Complex Made Simple

Fitch revises outlook on four Saudi Arabian banks to negative

The rating actions follow Fitch's revision of the Outlook on the Saudi Arabian sovereign.

Fitch Ratings has revised the Outlooks on Al Rajhi Bank (ARB), National Commercial Bank (NCB), Riyad Bank (RB) and SAMBA Financial Group (SAMBA) to Negative from Stable.

The rating actions follow Fitch’s revision of the Outlook on the Saudi Arabian sovereign.

The revision of the banks’ Outlooks to Negative reflects that their Long-term Issuer Default Ratings (IDR) are at the Support Rating Floor (SRF) for Saudi domestic systemically important banks (D-SIB) of ‘A+’. This would be revised down to ‘A’ in the event of a one-notch downgrade of the Saudi sovereign.

The other Saudi banks’ Long-term IDRs are not at the D-SIB SRF of ‘A+’, although we believe there is extremely high likelihood of support for all Saudi banks, and therefore would not be downgraded if the sovereign was downgraded by one notch.

KEY RATING DRIVERS: SUPPORT RATINGS AND SRFs FOR ALL 11 BANKS; IDRs FOR ARB, NCB, RB, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC

The Saudi banks’ Support Ratings (SRs) and SRFs reflect the extremely high probability of support from the Saudi authorities, if required. Fitch’s opinion of support is based on the strong ability and willingness of the authorities to support the banking sector.

Support has been demonstrated by the Saudi authorities’ long track record of supporting domestic banks, as well as close ties and ownership links with the government at a number of banks. Fitch’s view of support is also underpinned by the sovereign’s strong capacity to support the banking system supported by its sovereign wealth funds and on-going revenues mostly from its hydrocarbon production, and the moderate size of the Saudi Arabian banking sector in relation to the country’s GDP.

Fitch identifies D-SIBs based on its view of each bank’s systemic importance relative to other banks in the banking system, and considering, among other things, market share, franchise and government ownership. The ‘A+’ SRF of the four Saudi banks – ARB, NCB, RB and SAMBA – are at the Saudi banks’ D-SIB SRF of ‘A+’, reflecting their very high systemic importance.

The ‘A-‘ SRFs of the four JV banks, Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB) and Saudi Hollandi Bank (SHB), are below the Saudi D-SIB SRF. This reflects Fitch’s view that the large stakes held in these banks by foreign financial institutions could result in slightly lower willingness (albeit still high) by the sovereign to support these banks and their slightly lower systemic important based on their slightly smaller sizes, franchises and market shares.

The ‘A-‘ SRFs of the remaining three banks, Saudi Investment Bank (SAIB), Alinma Bank (Alinma) and Bank Aljazira (BAJ), are below the Saudi D-SIB SRF. This reflects Fitch’s view of their lower relative systemic importance in comparison to the larger banks, due to even smaller sizes, market shares and franchises.

The IDRs of ARB, NCB, RB, SAMBA, SHB, SAIB, Alinma and BAJ are driven by support from the authorities.

Aljazira Capital’s (AJC) IDRs and Support Rating reflect the extremely high probability of institutional support, if needed, from its 100% owner, BAJ (A-/Stable). Although AJC’s operations and management are separate, Fitch views AJC as a core subsidiary and aligns its IDR with that of BAJ.

The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued under these entities are rated in line with their respective banks’ IDRs and are therefore subject to the same rating drivers.

RATING SENSITIVITIES – SRs AND SRFs FOR ALL 11 BANKS; IDRs FOR ARB, NCB, RB, SAMBA, SHB, SAIB, ALINMA, BAJ AND AJC

The banks’ SRs and SRFs are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector. The willingness of the Saudi sovereign to support the banks is unchanged and is demonstrated by the authorities’ strong track record of support for local banks. However the Negative Outlook on the sovereign reflects its weakening ability to support the banks due to the significant deterioration in its fiscal position.

The IDRs of ARB, NCB, RB and SAMBA will be downgraded by one notch if the Negative Outlook on the sovereign results in a one-notch downgrade of Saudi Arabia. The IDRs of the other five banks would not be downgraded if the sovereign was downgraded by one notch as their SRFs are below the current D-SIB SRF of ‘A+’. All nine banks’ IDRs would be downgraded if the sovereign was downgraded by more than one notch.

Upward potential for the ratings is limited in light of a weakening sovereign and operating environment.

Where the banks’ IDRs are driven by sovereign support, these would be sensitive to a change in their SRs or SRFs.

AJC’s IDRs and SR are sensitive to a change in BAJ’s ratings or in Fitch’s view of BAJ’s willingness to support AJC. However, Fitch notes the high level of strategic and financial importance of AJC to BAJ and the latter’s 100% ownership.

The BSF Sukuk Ltd trust certificate issuance programme and the senior unsecured notes issued by these entities, are subject to the same sensitivities.

Saudi Arabia is an FSB/G20 member country and has implemented Basel III. As such resolution legislation is being implemented. We will review the SRFs once the legislation is closer to being fully enacted, although we currently do not expect any changes.