CI Ratings has affirmed the Financial Strength Rating of Riyadh-based SABB at ‘A+’ supported by the bank’s sound liquidity, strong capital ratios, excellent cost control and the quality of its management as supported by the Technical Services Agreement with HSBC.
The SABB (profile) rating is constrained by the fact that asset quality weakened last year because of a high rate of non-performing loan net accretion.
Also constraining the rating is the slower growth in operating profit and the resultant reduction in the return on average assets.
The rating is further constrained by the unavailability of information supplemental to that which is published in the bank’s financial statements.
In view of SABB’s ownership, it is expected that its major shareholders would be willing and of adequate means to provide support in the unlikely event it is needed, so the Support Rating remains at ‘2’.
Supported and constrained by the same factors as is the case for the FSR, the Long-Term Foreign Currency Rating is affirmed at ‘A+’ and the Short-Term FCR at ‘A1’.
Because of the deteriorating operating environment, the Outlook for all ratings is changed to ‘Negative’ from ‘Stable.’
Background
Like other Saudi banks, SABB had spent much of the past five years repairing its asset quality and profit profile, following successive financial challenges in 2008 and 2009.
The global financial crisis, followed by the default of two major Saudi conglomerates in 2009, affected SABB disproportionately. However, the Bank had gradually and successfully improved all aspects of its balance sheet while growing its operating profitability and its ROAA.
For SABB – as was the case for other Saudi banks – 2015 represented a year in which that process was slightly derailed, as a result of a changed economy and operating environment which culminated in a liquidity squeeze in the latter half of the year.
Liquidity tightened across the sector, and that was also the case at SABB. However, the bank chose to deal with the liquidity crisis through sound liability management, eschewing high-cost deposits, increasing medium/long-term funding from other sources and reducing its already minimal reliance on inter-bank liabilities and other short-term sources.
Consequently, the bank’s liquidity has remained sound. Supported by a strong capital base, the bank has a solid foundation for its lending activity, which for the full year 2015 continued at a steady pace.
In a scenario quite the contrary to the typical pattern at SABB, the bank’s trade finance fee and commission income fell, as did the entire headline item, slowing the growth in operating profit.
SABB was able to minimize the effects of this by continuing its customary cost control and once again reporting the sector’s best cost to income ratio.
SABB benefits from a credit culture which includes the use of many of the systems and controls of its strategic shareholder HSBC, which continues to support the bank through a long-standing TSA.
Nevertheless, asset quality also suffered last year, but the soundness of the loan book going into the year was such that the bank was able to relent on loan-loss provisioning to take pressure off earnings.
The lower provisioning expense allowed the bank to report a modest growth in net profit, with the expected side-effect that coverage of the NPL portfolio, whether by loan-loss reserves or by free capital, declined.
SABB vs. Banque Saudi Fransi
SABB is effectively tied as the largest of the four partly foreign owned banks in Saudi Arabia, both by total assets and by total capital.
However, the bank is slightly larger by both metrics than Banque Saudi Fransi; the two banks frequently alternate between the first and second positions. Of all twelve locally incorporated banks in the Kingdom, at year-end 2015 SABB ranked fifth, just ahead of BSF.
At year-end 2015 SABB’s assets totaled SAR 187.8 billion (equivalent to USD 50.1 billion), representing a market share of 8.8% by total assets.
As of the same date, the bank operated 102 domestic branches (2014: 99), and its staff totaled 3,451 (2014: 3,314).
Capital Intelligence Ratings (CI Ratings) can be found at http://www.ciratings.com.