Lower government spending into key sectors of the economy and delayed payments could have a domino effect on most sectors of the economy. Building and construction, contracting, hospitality (also under pressure from the coronavirus), retailers, or car dealers are likely to be particularly affected, which in turn would likely impair borrowers' ability to service their debt.
Saudi banks are exposed to tightening liquidity if the government withdraws deposits from the banking system to fund the fiscal deficit. At end-2019, government entities' deposits accounted for 23% of system wide deposits. Asset quality deterioration could also be sharp and exacerbated by lower growth while at the same time revenue would suffer from lower interest rates and subdued new business,
The RWN on the IDRs of National Commercial Bank (NCB), Al Rajhi (ARB), SAMBA Financial Group (SAMBA) and Saudi British Bank (SABB) reflect that a downgrade of their VR would lead to a downgrade of their IDRs as these are VR-driven.
Fitch will resolve the RWN once it has assessed how this economic shock impacts the banking system and the credit profiles of each bank, as well as their ability to adapt. Fitch expects to resolve the RWNs in the next six months.
KEY RATING DRIVERS
Saudi banks' VRs range from 'a-' to 'bb+', reflecting various franchise strengths, with the stronger ones benefiting from low funding costs and high margins. Their asset-quality metrics, despite having weakened in recent years, are still reasonably strong and capital ratios compare well with international standards These VRs also reflect high concentration risk and a soft operating environment in recent years, impacted by heightened geopolitical risks and low confidence levels.
As Islamic banks, we consider important differences when assessing ARB's, Alinma Bank's (Alinma) and Bank Aljazira's (BAJ) ratings compared with conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance, which results in a governance structure ESG relevance score of '4'.
Fitch's Islamic bank ratings do not express an opinion on the rated banks' compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.
NCB's, ARB's, SAMBA's and SABB's IDRs are driven by the banks' respective VRs. The RWN on these IDRs reflect that a downgrade of these banks' VR would trigger a downgrade of the IDRs. Riyad Bank's (Riyad), Arab National Bank's (ANB) and Banque Saudi Fransi's (BSF) IDRs are also driven by the banks' VRs, but are also underpinned by sovereign support, which means that a downgrade of the VR alone would not lead to a downgrade of the IDR.
The RWN on the Short-Term IDRs of NCB, ARB and SAMBA reflect that our assessment of their funding and liquidity profiles, if changed as part of the RWN resolution, may fall below the level required at the 'F1' rating level under our bank rating criteria.
SENIOR DEBT RATINGS
The ratings of senior debt or sukuk issued by Saudi banks or through their respective SPVs are rated in line with the banks' Long-Term IDRs. The RWNs on the senior debt ratings reflect those on the banks.
VRs OF ALL BANKS, IDRs AND SENIOR DEBT RATINGS
Fitch will resolve the RWNs on all Saudi banks' VRs, on the IDRs of NCB, ARB, SAMBA and SABB and the senior debt ratings of SAMBA and SABB based on our analysis of the likely impact on individual banks' overall credit profiles and in particular on their asset quality, performance, liquidity and funding, and, potentially, capitalisation. We will also assess the timeliness and effectiveness of the managements' responses and adjustments in the bank's strategies.
The resolution of the watch will also factor in the extent to which we believe the operating environment has deteriorated, as reflected in particular by the performance of the overall economy, non-oil sector growth prospects and credit demand levels for the sector.
Saudi banks' ratings could remain at their current levels if Fitch believes the operating environment is still supportive of the current ratings and in particular if the level of liquidity in the system has held up. This would need to be combined with asset-quality metrics, impairment charges, net interest margins, liquidity and capital ratios not having been significantly hit by weaker economic conditions.
A downgrade of NCB's, ARB's, SAMBA's and SABB's Long-Term IDRs would mirror a downgrade of these banks' VRs. The Short-Term IDRs of NCB, ARB and SAMBA could also be downgraded if the bank's funding and liquidity profile weakens. A downgrade of SABB's Short-Term IDR would require a downward revision of the bank's Support Rating Floor (SRF) and a multi-notch downgrade of the bank's VR.
A downgrade of BSF's, Riyad's and ANB's Long- and Short-Term IDRs would require a downgrade of the banks' respective VRs and a downward revision of the banks' SRFs.
A downgrade of Alinma's, Saudi Investment Bank's (SAIB) and BAJ's Long- and Short-Term IDRs would require a downward revision of these banks' SRFs.
An upgrade of these banks' Long-Term IDRs is unlikely in the near term.
The senior and subordinated debt or sukuk ratings of Saudi banks' issues are sensitive to changes in the banks' IDRs.
Support Ratings and SRFs
Saudi banks' Support Ratings and SRFs are sensitive to a change in the Saudi Arabian sovereign rating. As the Outlook on the latter is currently Stable, this is not our base case. A weaker propensity from the authorities to support the banking system would also lead to negative rating action, but this is unlikely in Fitch's view given the strong record of supporting domestic banks.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg.
As Islamic banks, ARB, Alinma and BAJ need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a governance structure relevance score of '4' (in contrast to a typical relevance influence score of '3' for comparable conventional banks).
In addition Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations imbedded in their operations and obligations, although this only has a minimal credit impact on the entities.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The Long-Term IDRs of Alinma, SAIB and BAJ are driven by a high probability of support from the Saudi sovereign as described above.
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© Press Release 2020