Capital Intelligence downgrades Saudi Hollandi Bank

In view of the Bank's position in the Saudi banking sector, official financial support would be expected to be forthcoming in the unlikely event it is needed. Consequently, the Support level remains at 2.

SHB began operations in the kingdom in 1926, financing the financial needs of pilgrims from Indonesia; over the years the nature of its franchise has changed several times and it is now an affiliate of Holland's ABN AMRO Bank. The Dutch shareholder owns 40% of the Bank's stock, while another 21% is held by Saudi Arabia's Olayan Saudi Investment Company.

The Bank's core business is with corporate customers involved in trading and contracting, which has been the Bank's historical niche market. SHB ranks eighth by total assets and ninth by total capital of 12 locally incorporated banks in the kingdom as of year-end 2009, with a market share of 4.5% by total assets.

The rating action was precipitated by loan asset quality problems in 2009. In common with other Saudi banks, SHB's loan asset quality suffered as the result of a slowdown in the domestic economy, and was exacerbated by its exposure to two financially troubled Saudi family-owned conglomerates. Despite robust loan-loss provisioning, loan-loss reserve growth had difficulty in keeping up with that of the gross NPL portfolio, and coverage remained about average by Saudi standards. Because of full profit retention for 2009, the Bank's capital and its key capital ratios all increased. While they remained only slightly below the peer-group average, the fact that deteriorated asset quality partly impaired that capital was another factor in the rating action. Liquidity improved last year and is considered sound.

While net profit and profitability for 2009 were low, the results of Q1 2010 can be seen as a positive indicator of a gradual turnaround. CI believes that barring a slowdown in the Saudi Arabian economy, SHB has the capacity to repair its asset quality in 2010. While that may involve only a small improvement in net profitability over last year, it could put the Bank on a sound footing to resume real growth in net profit in 2011.

At year-end 2009 SHB operated a network of 42 domestic branches (including eight ladies' branches), over 200 ATMs and over 5,000 POS terminals. Total staff at year-end was 1,511, of whom 87% were Saudi nationals.