Revises Outlook of 4 Others to Negative
Fitch Ratings-Dubai/London-20 April 2016: Fitch Ratings has downgraded the Long Term Issuer Default Ratings (LT IDRs) of seven Saudi Arabian banks. The affected banks are Al Rajhi Bank (ARB), National Commercial Bank (NCB), Riyad Bank (RB), SAMBA Financial Group (SAMBA), Saudi British Bank (SABB), Banque Saudi Fransi (BSF) and Arab National Bank (ANB).
At the same time Fitch has revised the Outlooks on Saudi Hollandi Bank (SHB), Saudi Investment Bank (SAIB), Alinma Bank (Alinma) and Bank Aljazira (BAJ) to Negative from Stable, while affirming their ratings.
The Outlooks on the other banks' IDRs are also Negative.
The rating actions follow Fitch's downgrade of the Saudi Arabian sovereign (see 'Fitch Downgrades Saudi Arabia to 'AA-' from 'AA'; Outlook Remains Negative' dated 12 April 2016 on www.fitchratings.com).
RATING ACTION RATIONALE
ARB, NCB, RB and SAMBA
The IDRs of the abovementioned four banks are at same level as the Saudi Banks D-SIB Support Rating Floor (SRF) and their downgrade to 'A' from 'A+' is driven by the downward revision of their D-SIB SRF to 'A' from 'A+' following the downgrade by one notch of the Saudi sovereign. The Negative Outlook for these four banks mirrors that of the sovereign.
The banks' Viability Ratings (VR) have also been downgraded to 'a-' from 'a', reflecting the deterioration in the Saudi operating environment, which will likely have a negative pressure on the banks' credit profiles.
SABB, BSF and ANB
The downgrade of the LT IDRs to 'A-' from 'A' and the Short-term IDRs to 'F2' from 'F1' reflects the downgrade of the banks' VRs to 'a-' from 'a' as a result of the deterioration in the Saudi operating environment. The Negative Outlook reflects our continued negative view on the local operating environment.
SHB, SAIB, Alinma and BAJ
The revision of the Outlooks to Negative reflects Fitch's view that it is now appropriate to have these banks' Long-term IDRs one notch below the Saudi Banks D-SIB SRF of 'A' at 'A-'. The Negative Outlook now mirrors that on the sovereign, meaning that the SRFs of SHB, SAIB, Alinma and BAJ will be revised to 'BBB+' in the event of a downgrade by one notch of the Saudi sovereign.
KEY RATING DRIVERS
SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL 11 BANKS; IDRs FOR ARB, NCB, RB, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC
The Saudi banks' Support Ratings (SRs) and SRFs reflect 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 supported by its sovereign wealth funds and on-going revenues mostly from its hydrocarbon production, and the moderate size of the Saudi Arabian banking sector in relation to the country's GDP.
Fitch identifies domestic systemically important banks (D-SIB) based on its view of each bank's systemic importance relative to other banks in the banking system, and considering, among other things, market share, franchise and government ownership. The 'A' SRF of the four Saudi banks - ARB, NCB, RB and SAMBA - are at the Saudi banks' D-SIB Support Rating Floor of 'A', reflecting their very high systemic importance.
The 'A-' SRFs of the four JV banks, SABB, BSF, ANB and SHB, are one notch below the Saudi banks' D-SIB SRF. This reflects Fitch's view that the large stakes held in these banks by foreign FIs could result in slightly lower, but still high, willingness of the sovereign to support these banks and their slightly lower systemic important based on their slightly smaller sizes, franchises and market shares.
The 'A-' SRFs of the remaining three banks, SAIB, Alinma and BAJ, are also one notch below the Saudi banks' D-SIB SRF. This reflects Fitch's view of their lower relative systemic importance in comparison to the larger banks, due to even smaller sizes, market shares and franchises.
The IDRs of eight of the banks (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% owner, BAJ (A-/Negative). Although AJC's operations and management are separate from BAJ, Fitch views AJC as a core subsidiary and aligns its IDR with that of BAJ.
Despite AJC being a separate legal entity, Fitch believes it is not meaningful to analyse AJC in its own right, viewing it more as a BAJ business line. Moreover, Fitch does not usually assign VRs to non-banking financial institutions.
The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued under these entities are rated in line with their respective banks' IDRs and are therefore subject to the same rating drivers.
KEY RATING DRIVERS: VRs FOR ALL 11 BANKS; IDRs FOR ANB, BSF AND SABB
Saudi Arabia is the largest economy in the Gulf Cooperation Council (GCC), with reasonable growth prospects supported by significant, albeit reducing, government spending on infrastructure projects, strong oil revenues, albeit at a lower price, and an expanding non-oil private sector. All banks benefit from high barriers to entry, a strict and hands-on regulator, sound liquidity and capital ratios, and pre-impairment operating profit levels that enables them to absorb high impairment charges, if necessary.
The operating environment has been weakening as lower oil prices impact government spending, slowing loan growth and impacting growth in earnings and profitability, and over time we expect it to impact asset quality, all of which could result in lower capital ratios in the longer term. In addition, the impact of lower oil prices has reduced liquidity in the system, through an outflow of government-linked deposits and an increase in the cost of deposits. The weakening operating environment is effectively capping the Saudi banks' VRs at 'a-'.
The IDRs of ANB, BSF and SABB reflect their intrinsic creditworthiness and financial strength, as underlined by their respective VRs. Where a bank's VR is equal to or above its SRF, the IDRs reflect the VR.
The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued under it are rated in line with BSF' IDRs.
ARB
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 a large and stable retail deposit base. The VR also considers higher loan impairment charges and improving risk controls under new management.
NCB
NCB's VR reflects the bank's leading domestic franchise and strong, albeit under pressure, profitability and stable funding. The VR also considers falling core capital ratios and an increasing risk appetite for international investments.
RB
RB's VR reflects the bank's solid capital ratios, strong commercial franchise with leading market shares in some business lines, solid core earnings generation and diversification, and sound asset quality. It also reflects high concentration risks in assets and liabilities.
SAMBA
SAMBA's VR reflects the bank's sound capital ratios, resilient franchise and stable business model. It also reflects strong financial metrics, including its sound liquidity and strong and stable earnings. The rating is constrained by high concentration risks in both assets and liabilities (by sector and by name).
ANB
ANB's VR reflects strong liquidity, consistently 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 as is similar to other Saudi banks and lower -than-sector average capital ratios.
BSF
BSF's VR reflects the bank's low risk appetite compared with peers. This is driven by the bank's focus on lower risk, large corporates. The risk appetite also benefits from an investment portfolio almost entirely comprising domestic government securities and also factors in the benefits of being an associate bank of Credit Agricole Corporate and Investment Bank (CACIB: A/Positive), with whom BSF has a technical services agreement. The VR reflects BSF's strong asset quality and improved earnings. It takes into account the bank's lower capital ratios compared with larger peers in Saudi Arabia, and lower diversification of earnings outside of corporate banking than many peers.
SABB
SABB's VR reflects the bank's consistently strong profitability and core earnings generation, and comfortable liquidity. The rating also reflects 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 factors in SABB's slightly lower capital ratios compared with the Saudi Arabian sector average and SABB's high large customer exposures relative to equity compared with larger Saudi peers.
SHB
SHB's VR reflects the bank's weaker Tier 1 capital ratio than peers, smaller, but growing, franchise, recent fast loan growth and high concentrations on both sides of the balance sheet. The VR also factors in the bank's sound asset quality, healthy profitability and strong funding and liquidity.
Uncertainty relating to its future ownership of SHB, if it remains unresolved, could constrain its ability to raise new share capital and therefore could affect its ability to execute its strategy in the long term, constraining its competitive position. ABN AMRO Bank N.V. currently holds a 40% stake in SHB. This stake is considered non-strategic and is likely to be sold in due course.
SAIB
SAIB's VR reflects the bank's previous rapid loan growth, which is likely to put pressure on asset quality metrics in the medium term, although growth has slowed during 2015. Profitability metrics now compare well with similarly sized peers. These factors are counterbalanced by SAIB's limited capital buffers compared with peers.
Other factors constraining its VR include the bank's smaller franchise and its high concentration in deposits.
ALINMA
Alinma's VR reflects the bank's more established Islamic bank franchise and market share, albeit still low in the context of the banking system. It also reflects the bank's fairly high loan growth since inception, that the bank is still a young bank, as well as concentrations on both sides of the balance sheet. The expected continued expansion of the bank's operations, albeit at a slower pace, will inevitably bring the bank's current strong capital ratios more in line with peers. The VR also reflects the bank's sound liquidity and asset quality metrics and lower-than- peer, but improving, profitability.
BAJ
BAJ's VR is constrained by the bank's lower capital ratios from rapid financing growth and weaker company profile than peers, and high concentration in deposits. The VR also reflects BAJ's improved asset quality and weaker earnings metrics compared with peers.
RATING SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL 11 BANKS; IDRs FOR ARB, NCB, RB, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC
Where the banks' IDRs are driven by sovereign support, these would be sensitive to a change in their SRs or SRFs.
The banks' SRs and SRFs are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector. The willingness of the Saudi sovereign to support the banks is unchanged and is demonstrated by the authorities' strong track record of support for local banks. However, the Negative Outlook on the sovereign reflects a weakening ability of the sovereign to support the banks due to the significant deterioration in its fiscal position. The Saudi banks' D-SIB SRFs will be revised down by one notch if the sovereign rating is downgraded.
The IDRs of ARB, NCB, RB and SAMBA, SHB, SAIB, ALINMA, BAJ and AJC will be downgraded by one notch if Saudi Arabia is downgraded by a notch.
The Outlook may be revised to Stable if the sovereign rating Outlook returns to Stable and the operating environment improves.
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 views this unlikely, given the high strategic and financial importance of AJC to BAJ and the latter's 100% ownership.
The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued by these entities are subject to the same sensitivities.
Saudi Arabia is an FSB/G20 member country and has implemented Basel III. As such resolution legislation is being implemented. We will review the Saudi banks' D-SIB SRFs once the legislation is closer to being fully enacted, although we currently do not expect any changes.
RATING SENSITIVITIES: VRs FOR ALL 11 BANKS; IDRs FOR ANB, BSF AND SABB
The most likely driver of negative rating action for all banks is from a weakening operating environment, resulting in lower loan growth, impacting earnings and profitability and asset quality, ultimately leading to a reduction in capital ratios. The 'a-' VRs are potentially more sensitive being closer to the sovereign rating level, while lower VRs have somewhat more tolerance in them.
ARB
Upside to ARB's VR is limited given the current high rating level. The VR could be downgraded if there is a notable deterioration in asset quality indicators, capital ratios, or profitability to a level that will significantly affect internal capital generation.
NCB
An upgrade of NCB's VR is unlikely given the already high rating level and the bank's high loan book concentration. Pressure on NCB's VR could come from further deterioration in capital ratios or asset quality as a result of rapid loan growth, especially at NCB's Turkish subsidiary.
RB
Upside to RB's VR is limited, considering its current high rating level. Downside could result from deterioration in asset quality, if this leads to a significant decline in profitability and an erosion of the capital ratios. However, revenues from RB's core banking businesses should be sufficient to cover any future loan impairment charges.
SAMBA
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 ratios. An upgrade is unlikely considering the already high level of the VR.
ANB
ANB's IDR would be downgraded only if there is both a change in its VR and in the SRF as they are both at the same level of 'a-' and 'A-'.
Negative pressure on ANB's VR may arise from a significant weakening of the bank's capital ratios. This would be most likely through deterioration in the bank's loan quality or strong loan growth. Upside is limited given the current high level of the rating.
BSF
BSF's IDR would be downgraded only if there is both a change in its VR and in the SRF as they are both at the same level of 'a-' and 'A-'.
Negative pressure on BSF's VR may arise from a significant weakening of the bank's capital ratios. A termination of the technical services agreement between BSF and CACIB 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.
The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued by these entities are subject to the same sensitivities.
SABB
SABB's IDR would be downgraded only if there was both a change in its VR and in the SRF as they are both at the same level of 'a-' and 'A-'.
Negative pressure on SABB's VR could be driven by a significant weakening of the bank's capital ratios, together with a significant increase in large customer exposures relative to equity. A termination of the technical services agreement between SABB and HSBC, leading to a weakening of its franchise 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.
SHB
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.
SAIB
Upside for SAIB's VR could result from more sustainable growth rates, increasing internal capital generation and declining asset quality cyclicality. Downward pressure on the VR could arise from sharp deterioration in asset quality, following the seasoning of recent high loan growth, contributing to erosion of already limited capital buffers.
ALINMA
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 of the VR. Rapid growth leading to asset quality deterioration could put pressure on Alinma's VR, as would sharp deterioration in profitability.
BAJ
Upward potential for BAJ's VR may arise from a successful Tier 1 capital increase, following plans announced in 1H15 by the bank. Downward pressure on BAJ's VR could come from deterioration in its Fitch Core Capital (FCC) and Tier 1 capital ratios, most likely attributable to fast financing growth or deteriorating asset quality.
The rating actions are as follows:
Al Rajhi Bank
Long-term IDR downgraded to 'A' from 'A+', Outlook Negative
Short-term IDR affirmed at 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor revised to 'A' from 'A+'
National Commercial Bank
Long-term IDR downgraded to 'A' from 'A+', Outlook Negative
Short-term IDR affirmed at 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor revised to 'A' from 'A+'
Riyad Bank
Long-term IDR downgraded to 'A' from 'A+', Outlook Negative
Short-term IDR affirmed at 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor revised to 'A' from 'A+'
SAMBA Financial Group
Long-term IDR downgraded to 'A' from 'A+', Outlook Negative
Short-term IDR affirmed at 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor revised to 'A' from 'A+'
Arab National Bank
Long-term IDR downgraded to 'A-' from 'A', Outlook Negative
Short-term IDR downgraded to 'F2' from 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Banque Saudi Fransi
Long-term IDR downgraded to 'A-' from 'A', Outlook Negative
Short-term IDR downgraded to 'F2' from 'F1'
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
BSF Sukuk Limited
Trust certificate issuance programme downgraded to 'A-' from 'A'
Senior unsecured trust certificates downgraded to 'A-' from 'A'
Saudi British Bank
Long-term foreign currency IDR downgraded to 'A-' from 'A', Outlook Negative
Short-term foreign currency IDR downgraded to 'F2' from 'F1'
Long-term local currency IDR downgraded to 'A-' from 'A', Outlook Negative
Viability Rating downgraded to 'a-' from 'a'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
EMTN programme downgraded to 'A-'/'F2' from 'A'/'F1'
Saudi Hollandi Bank
Long-term IDR affirmed at 'A-', Outlook revised to Negative from Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Saudi Investment Bank
Long-term IDR affirmed at 'A-', Outlook revised to Negative from Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Alinma Bank
Long-term IDR affirmed at 'A-', Outlook revised to Negative from Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Bank Aljazira
Long-term IDR affirmed at 'A-', Outlook revised to Negative from Stable
Short-term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Aljazira Capital
Long-term IDR affirmed at 'A-', Outlook revised to Negative from Stable
Short-term IDR affirmed at 'F2'
Support Rating affirmed at '1'
Contact:
Primary Analyst
Redmond Ramsdale
Senior Director
+971 4 424 1202
Fitch Ratings Limited
Al Thuraya Tower 1, Office 1805 & 1806, Dubai Media City,
Dubai, United Arab Emirates
PO Box 502030
Secondary Analysts
Andrew Parkinson (AJC, BAJ, BSF, NCB, SAIB)
Associate Director
+44 20 3530 1420
Marc Ellsmore (ARB, ANB, Alinma)
Associate Director
+44 20 3530 1438
Nicolas Charreyron (SAMBA, SHB, RB, SABB)
Analyst
+971 4 424 1208
Committee Chairperson
Alexander Danilov
Senior Director
+7 495 956 2408
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com.
Additional information is available on www.fitchratings.com
© Press Release 2016
