Fitch affirms Banque Saudi Fransi at 'A'; outlook stable

The IDRs and individual rating reflect BSF's strong corporate franchise, close links to Credit Agricole Group (CA; rated 'AA-' (AA minus)/outlook stable/'F1+') and healthy financials, including strong profitability, solid asset quality, good cost control and reasonable liquidity. The ratings also reflect rapid loan growth, concentrations in loans and deposits and declining capital ratios. The Support rating reflects the extremely high probability of support from the Saudi Arabian authorities, if needed. Fitch's opinion of likely support is based on the long history of support for banks in Saudi Arabia and BSF's systemic importance. There is also a moderate probability of support from CA and its wholly owned subsidiary, Calyon.

Profitability has been consistently good and the bank has not been hit as hard by a decline in stock market-related revenues as some of its peers in 2007 and H1 2008. Although the outlooks for the Saudi economy and banking sector look relatively favourable, given current oil prices, risks remain while the global credit crunch persists. The Saudi banks have already seen an increase in the cost of regional inter-bank funding and some have had to delay international funding programmes, while the local stock market is down about 36% in the year to date and a possible bubble exists in the real estate market. Nevertheless, BSF reported an operating return on average equity of 25.5% in H1 2008 and 26.3% in 2007.

Asset quality ratios remained good with less than 1% of the portfolio deemed impaired, reflecting the continuation of a favourable domestic operating environment. The bank's investment portfolio has experienced impairment losses against the structured credit portfolio, although these have not been material enough to cause the bank any problems. Capital ratios have been eroded in H1 2008 by rapid loan growth and the introduction of Basel II. BSF's total capital ratio under Basel II was 10.1% (Tier 1 of 9.6%) at end-H1 2008, below its target of 12%, although this will be addressed by an increase in capital via a rights issue in H1 2009.

BSF was established in 1977 and focuses mainly on corporate banking and treasury. It is now expanding retail banking and investment services. Calyon owns 31.1% of BSF and provides technical and management assistance under a rolling five-year agreement. The Saudi government, via the Government Organisation for Social Insurance (GOSI), holds 12.8%. BSF operates through 80 branches and several JVs with CA/Calyon.