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Fitch Downgrades Nine Saudi Banks Following Sovereign Downgrade
March 30, 2017 / 3:37 PM / 8 months ago

Fitch Downgrades Nine Saudi Banks Following Sovereign Downgrade

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Downgrades Nine Saudi Banks Following Sovereign Downgrade - Rating Action Report here LONDON, March 30 (Fitch) Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of nine Saudi Arabian banks. The affected banks are Al Rajhi Bank (ARB), National Commercial Bank (NCB), Riyad Bank, SAMBA Financial Group (SAMBA), Arab National Bank (ANB), Alawwal Bank (AAB), Saudi Investment Bank (SAIB), Alinma Bank, and Bank Aljazira (BAJ). Fitch has also downgraded the Long-Term IDR of BAJ's wholly owned capital markets subsidiary Aljazira Capital (AJC). A full list of rating actions is given in the rating action report above. The rating actions follow Fitch's downgrade of the Saudi Arabian sovereign rating (see 'Correct: Fitch Downgrades Saudi Arabia to 'A+'; Outlook Stable' dated 22 March 2017 on The IDRs of Banque Saudi Fransi (BSF) and Saudi British Bank (SABB), as well as the Viability Ratings (VRs) of all banks are unaffected by the sovereign rating action, as we believe that the rationale for the sovereign downgrade is already considered in Fitch's assessment of the bank's standalone creditworthiness. The Outlook on the Long-Term IDRs of all nine banks and AJC has been revised back to Stable from Negative. The Outlook on the Long-Term IDRs of BSF and SABB remains Negative as their IDRs are driven by their respective VRs, which are unaffected. RATING ACTION RATIONALE Following the downgrade of the sovereign rating, Fitch has revised downwards the Support Rating Floors (SRFs) of all 11 banks in Saudi Arabia by one notch. This reflects a weakening ability of the sovereign to support banks in the event of need. For all banks except BSF and SABB, this has resulted in a downgrade of their Long-Term IDRs by one notch as the banks' SRFs were higher than their respective VRs. For BSF and SABB, their SRFs were equal to their VRs and therefore a downward revision of their SRFs has not resulted in a downgrade of their Long-Term IDRs, which are now solely driven by their VRs of 'a-'. The Short-Term IDRs of ARB, NCB, Riyad and SAMBA have been affirmed at 'F1'. Fitch has opted for the higher of two potential Short-Term IDRs for a Long-Term IDR of 'A-' as we believe that the state's short-term financial flexibility is strong, as indicated by its own Short-Term IDR of 'F1+', and the liquidity positions of the banks are transparent and well monitored by the regulator, enabling any need for extraordinary support to be identified ahead of time. We believe that solvency support could be easily provided in the short term through the conversion of state deposits to equity. Substantial state deposits continue to be held at domestic systemically important banks (D-SIBs) even after withdrawals in 2016, due to tighter sovereign liquidity. The Short-Term IDRs of AAB, Alinma, ANB, BAJ, SAIB and AJC have been affirmed at 'F2'. KEY RATING DRIVERS IDRs The banks' IDRs are now driven by different factors. For Riyad, AAB, SAIB, Alinma and BAJ, their IDRs are driven by their SRFs, which remain higher than their respective VRs. For BSF and SABB, their IDRs are driven by their standalone credit worthiness, as indicated by their VRs of 'a-'. For ARB, NCB, SAMBA and ANB, their IDRs are driven by their standalone credit worthiness, but also underpinned by their SRFs, which are equal to their respective VRs. AJC's Long-Term IDR is driven by the probability of support from BAJ. The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued under these entities are unaffected and remain in line with BSF's Long-Term IDR of 'A-' and are therefore subject to the same rating drivers. SABB's EMTN programme is unaffected and remains in line with its Long-Term IDR of 'A-' and is therefore subject to the same rating drivers. The Stable Outlook on the Long-Term IDRs of all banks, except BSF and SABB, mirrors the Stable Outlook on the sovereign rating, as the probability of sovereign support drives or underpins the Long-Term IDRs. The Negative Outlook on BSF and SABB reflects continued challenges in the domestic operating environment. This affects all Saudi banks, but leads to a Negative Outlook on the Long-Term IDRs of these two banks, as their VRs are higher than their respective SRFs. SUPPORT RATINGS AND SRFs The SRFs of all 11 banks have been revised down by one notch. The Saudi banks' Support Ratings (SRs) and SRFs reflect the high probability of support available from the Saudi authorities, if required. Fitch's opinion of support is based on the strong ability and willingness of the authorities to support the banking sector, although the downward revision of all SRFs reflects a slight weakening of the authorities' ability to support the banking sector. The SRs of BSF, SABB, ANB, AAB, SAIB, Alinma and BAJ have been downgraded from '1' to '2', reflecting the downward revision of their SRFs to 'BBB+'. Support has been demonstrated by the Saudi authorities' long track record of supporting domestic banks, as well as close ties and ownership links with the government at a number of banks. Fitch's view is also underpinned by the sovereign's strong capacity to support the banking system, via 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. Fitch identifies D-SIBs based on its view of each bank's systemic importance relative to other banks in the banking system, and considering, among other things, market share, franchise and government ownership. The 'A-' SRF of ARB, NCB, RB and SAMBA are at the Saudi banks' D-SIB Support Rating Floor of 'A-', reflecting their systemic importance. Therefore we consider the probability of support from the authorities as extremely high. The 'BBB+' SRFs of banks with material foreign ownership, namely SABB, BSF, ANB and AAB, are one notch below the Saudi banks' D-SIB SRF. This reflects Fitch's view that the large stakes held in these banks by foreign financial institutions could result in slightly lower, but still high, willingness of the sovereign to support these banks. The 'BBB+' SRFs of the remaining three banks, SAIB, Alinma and BAJ, are also one notch below the Saudi banks' D-SIB SRF. This reflects Fitch's view of their lower relative systemic importance in comparison to the larger banks, due to even smaller size, market share and franchises, but also the fact that they are domestically owned. AJC's SR reflects the high probability of institutional support, if needed, from its 100% owner, BAJ (BBB+/Stable). Although AJC's operations and management are separate from BAJ, Fitch views AJC as a core subsidiary and aligns its Long-Term IDR with that of BAJ. Despite AJC being a separate legal entity, Fitch believes it is not meaningful to analyse AJC in its own right, viewing it more as a BAJ business line. Moreover, Fitch does not usually assign VRs to non-banking financial institutions. RATING SENSITIVITIES IDRs AND SENIOR DEBT For Riyad, AAB, SAIB, Alinma and BAJ, who's IDRs are driven by sovereign support, these are sensitive to a change in the banks' SRs or SRFs. For ARB, NCB, SAMBA and ANB, their IDRs are driven by their standalone credit worthiness, but underpinned by their SRFs, which are equal to their respective VRs. Therefore, a downgrade of the banks' Long-Term IDRs would require a simultaneous downward revision of their SRFs and a downgrade of their VRs. An upgrade of the banks' IDRs would require either an upward revision of their respective SRFs, or an upgrade of their VRs. AJC's IDRs are sensitive to any change in its SR. For BSF and SABB, their IDRs are driven by their standalone credit worthiness and are therefore sensitive to a change in their respective VRs. SUPPORT RATINGS AND SRFs The banks' SRs and SRFs are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector. The willingness of the Saudi sovereign to support the banks is unchanged and is demonstrated by the authorities' strong track record of support for local banks. The Saudi banks' SRFs will be revised down by one notch if the sovereign rating is downgraded by one notch. AJC's SR is sensitive to a change in BAJ's ratings or in Fitch's view of BAJ's willingness to support AJC. However, Fitch views this as unlikely, given the high strategic and financial importance of AJC to BAJ and the latter's 100% ownership. Saudi Arabia is an FSB/G20 member country and has implemented Basel III. As such, resolution legislation is being implemented. We will review the Saudi banks' D-SIB SRF once the legislation is closer to being fully enacted, although we currently do not expect any changes. In our view, the downgrade of the Saudi sovereign rating does not affect the banks' VRs. The VRs already consider many of the elements relating to the sovereign downgrade. Certain aspects, such as the sovereign's increased fiscal deficit in 2016, primarily reflect the clearing of a SAR75 billion backlog of contractor payments relating to infrastructure projects, which is beneficial to banking sector liquidity and asset quality. All banks benefit from high barriers to entry, a strict and hands-on regulator, sound liquidity and capital ratios, and pre-impairment operating profit levels that enable them to absorb high impairment charges, if necessary. However, the operating environment has been weakening as lower oil prices impact government spending, slowing earnings growth. In 2016, the earnings of some banks declined, due to slower loan growth and rising loan impairment charges and funding costs (albeit from a low base). If asset quality and earning trends gather pace, this will impact capital ratios in the longer term. The weakening operating environment is effectively capping the Saudi banks' VRs at 'a-' and drives our Negative Outlook for the operating environment. Falling government deposits caused a significant tightening of liquidity in the banking sector in 2H16. However, the authorities injected around SAR20 billion of deposits in 4Q16 and introduced new central bank repurchase facilities for banks. In our view, liquidity conditions have stabilised since the last review, although rising interest rates may continue to negatively affect banks' funding costs. Contact: Primary Analyst Andrew Parkinson Director +44 203 530 1420 Fitch Ratings Limited 30 North Colonnade, London, E14 5GN Secondary Analysts Marc Ellsmore (ANB, BSF, Alinma, SAIB) Associate Director +44 20 3530 1438 Nicolas Charreyron (AAB, AJC, ARB, BAJ, NCB, Riyad, SABB, SAMBA) Analyst +44 20 3530 1420 Committee Chairperson Christian Kuendig Senior Director +44 203 530 1399 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021384 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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