Fitch Ratings has affirmed Saudi Hollandi Bank’s (SHB) long-term issuer default rating (IDR) at A- with a stable outlook and viability rating (VR) at bbb.
SHB’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s view that there is an extremely high probability that the Saudi Arabian authorities would support the bank, if needed. This view is based on the Saudi authorities’ strong track record of support for the banking system and SHB’s well-established corporate and commercial banking franchise.
These ratings are therefore sensitive to a rating action on the Saudi sovereign rating (‘AA-‘/Stable) or a change in Fitch’s assumptions around the propensity of the Saudi authorities to provide timely support to SHB.
The affirmation of the VR reflects SHB’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. A 40% stake in SHB is currently held by the Royal Bank of Scotland N.V. (RBSNV; ‘A’/Stable). This stake is considered non-strategic and is likely to be sold in due course.
In 9M12, net income grew 17% yoy and SHB continues to report healthy profitability ratios (operating ROAA of 2.1% and ROAE of 16.5%). Operating revenues were supported by 16% loan growth during 9M12, good growth in fee income and well contained operating costs. Fitch expects operating profitability to continue its positive trend in 2013, supported by the benign operating environment and a pick-up in loan growth across the banking sector.
SHB’s loan book is concentrated, both by name and industry, as is common in the region. However, at end-9M12, the non-performing loan (NPL) ratio was low at 1.7% and the reserve coverage strong at 143%. NPLs will remain well contained in the short to medium term, in Fitch’s view. Customer deposits (up 18% in 9M12) represent about 95% of SHB’s total non-equity funding. As is common in Saudi Arabia, a large portion of SHB’s deposit base is non-remunerated, which supports margins. The deposit book is highly concentrated, but a high proportion is government-related, which has proven stable despite the short-term maturities. At end-9M12, cash, interbank placements and liquid investments totalled about 30% of total assets (equivalent to 38% of customer deposits), which provides an ample liquidity cushion.
At end-9M12, the regulatory Tier 1 and Fitch core capital ratios were 11.4% and 13.0%, respectively. Capitalisation is slightly lower than the Saudi average, but should be sufficient to support modest business growth. In November 2012, SHB successfully raised SAR1.4bn in Tier 2 capital via a sukuk issuance, with a seven-year maturity. The bank’s capital base is well protected from impairment losses given its strong reserve coverage ratio.
An upgrade of the 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 if the current volatile global economic backdrop affected the Saudi Arabian economy, translating into notable deterioration in asset quality. Fitch does not view this as likely at present. The VR could also face downward pressure from excessive lending growth that may result in lower capital ratios.