Sunday, 3 April 2016

Why Standard & Poor's Has Taken Mainly Negative Rating Actions On Saudi Banks

 
 
 
 
 
DUBAI (Standard & Poor's) April 1, 2016--Standard & Poor's Ratings Services 
considers that Saudi banks face heightened economic and industry risks and 
weaker credit conditions. On March 31, we consequently took mainly negative 
rating actions on the eight Saudi banks we rate. 
 
We lowered our long-term counterparty credit ratings on five banks:
 
Al Rajhi Bank to 'BBB+/Stable/A-2' from 'A-/Watch Neg/A-2',
The National Commercial Bank to 'BBB+/Stable/A-2' from 'A-/Watch 
Neg/A-2', 
Riyad Bank to 'BBB+/Stable/A-2' from 'A-/Watch Neg/A-2',
Samba Financial Group to 'BBB+/Stable/A-2' from 'A-/Watch Neg/A-2', and 
The Saudi British Bank to 'BBB+/Stable/A-2' from 'A-/Negative/A-2'.
 
 
We affirmed our long- and short-term counterparty credit ratings on three 
banks: 
 
Arab National Bank at 'BBB+/Stable/A-2',
Banque Saudi Fransi at 'BBB+/Stable/A-2', and
The Saudi Investment Bank at 'BBB/Stable/A-2'.
 
For our rationales behind these rating actions, please see our research 
updates on each bank in Related Research below.
 
In our view, the drop in oil prices has a marked and lasting impact on Saudi 
Arabia's fiscal and economic indicators, resulting in difficult operating 
conditions for the banking sector. Given the limited business sector 
diversification in the Saudi economy and the small number of large 
corporations, Saudi banks are exposed to structurally high concentration risk. 
We expect credit conditions for Saudi banks will deteriorate through a 
correction cycle, leading to increased nonperforming loans and credit losses, 
as well as a decline in profitability. Consequently, we think that the 
economic risks for banks based in Saudi Arabia have increased. 
 
We also see increasing industry risk for Saudi banks, based on our view that 
banks will have lower capacity to generate earnings to cover risks, at a time 
when they will continue to support infrastructure projects and the real estate 
sector, which could be affected by the current difficult operating 
environment. Still, our view on the framework of the Saudi regulator, the 
Saudi Arabian Monetary Agency, as conservative; and the funding support 
domestic banks derive from a large, low-cost customer deposit base remain 
strong mitigating factors. 
 
We have therefore revised our Banking Industry Country Risk Assessment (BICRA) 
on Saudi Arabia to group '4' from group '3', on a scale of '1' to '10', with 
group '10' indicating the highest-risk banking systems. This also follows our 
downgrade of the Kingdom of Saudi Arabia on Feb. 17, 2016 (see "Ratings On 
Saudi Arabia Lowered To 'A-/A-2'; Outlook Stable" published on RatingsDirect).
 
We now view the trends for both economic and industry risks for Saudi banks as 
stable, versus negative previously.
 
Our assessment of the stable trend in economic risks includes our expectation 
of a decline in lending opportunities and higher risks in some sectors, such 
as construction. Still, we think the impact on Saudi banks will be manageable 
thanks to their high loan-loss reserves and strong capitalization. 
 
As regards the stable trend in industry risks, we continue to see the Saudi 
banking system as concentrated and subject to strong regulation and 
supervision. Although we expect a gradual slowdown in deposit formation due to 
low oil prices, banks' funding profiles are not likely to fundamentally change 
and continue to benefit from a low-cost domestic deposit base with limited 
reliance on external debt.
 
 
BICRA SCORE SNAPSHOT*
Saudi Arabia                 To                  From
BICRA Group                  4                   3
Economic risk                5                   4
Economic resilience          High risk           High risk
Economic imbalances          Limited impact      Low risk 
Credit risk in the economy   Intermediate risk   Intermediate risk
Trend                        Stable              Negative
 
Industry risk                3                   2
Institutional framework      Low risk            Low risk
Competitive dynamics         Intermediate risk   Low risk
Systemwide funding           Low risk            Low risk
Trend                        Stable              Negative
 
 
*Banking Industry Country Risk Assessment (BICRA) economic risk and industry 
risk scores are on a scale from 1 (lowest risk) to 10 (highest risk). For more 
details on our BICRA scores on banking industries across the globe, please see 
our latest "Banking Industry Country Risk Assessment Update," published 
monthly on RatingsDirect.
 
RELATED CRITERIA AND RESEARCH
 
Related Criteria
Banks: Rating Methodology And Assumptions, Nov. 9, 2011
Banking Industry Country Risk Assessment Methodology And Assumptions, 
Nov. 9, 2011
 
Related Research
Rating actions published on March 31, 2016:
Saudi Arabia-Based Al Rajhi Bank Downgraded To 'BBB+' On Increased 
Economic Risks; Outlook Stable
Saudi Arabia-Based Arab National Bank 'BBB+/A-2' Ratings Affirmed Despite 
Increased Economic Risks; Outlook Stable
Banque Saudi Fransi 'BBB+/A-2' Ratings Affirmed Despite Increased 
Economic Risks; Outlook Stable
Saudi Arabia-Based National Commercial Bank Downgraded To 'BBB+' On 
Increased Economic Risks; Outlook Stable
Saudi Arabia-Based Riyad Bank Downgraded To 'BBB+' On Increased Economic 
Risks; Outlook Stable
Saudi Arabia-Based Samba Financial Group Downgraded To 'BBB+' On 
Increased Economic Risks; Outlook Stable
Saudi British Bank Long-Term Rating Lowered To 'BBB+' On Increased 
Economic Risks; Outlook Stable
The Saudi Investment Bank 'BBB/A-2' Ratings Affirmed Despite Increased 
Economic Risks; Outlook Stable
 
Only a rating committee may determine a rating action and this report does not 
constitute a rating action.
 
 
Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: 
MHFI), is the world's leading provider of independent credit risk research and 
benchmarks. We publish more than a million credit ratings on debt issued by 
sovereign, municipal, corporate and financial sector entities. With over 1,400 
credit analysts in 26 countries, and more than 150 years' experience of 
assessing credit risk, we offer a unique combination of global coverage and 
local insight. Our research and opinions about relative credit risk provide 
market participants with information and independent benchmarks that help to 
support the growth of transparent, liquid debt markets worldwide.

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