Fitch affirms SABB at 'A'/'F1'; Outlook Stable

The Support Rating Floor is affirmed at 'BBB+'. The Outlook for the Long-term IDR remains Stable.

SABB's Long- and Short-term IDRs and Individual rating reflect its strong and consistent profitability, good asset quality, conservative approach to risk, low-cost funding, sound capitalisation and strong franchise. SABB benefits from the systems and expertise of the HSBC Group. The ratings also take into account some concentration in the loan portfolio and deposit base. The Support rating reflects the high probability of support from the Saudi authorities should it ever be required.

Performance in 2007, while not matching the exceptional highs of 2006, remains sound as the bank continues to benefit from a benign domestic operating environment. Net income of SAR1.25bn in the first six months of 2007 (H107) was down about 30% yoy after the correction in the local stock market in 2006 resulted in sharply lower non-interest income. The core lending business, however, continues to grow strongly. Margins in excess of 4% are ahead of the prior year, while the cost base remains well controlled.

Recent loan growth has been fairly rapid (15% in H107), although broadly in line with the banking sector. Asset quality ratios remain good with a low 0.37% of the loan portfolio deemed impaired at end-H107 and adequately covered by impairment reserves. The bank has some exposure to the troubled SIV market within its investment book, but at approximately SAR200m it remains small relative to the size of the total balance sheet of SAR90bn. Capital adequacy is sound with a Fitch eligible capital ratio of 16.2% at end-H107, and retentions remain strong.

SABB was established in 1978 to take over the Saudi Arabian operations of the British Bank of the Middle East (established in Saudi Arabia in 1950). HSBC (through HSBC Holdings BV) holds 40% of SABB's shares. The bank has access to the resources, expertise and international network of the HSBC Group and benefits from a technical services agreement (renewed in 2007 for a further five years).

Products are provided in both Islamic and conventional form, with Islamic products under the SABB Amanah brand targeted at both personal and corporate customers. SABB had market shares of around 10.8% in customer deposits and 9.3% in customer loans at end-H107. The bank is developing into a financial services group through its joint ventures with HSBC in investment banking (HSBC Saudi Arabia) and insurance (SABB Takaful). It has recently formed a wholly-owned subsidiary, SABB Securities Limited (SSL), to handle its brokerage and custody businesses.