Capital Intelligence lowers Saudi Hollandi Bank's ratings

The long-term foreign currency rating of A and the short-term foreign currency rating of A2 are unchanged, as is SHB's support rating of 2; a 'Stable' outlook is assigned to both the Foreign Currency and Financial Strength Ratings.

SHB is Saudi Arabia's fourth-smallest bank by total assets, with a market share of about 5%. At yearend 2008 it operated 41 branches, all of them in Saudi Arabia. The Bank's core customer base consists of traders and contractors, and it benefits from a very loyal customer base.

Although other issues contributed peripherally, it is asset quality which was the principal reason for the downgrade. At year-end 2008 SHB posted the sector's highest NPL ratio with relatively low coverage, in addition to which there was a sizeable volume of loan assets past due less than 30 days, which in the current economy are a threat to become non-performing.

The level of NPLs has been reduced this year as the result of collection efforts, provisioning and restructuring. However, 2009 presents other obstacles to the Bank's improving its asset quality.

Like most Saudi banks, SHB faces the likelihood of write-offs and/or workouts relative to several troubled Saudi private corporate groups sometime soon. Consequently, the positive results achieved will be largely offset by the need to utilise a large portion of the year's operating earnings to provide for the new non-performing loans from one or two borrowers.

CI expects that in terms of its overall balance sheet profile, SHB should end the year looking very much as it did at the beginning.

In 2008 SHB posted the best increase in net profit of all Saudi banks, highlighted by strong increases in all major components of non-special commission income (NSCI), continued cost control, and a less than aggressive provisioning against NPLs. For the first half of 2009 operating profit is on the way to equalling that of 2008, which was a strong figure.

SHB is well capitalised by global standards, but in the world of robust capitalisation displayed by Saudi banks, SHB typically ranks in the bottom third of that group. Like the other Saudi banks, SHB has seen a boost in its capital ratios during 2009. Similarly, SHB's liquidity had been characterised by strained liquidity ratios; as has been the case with most other Saudi banks, that situation has also been alleviated this year.

SHB is descended from Saudi Arabia's first bank, which was established in 1926. The Netherlands Trading Society concentrated on financing trade through Jeddah port and servicing the needs of pilgrims from Dutch Indonesia. In 1946 it became part of Dutch banking group Algemene Bank Nederland NV, which capitalised its branches into a local affiliate in 1977, SHB's principal owners are ABN AMRO Bank N.V. (40%), Olayan Saudi Investment Company (21%), the General Organisation for Social Insurance (GOSI) (10%), and other Saudi shareholders (30%).