Standard and Poor's rates Banque Saudi Fransi in good market position

The long-term rating on BSF, a government-related entity (GRE) under Standard & Poor's Ratings Services' methodology, includes a one-notch uplift above the stand-alone credit profile.

This reflects our expectation of strong likelihood of extraordinary government support if needed, given the bank's systemic importance, which mainly stems from its domestic market position and importance to the economy of the Kingdom of Saudi Arabia (AA-/Stable/A-1+).

The ratings are constrained by credit risk related to the loan portfolio that has been growing rapidly until recently and remains to be tested through a full economic cycle, concentration risks, and limited diversification outside corporate finance, the bank's historical core market.

BSF is 31.1% owned by French corporate and investment bank Calyon, which is fully owned by Crédit Agricole (CASA). BSF benefits from a technical service agreement with its French parent. Calyon also seconds key senior staff to its Saudi affiliate.

The extent to which Calyon would support its affiliate depends on commercial and financial considerations. In many stressful scenarios, support would be likely, but cannot be assumed in all circumstances.

Therefore, we give no uplift to the ratings for this potential support. BSF is the sixth-largest bank in Saudi Arabia, with total assets of Saudi Arabian riyal SR125bn($33.6bn) on Dec. 31, 2008. BSF is a significant player in the Saudi banking system, but its overall commercial position is only average.

Traditionally focused on corporate banking, so far the main driver of its profitability, BSF is less entrenched in the lucrative retail segment than most of its domestic peers and is now actively building on synergies with Crédit Agricole group to reduce this gap.

BSF's lending book has been growing rapidly in the recent past (35% in 2008), thanks to the buoyant Saudi economy and waves of new projects for its corporate clients, and asset quality indicators have improved.

However, we have noticed a slight reversal by the end of 2008, with the ratio of nonperforming loans to total loans standing at 0.93%, compared with 0.72% a year before. Asset quality indicators are likely to continue deteriorating systemwide because customers are facing a more challenging environment. We nevertheless expect the deterioration to be limited at the bank level. It is still unclear at that stage if government spending, aiming to upgrade the country's infrastructure, will fully compensate for the economic slowdown.

BSF's corporate loan book displays some concentration by name and sector, a feature shared by all Saudi banks active in this segment, while loan leverage is higher than the domestic average. The slowdown of the local economy, and consequently a more cautious approach toward lending growth, should alleviate some pressure on funding. The ratio of loans to customer deposits stood at 88% at year-end 2008, compared with 82% a year ago.

The bank's financial performance remains strong, with return on equity at 24.5% for 2008. BSF's return on assets has shown some signs of erosion, declining to 2.5% in 2008 from 4.1% in 2006, as a result of stiffening competition and a sizable reduction of brokerage-related revenues related to the Saudi stock market correction.

Liquidity is satisfactory, with 22% of assets invested in securities, mainly in Saudi government bonds that can easily be repoed and 8% of assets held in liquid forms (cash and interbank deposits) on Dec. 31, 2008.

BSF's capitalization remains sound, although it declined in line with the rapid growth of risk assets. The negative trend was limited due to a conservative dividend policy. On Dec. 31, 2008, adjusted total equity stood at 9.6% of adjusted total assets, in line with that of most domestic peers. The bank's sound capital base serves as a cushion against concentration risks that are difficult to overcome within the undiversified Saudi economy.

Outlook

The stable outlook reflects our expectation that BSF will protect its market position and maintain its strong financial performance. The ratings are constrained by structural weaknesses in the Saudi economy and the bank's limited diversification compared with that of international banks.

The ratings could come under pressure if BSF's appetite for risk increases, market share erodes significantly, quality of core earnings declines, or capitalization or asset quality deteriorate materially. We could raise the ratings if the bank's asset quality indicators prove resilient to the Saudi economic slowdown, and solid earnings allow the bank to further strengthen its capitalization and enhance its market position.