Fitch affirms Saudi Investment Bank at 'A-'; outlook stable

The IDRs and Support rating reflect the extremely high probability of support from the Saudi Arabian authorities, if needed.

Fitch's opinion of likely support is based on the Saudi government's stake in SAIB and the long history of support for banks in Saudi Arabia.

Its Individual rating reflects the bank's reasonable franchise, diversification strategy, and good asset quality ratios and liquidity, but also takes into account the bank's small market share, rapid recent loan growth, large concentrations in loans and deposits, and lower capital ratios under Basel II.

SAIB remains in discussions with Bahrain-based Albaraka Banking Group (ABG) about a possible merger. The discussions have been taking place for over a year and it is not clear when and if a transaction will be completed.

ABG is an Islamic bank and has 240 branches in 12 countries across the MENA region and is primarily engaged in retail and corporate banking (end-2007: total assets of USD10.1bn).

If a merger goes ahead, then it is possible that there could be negative implications for SAIB's Individual rating, given the resulting increase in exposures to markets significantly riskier than Saudi Arabia.

Profitability suffered in 2007 and H108 from lower stock market-related revenues, although core banking income and fees have been fairly resilient, while the net margin has been consistent.

SAIB was required to take impairment charges against its structured credit portfolio (SIVs and CDOs) in both H108 (SAR303m) and 2007 (SAR232m).

However, the impact was not significant enough to cause the bank any profitability or solvency problems.

Asset quality ratios remain good, with 1% of the loan book deemed impaired at end-H108 and reserve coverage of 244%. However, loan growth to date in 2008 has been rapid, which could lead to deterioration in these ratios as the portfolio seasons.

The loan book remains fairly concentrated by borrower and with a particular emphasis on share and real estate financing for high net worth customers.

Consumer lending remains a smaller proportion of the portfolio than the average for the sector. Capital ratios were significantly lower at end-H108 following the introduction of Basel II and rapid loan growth.

The Fitch eligible capital ratio was 13.7%, which is just about adequate, in Fitch's opinion.

SAIB is the ninth-largest Saudi bank, mainly active in corporate banking. The bank has entered into a number of joint ventures to diversify assets and revenues.

Its largest shareholder is the Saudi government, via the General Organisation for Social Insurance with 21.5% and a state pension fund with 17.1%.