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. A complete list of ratings for the banks and their related entities is at the end of this rating action commentary. 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 recognises 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. KEY RATING DRIVERS: VRs FOR ALL 11 BANKS AND IDRs FOR ANB, BSF AND SABB 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 (Al Rajhi) 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 capitalisation, but also some concentration in loans and deposits. SAMBA Financial Group's (SAMBA) 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 (VR) which reflect the intrinsic creditworthiness and financial strength of each issuer (see specific drivers below). Where an issuer's VR is equal to or above its Support Rating Floor, the IDRs reflect the VR. 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% 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. RATING SENSITIVITIES: VRs FOR ALL 11 BANKS AND IDRs FOR ANB, BSF AND SABB 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. ANB's, BSF's and SABB's IDRs are sensitive to any change in their VRs and the Negative Outlook on the IDRs highlights downward pressure on the VRs. However, any downward movement would be limited to one notch due to their Support Rating Floors of 'A-'. Support is not factored into the IDRs of ANB, BSF and SABB. Negative pressure on ANB's VR would be driven by the bank's weaker capital ratios and capital buffer, and cost efficiency compared to larger peers. Failure to significantly improve its Fitch core capital and Tier 1 ratios, and its capital buffer, as well as controlling its cost structure, could lead to a downgrade of the VR. Upside is limited, given the relatively lower capital ratios and relatively high cost/income ratio. Negative pressure on BSF's VR would be driven by the bank's weaker capital ratios and capital buffer, and high loan concentrations compared to larger peers. Failure to significantly improve its Fitch core capital and Tier 1 ratios, and its capital buffer, as well as significantly reducing loan book concentrations, could lead to a downgrade of the VR. If the technical services agreement between BSF and CACIB was terminated, weakening its franchise, this could also put pressure on the VR but this is not our base case. Upside is limited, given the relatively lower capital ratios and high concentrations. Negative pressure on SABB's VR would be driven by the bank's weaker capital ratios and capital buffer, and high loan concentrations compared to larger peers. Failure to significantly improve its Fitch core capital and Tier 1 ratios, and its capital buffer, as well as significantly reducing loan book concentrations, could lead to a downgrade of the VR. The VR is also sensitive to a significant deterioration in asset quality and profitability. If the technical services agreement between SABB and HSBC was terminated, weakening its franchise, this could also put pressure on the VR but this is not our base case. Upside is limited, given the relatively lower capital ratios and high concentrations. An upgrade of SHB's VR would require better diversification of the loan book and a stronger capital cushion that is more in line with its domestic peers. An end to the uncertainty surrounding SHB's ownership could also positively affect the VR. The VR could be downgraded as a result of a notable deterioration in asset quality, if it impacted the bank's capitalisation. Fitch does not view this as likely at present. The VR could also face downward pressure if strong loan growth resulted in a lower Tier 1 capital ratio. Upside for SAIB's VR would require improved profitability and loan book diversification, while maintaining strong asset quality, high capital ratios and sound funding and liquidity positions. Downward pressure on the VR could arise from a sharp deterioration in asset quality, earnings capacity or capital ratios. Given Alinma's limited track record, an upgrade of its VR is considered unlikely in the short term. Diversification on both sides of the balance sheet, increasing and extending its funding profile, as well as improving profitability and internal capital generation, would likely be required for an upgrade. Rapid growth, eroding capital ratios, could put pressure on Alinma's VR, as well as a sharp deterioration in asset quality and profitability. Downward pressure on BAJ's VR could come from a deterioration of its Fitch core capital and Tier 1 capital ratios, most likely attributable to fast financing growth. BAJ's capital ratios are at the lower end of the peer group range. Deterioration in asset quality and earnings could also put downward pressure on the VR. Upward potential is limited by BAJ's below-average capital ratios and its fast growth and below average earnings. KEY RATING DRIVERS: SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL BANKS AND IDRs FOR AL RAJHI, NCB, RIYAD, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC The affirmation of the banks' Support Ratings and Support Rating Floors reflects the extremely high probability of support available from the Saudi authorities if required. Fitch's opinion of support is based on the ability and willingness of the authorities to support the banking sector, which has been demonstrated in the past. Fitch's view of support also considers the sovereign's strong capacity to support the banking system, sustained 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. The banks' Support Ratings are all '1', reflecting potential state support. AJC's Support Rating reflects potential institutional support from its parent, BAJ. The Support Rating Floors of the four largest banks (Al Rajhi, NCB, Riyad and SAMBA) are 'A+' reflecting their high systemic importance. The Support Rating Floors for the remaining seven banks are 'A-'. The Issuer Default Rating (IDRs) of eight of the banks are driven by support from the authorities (Al Rajhi, NCB, Riyad, SAMBA, SHB, SAIB, Alinma and BAJ). The differences in the Support Rating Floors and by extension the IDRs reflect their systemic importance, franchise and market share, and government ownership. AJC's IDRs and Support Rating reflect the extremely high probability of institutional support, if needed, from its 100% owner, BAJ. Although AJC's operations and management are separate, Fitch views AJC as a core subsidiary and aligns its IDR with that of BAJ. RATING SENSITIVITIES: SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL BANKS, AND IDRs FOR AL RAJHI, NCB, RIYAD, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC The banks' Support Ratings and Support Rating Floors are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector. Given the robust economy and the authorities' strong track record of support for local banks, downward pressure is considered low. Where the banks' IDRs are driven by sovereign support, these would be sensitive to a change in their Support Ratings or Support Rating Floors. 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 notes the high level of strategic and financial importance of AJC to BAJ and the 100% ownership. A Special Report with more details on the banks will shortly be available at www.fitchratings.com. The rating actions are as follows: Al Rajhi Bank Long-term IDR affirmed at 'A+', Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' National Commercial Bank Long-term IDR affirmed at 'A+', Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' EMTN Programme affirmed at 'A+'/'F1' Riyad Bank Long-term IDR affirmed at 'A+', Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' EMTN Programme affirmed at 'A+'/'F1' SAMBA Financial Group Long-term IDR affirmed at 'A+', Outlook Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' EMTN Programme affirmed at 'A+'/'F1' Arab National Bank Long-term IDR affirmed at 'A', Outlook revised to Negative from Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Banque Saudi Fransi Long-term IDR affirmed at 'A', Outlook revised to Negative from Stable Short-term IDR affirmed at 'F1' Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' EMTN Programme affirmed at 'A' Senior unsecured notes affirmed at 'A'/'F1' BSF Sukuk Limited Trust Certificate Issuance Programme affirmed at 'A' Senior unsecured trust certificates affirmed at 'A' Saudi British Bank Long-term IDR affirmed at 'A', Outlook revised to Negative from Stable Short-term IDR affirmed at 'F1' Long-term local currency IDR affirmed at 'A', Outlook revised to Negative from Stable Viability Rating affirmed at 'a' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' EMTN Programme affirmed at 'A'/ 'F1', Senior unsecured notes affirmed at 'A' Saudi Hollandi Bank Long-term IDR affirmed at 'A-', Outlook 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 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 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 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 Stable Short-term IDR affirmed at 'F2' Support Rating affirmed at '1' Source: Fitch Ratings
