Fitch Maintains Alawwal Bank on RWP

Fitch Ratings-Dubai: Fitch Ratings is maintaining Alawwal Bank's Long-Term Issuer Default Rating (IDR), Support Rating (SR), Support Rating Floor (SRF) and Viability Rating (VR) on Rating Watch Positive (RWP), pending the bank's merger with Saudi British Bank (SABB). 

The agency has also put Alawwal's Short-Term IDR of 'F2' on RWP, as it is likely to converge at SABB's 'F1' level, reflecting stronger funding and liquidity profile of the merged entity. The agency is also maintaining SABB's SR and SRF on RWP. 

All other ratings are unaffected. 

SABB and Alawwal entered into a binding merger agreement on 3 October 2018. The merger of the two banks will be implemented in the form of a share swap with Alawwal shareholders receiving 0.485 SABB shares for each Alawwal share. Following the issue of new shares, Alawwal's current shareholders will own approximately 27% of the combined bank and SABB's shareholders will own 73%. 

On a pro-forma basis, SABB's current largest shareholder (with 40%), HSBC Holdings Plc (AA-/Stable), will own approximately 29% of the merged bank, while Alawwal's current largest shareholder (with 40%), The Royal Bank of Scotland N.V., will own around 11%. Local family-owned conglomerate, the Saudi Olayan Investment Company, will own around 18%, with the Kingdom of Saudi Arabia owning around 10% through its social insurance agency. The remaining shares will be widely held. The merger is still subject to regulatory approval and is expected to complete by 1H19. 

KEY RATING DRIVERS 
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The RWP on Alawwal's and SABB's SR and SRF reflects Fitch's view of potentially higher propensity to support the merged bank by the Saudi authorities, compared with each bank individually. This reflects higher systemic importance with the new bank likely to be the third-largest in the sector, with a market share of domestic credit of around 13%. At end-2017 SABB's and Alawwal's market shares individually were 8% and 5%, respectively.

For Alawwal an upward revision of its SRF would also lead to an upgrade of its IDRs, which have also been placed on RWP. Alawwal's IDRs are expected to be aligned with SABB's post-merger. The IDRs of SABB will remain driven by its Viability Rating (VR).

VR 
The RWP on Alawwal's VR reflects our expectation that the credit profile of a merged bank (excluding external support) will be stronger than the bank's existing credit profile. This reflects a potentially stronger franchise and financial metrics, which are generally weaker for Alawwal than those of SABB. At the same time, Alawwal's VR reflects the bank's stable domestic operating environment, solid liquidity and improved capital ratios. It also reflects weaker asset quality than peers' and a limited franchise. 

The VR of SABB reflects our view that its credit profile following the merger would not be materially different to its existing credit profile. This balances a larger franchise and potentially stronger earnings generation, against combining with a weaker bank, particularly with respect to asset quality and funding. At the same time the VR reflects SAAB's strong capitalisation, driven by sound earnings, and the benefits from the bank's relationship with HSBC.

DEBT AND SUKUK RATINGS
The ratings on SABB's EMTN programme and SABB Sukuk Limited's trust certificate issuance programme are in line with SABB's IDRs.

RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR 
Fitch expects to resolve the Rating Watches once the merger is completed, which is expected by end-1H19, and when there is more clarity on the banks' integration, strategy and performance prospects of the merged entity. 

Alawwal's and SABB's SRs and SRFs are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support for the banking sector or the banks. Given strong sovereign financial flexibility and only early implementation of bank resolution legislation downward pressure is currently low.

VR 
Alawwal's VR is likely to be upgraded following the completion of the merger and simultaneously withdrawn as Alawwal is likely to surrender its banking licence. Alawwal's VR could be downgraded before the merger if the bank's asset quality materially deteriorates, eroding capital. However, this is not Fitch's base case.

SABB's VR will be affirmed if the bank demonstrates efficient integration and no material lowering of risk appetite, asset quality or capitalisation metrics. The VR could be downgraded if the bank's risk appetite, strategy and/or business model post-merger places a greater emphasis on higher-risk customer segments or the bank experiences difficulties with integrating Alawwal. 

DEBT RATINGS
The ratings on SABB's EMTN programme and SABB Sukuk Limited's trust certificate issuance programme are sensitive to a change in SABB's IDRs. 

The Rating Watches could be extended beyond a six-month period if the merger is not completed by the end of it.

The rating actions are as follows: 

Saudi British Bank
Long-Term Foreign Currency IDR: 'A-'; unaffected
Long-Term Local Currency IDR: 'A-'; unaffected
Short-Term Foreign Currency IDR: 'F1'; unaffected
Viability Rating: 'a-'; unaffected
Support Rating '2' maintained on RWP
Support Rating Floor 'BBB+' maintained on RWP
EMTN programme long-term rating: 'A-'; unaffected
EMTN programme short-term rating: 'F1'; unaffected

SABB Sukuk Limited
Trust certificate issuance long-term rating: 'A-'; unaffected

Alawwal Bank
Long-Term IDR 'BBB+' maintained on RWP
Short-Term IDR 'F2' placed on RWP
Viability Rating 'bbb' maintained on RWP
Support Rating '2' maintained on RWP
Support Rating Floor 'BBB+' maintained on RWP

-Ends-

Media Relations: Louisa Williams, London, Tel: +44 (0) 20 3530 2452, Email: louisa.williams@fitchratings.com .

© Press Release 2019