Global Arab Network | Fitch Rating reflects good cost efficiency of Saudi Hollandi Bank

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Fitch Rating reflects good cost efficiency of Saudi Hollandi Bank

- Reda Darwish

Monday, 08 March 2010 15:36

Fitch Ratings has today affirmed Saudi Hollandi Bank's (SHB) Long-term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, Short-term IDR at 'F2', Individual Rating at 'C', Support Rating at '1' and Support Rating Floor at 'A-'.

The affirmation of the Individual Rating reflects SHB's corporate banking franchise and good cost efficiency. It also considers its significant concentrations in loans and customer deposits, some deterioration in asset quality and moderately tight capitalisation. The Individual Rating could be downgraded if performance remains weak relative to peers, especially as Fitch also views the bank's capitalisation as moderately tight relative to its peers. The affirmation of the IDRs and Support Rating reflects Fitch's opinion that, given SHB's systemic importance to the Kingdom's banking sector, there is an extremely high probability of support coming from the Saudi Arabian authorities.

SHB's profitability deteriorated in 2009 mainly due to substantial loan impairment charges in corporate banking. Loan and securities impairment charges absorbed a substantial 93.6% of SHB's pre-impairment operating profit in 2009 (2008: 6.0%). In the low-interest rate environment, SHB's net margin declined to 2.0% in 2009 (2008: 2.8%). SHB has a relatively small branch network and the cost/income ratio is assisted by its mainly corporate franchise. Fitch expects renewed growth of the Saudi economy in 2010, which should lead to an improvement in the operating environment.

SHB's impaired loan ratio worsened significantly during 2009 to 5.9% at end-2009 (end-2008: 2.7%). One significant exposure was classified as impaired. However, Fitch understands that, at end-2009, almost all of this exposure was covered by impairment allowances. Customer deposits more than covered loans at end-2009 reflecting a low dependence on non-customer funding. Given the substantial concentration in the customer deposit base, Fitch takes some comfort from SHB's relatively high level of liquid assets, largely comprising government securities.

Fitch considers SHB's capitalisation moderately tight relative to its peers and this may be a constraint on its ability to develop its franchise and exploit opportunities for organic growth in the future. At end-2009, SHB had a Fitch Core Capital ratio of 11.3% (end-2008: 10.4%). SHB's total capital ratio of 14.8% at end-2009 calculated under the Basel II standardised approach also included two Lower Tier II subordinated debt issues. In December 2008, SHB issued SAR775m of sukuk while a previous non-Islamic issue of SAR700m was redeemed in December 2009 and replaced with SAR725m of sukuk.

SHB is the oldest bank in Saudi Arabia. It was the eighth-largest rated bank in Saudi Arabia by assets at end-2009. ABN AMRO Bank N.V. ('A+'/Stable/'F1+') holds a 40% stake in SHB.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.

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