower capital buffers for the three banks compared with stronger peers in an environment of potentially strong loan growth, higher loan concentrations for BSF and SABB and a higher cost/income ratio for ANB. However, Fitch recognizes that all three banks have low NPL ratios and high loan loss reserve coverage, so the banks' capital bases are unlikely to need to absorb losses in the foreseeable future.
The banks all benefit from a stable operating environment, a conservative and hands-on regulator and high barriers to entry into the Saudi Arabian banking market. Saudi Arabia is the largest economy in the GCC, with solid growth prospects supported by government related projects and an expanding non-oil private sector.
Al-Rajhi's VR reflects the bank's leading domestic retail franchise, strong profitability, healthy asset quality indicators and large retail deposit base, whilst also considering some name concentration within the corporate loan portfolio, similar to other Saudi banks.
National Commercial Bank's (NCB) VR reflects the bank's leading domestic franchise, strong profitability, solid capital and stable funding, but also the lending concentrations it has to large corporate borrowers and potential asset quality issues arising from rapid loan growth.
Riyad Bank's (Riyad) VR reflects the bank's strong commercial franchise with leading market shares in some business lines, consistent but lower profitability than its peers, and good liquidity, asset quality and capitalization, but also some concentration in loans and deposits.
Samba Financial Group's VR reflects the bank's healthy financial profile, particularly its strong liquidity and capital position. The rating also considers Samba's resilient franchise and dominant market position. The rating is constrained by high concentration risks in both assets and liabilities (by sector and name) and some pressure on operating income.
The IDRs of ANB, BSF and SABB are driven by their Viability Ratings which reflect the intrinsic creditworthiness and financial strength of each issuer.
ANB's VR reflects strong liquidity, sound asset quality, consistent profitability, and a stable deposit base and the benefits of being an associate bank of Arab Bank Plc (A-/Stable). It also considers some concentrations on both sides of the balance sheet. The VR also reflects ANB's lower capital ratios and capital buffers compared with larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and ANB's high cost/income ratio compared to larger peers.
BSF's VR reflects strong asset quality, stable deposit base, and sound liquidity. It also considers the bank's strong corporate franchise, consistent profitability, stable deposit base, as well as significant concentrations, particularly in the loan book and the benefits of being an associate bank of Credit Agricole Corporate and Investment Bank (CACIB, A+/negative) with a technical services agreement with the group.
The VR also reflects BSF's lower capital ratios and capital buffers compared with larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and relatively high concentrations.
SABB's VR reflects its consistent profitability and 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 (HSBC, AA-/stable) with a technical services agreement with the group. The VR also reflects SABB's lower capital ratios and capital buffers compared to larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and SABB's high loan concentrations compared with larger Saudi peers.
Saudi Hollandi Bank's (SHB) VR reflects the bank's healthy asset quality, improving profitability and sound liquidity position, while also considering the concentrations on both sides of SHB's balance sheet and uncertainty relating to its future ownership. Its Tier 1 capital ratio is weaker than its peers. Royal Bank of Scotland N.V. currently holds a 40 percent stake in SHB. This stake is considered non-strategic and is likely to be sold in due course.
Saudi Investment Bank's (SAIB) VR reflects its strong capital ratios, healthy liquidity position and improving profitability and asset quality. These factors are counterbalanced by SAIB's limited franchise and therefore weaker earnings power than its larger peers, as well as high concentration risks in loans and deposits.
SAIB's five-year strategy (launched in 2009) aims to diversify the franchise, primarily by expanding retail banking.
Alinma Bank's (Alinma) VR reflects its strong capital ratios, good liquidity position, solid customer funding, improving profitability and lack of legacy problem assets. The VR also considers the bank's rapid loan growth, concentrations on both sides of the balance sheet, liquidity mismatch and short track record. The expected expansion of the bank's operations will inevitably reduce the bank's currently strong capital ratios.
Bank Aljazira (BAJ)'s VR reflects its fast retail growth, concentrated financing book and declining capital ratios. The VR also considers BAJ's low but improving profitability, stable asset quality, and sound liquidity and funding.
Aljazira Capital's (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.
Upside to Al-Rajhi's VR is somewhat limited, given its current high level. The VR could be downgraded if there was a notable deterioration in asset quality indicators and/or capitalisation. Fitch does not view this as likely at present.
An improvement in NCB's VR is also 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, liquidity, or asset quality -- particularly as a result of rapid loan growth, especially in NCB's Turkish subsidiary.
Upside to Riyad's VR is limited, considering its current high level. Downside could result from deterioration in asset quality, if this led 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.
Negative pressure on Samba's VR could occur if there was deterioration in the domestic operating environment and in the bank's asset quality, particularly as a result of rapid loan growth, or if there was a sharp reduction in capital or liquidity levels. Upward movement is unlikely considering the already high level of the VR.
Fitch Ratings has affirmed 11 Saudi Arabian banks as part of a peer review of the Saudi banking sector. Fitch has revised the outlooks on three of these (Arab National Bank (ANB), Banque Saudi Fransi (BSF) and Saudi British Bank (SABB)) to negative from stable.
The negative outlooks reflect Fitch's reassessment of the relative intrinsic strengths and weaknesses of ANB, BSF and SABB in comparison with their peers. The factors considered include relatively lower capital ratios and therefore lower capital buffers for the three banks compared with stronger peers in an environment of potentially strong loan growth, higher loan concentrations for BSF and SABB and a higher cost/income ratio for ANB. However, Fitch recognizes that all three banks have low NPL ratios and high loan loss reserve coverage, so the banks' capital bases are unlikely to need to absorb losses in the foreseeable future.
The banks all benefit from a stable operating environment, a conservative and hands-on regulator and high barriers to entry into the Saudi Arabian banking market. Saudi Arabia is the largest economy in the GCC, with solid growth prospects supported by government related projects and an expanding non-oil private sector.
Al-Rajhi's VR reflects the bank's leading domestic retail franchise, strong profitability, healthy asset quality indicators and large retail deposit base, whilst also considering some name concentration within the corporate loan portfolio, similar to other Saudi banks.
National Commercial Bank's (NCB) VR reflects the bank's leading domestic franchise, strong profitability, solid capital and stable funding, but also the lending concentrations it has to large corporate borrowers and potential asset quality issues arising from rapid loan growth.
Riyad Bank's (Riyad) VR reflects the bank's strong commercial franchise with leading market shares in some business lines, consistent but lower profitability than its peers, and good liquidity, asset quality and capitalization, but also some concentration in loans and deposits.
Samba Financial Group's VR reflects the bank's healthy financial profile, particularly its strong liquidity and capital position. The rating also considers Samba's resilient franchise and dominant market position. The rating is constrained by high concentration risks in both assets and liabilities (by sector and name) and some pressure on operating income.
The IDRs of ANB, BSF and SABB are driven by their Viability Ratings which reflect the intrinsic creditworthiness and financial strength of each issuer.
ANB's VR reflects strong liquidity, sound asset quality, consistent profitability, and a stable deposit base and the benefits of being an associate bank of Arab Bank Plc (A-/Stable). It also considers some concentrations on both sides of the balance sheet. The VR also reflects ANB's lower capital ratios and capital buffers compared with larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and ANB's high cost/income ratio compared to larger peers.
BSF's VR reflects strong asset quality, stable deposit base, and sound liquidity. It also considers the bank's strong corporate franchise, consistent profitability, stable deposit base, as well as significant concentrations, particularly in the loan book and the benefits of being an associate bank of Credit Agricole Corporate and Investment Bank (CACIB, A+/negative) with a technical services agreement with the group.
The VR also reflects BSF's lower capital ratios and capital buffers compared with larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and relatively high concentrations.
SABB's VR reflects its consistent profitability and 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 (HSBC, AA-/stable) with a technical services agreement with the group. The VR also reflects SABB's lower capital ratios and capital buffers compared to larger peers in Saudi Arabia, in an operating environment of potentially high loan growth, and SABB's high loan concentrations compared with larger Saudi peers.
Saudi Hollandi Bank's (SHB) VR reflects the bank's healthy asset quality, improving profitability and sound liquidity position, while also considering the concentrations on both sides of SHB's balance sheet and uncertainty relating to its future ownership. Its Tier 1 capital ratio is weaker than its peers. Royal Bank of Scotland N.V. currently holds a 40 percent stake in SHB. This stake is considered non-strategic and is likely to be sold in due course.
Saudi Investment Bank's (SAIB) VR reflects its strong capital ratios, healthy liquidity position and improving profitability and asset quality. These factors are counterbalanced by SAIB's limited franchise and therefore weaker earnings power than its larger peers, as well as high concentration risks in loans and deposits.
SAIB's five-year strategy (launched in 2009) aims to diversify the franchise, primarily by expanding retail banking.
Alinma Bank's (Alinma) VR reflects its strong capital ratios, good liquidity position, solid customer funding, improving profitability and lack of legacy problem assets. The VR also considers the bank's rapid loan growth, concentrations on both sides of the balance sheet, liquidity mismatch and short track record. The expected expansion of the bank's operations will inevitably reduce the bank's currently strong capital ratios.
Bank Aljazira (BAJ)'s VR reflects its fast retail growth, concentrated financing book and declining capital ratios. The VR also considers BAJ's low but improving profitability, stable asset quality, and sound liquidity and funding.
Aljazira Capital's (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.
Upside to Al-Rajhi's VR is somewhat limited, given its current high level. The VR could be downgraded if there was a notable deterioration in asset quality indicators and/or capitalisation. Fitch does not view this as likely at present.
An improvement in NCB's VR is also 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, liquidity, or asset quality -- particularly as a result of rapid loan growth, especially in NCB's Turkish subsidiary.
Upside to Riyad's VR is limited, considering its current high level. Downside could result from deterioration in asset quality, if this led 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.
Negative pressure on Samba's VR could occur if there was deterioration in the domestic operating environment and in the bank's asset quality, particularly as a result of rapid loan growth, or if there was a sharp reduction in capital or liquidity levels. Upward movement is unlikely considering the already high level of the VR.
© Arab News 2013
