Fitch: Strongest Saudi banks defy tough operating environment

LONDON: Five Saudi banks stand out, demonstrating particular strengths in the face of the country’s increasingly tough operating environment, Fitch Ratings says.
These banks achieve ‘a-’ standalone Viability Ratings (VR), which are higher than the ‘bbb+’ score we assign to the country’s operating environment. The remaining six Saudi banks rated by Fitch all have VRs either at or below ‘bbb+’.
National Commercial Bank (NCB) is the country’s leading corporate bank and second largest in retail. The strength of its franchise delivers earnings metrics that are among the strongest in the sector and a strong retail franchise also supports a low-cost funding base and strong liquidity, Fitch Ratings added.
Banque Saudi Fransi’s low risk appetite, with its conservative underwriting standards, supports the bank’s strong asset quality indicators, Fitch said.
“We expect the operating environment to eventually weigh on these ratios but, in our opinion, any deterioration should be less pronounced than for peers, reflecting the bank’s conservative approach to risk,” Fitch Ratings stated.
As a result, its capital buffers should hold up better.
Different aspects of the financial profiles of Saudi British Bank (SABB), SAMBA Financial Group and Al-Rahji Bank drive these banks’ VRs above the operating environment.
SABB achieves consistently strong profitability and core earnings generation and its earnings mix is well diversified across retail and corporate banking.
The bank achieves a good mix of interest and fee-based income. Strong internal capital generation helps to maintain a sound capital base.
SAMBA’s capital buffers are well above peers’ and regulatory requirements, reflecting the bank’s asset mix where the loan book is small and the stockpile of domestic government securities is considerable.
This also drives strong and stable liquidity metrics in spite of public-sector deposit withdrawals.
Al-Rajhi Bank’s funding profile is particularly strong. It is the country’s leading retail bank, its deposits are both low cost and stable and concentration risk, which affects most Saudi Arabian, is low compared to peers’.
The bank’s low funding costs also explain the bank’s profitability metrics, which are the highest in the sector, while more favorable regulatory capital treatment of retail lending drives strong capital ratios.
The 11 Fitch-rated banks operate almost entirely in the domestic market — the only notable exception being NCB whose Turkish subsidiary represents 11 percent of consolidated assets — and the lack of geographic diversification means the banks are directly affected by the country’s economic slowdown and tougher business conditions.
“The outlook for Saudi Arabia’s sovereign rating is negative in line with our expectations that the government’s balance sheet will weaken further and the general government deficit will remain high during the closing months of 2016 and 2017,” the Fitch statement added.
“We forecast a sharp fall in GDP growth to 0.9 percent in 2016 and 1.1 percent in 2017, weak compared with 3.5 percent achieved in 2015,” Fitch Ratings said.
The economy is highly reliant on hydrocarbon revenues, which account for 39 percent of GDP and 74 percent of government revenue.
Sustained higher oil prices would boost economic growth but our forecast is for a gradual recovery in oil prices to $55/barrel by 2018.
The economy is still highly reliant on government spending, currently being cut, and efforts to diversify revenues, part of the government’s ‘Vision 2030’ plan, will take time to feed through. The sovereign recently tapped the international markets for its first bond, Fitch Ratings added.