OREANDA-NEWS. Fitch Ratings has affirmed 11 Saudi Arabian banks' Long-Term Issuer Default Ratings (LTIDRs) and downgraded the Viability Ratings (VRs) of two of the reviewed banks, Riyad Bank (Riyad) and Arab National Bank (ANB), to 'bbb+' from 'a-'. The Outlook for all banks is Negative. A full list of rating actions is available at the end of this rating action commentary.

The downgraded VRs of Riyad and ANB reflect weakened financial metrics, in particular with respect to funding and liquidity. Some financial metrics are also less strong at these banks than the highest rated banks in the sector.

KEY RATING DRIVERS

SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL 11 BANKS; IDRs FOR AL RAJHI, NCB, RIYAD, SAMBA, ANB, SHB, SAIB, ALINMA, BAJ AND AJC

The Saudi banks' Support Ratings (SRs) and Support Rating Floors (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.

The authorities' ability to support is underpinned by the sovereign's strong, albeit reduced, capacity to support the banking system, driven by large sovereign wealth funds and on-going revenues mostly from hydrocarbon production.

An extremely high propensity to support is indicated by the Saudi authorities' long track record of supporting domestic banks, as well as close ties and ownership links with the government at almost all banks. A high propensity to support is also likely given the banking sector is funded almost entirely by domestic deposits, many of which are placed by government entities. A new deposit insurance scheme, effective from 1 January 2016, also increases the probability of support as the government would be liable to reimburse depositors, which would be a similar burden to providing extraordinary support, particularly as a deposit insurance fund, paid for by banks, will take time to grow.

Fitch identifies domestic systemically important banks (D-SIB) 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 largest Saudi banks - Al Rajhi Bank (Al Rajhi), National Commercial Bank (NCB), Riyad and Samba Financial Group (SAMBA) - are at the Saudi banks' D-SIB Support Rating Floor of 'A', reflecting their very high systemic importance.

The 'A-' SRFs of the four JV banks, Saudi British Bank (SABB), Banque Saudi Fransi (BSF), ANB and Saudi Hollandi Bank (SHB), are one notch below the Saudi banks' 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, but still high, willingness of the sovereign to support these banks and their slightly lower systemic importance 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 also one notch below the Saudi banks' D-SIB SRF. This reflects Fitch's view of their lower relative systemic importance than the larger banks, due to even smaller sizes, market shares and franchises.

The IDRs of nine of the banks (Al Rajhi, NCB, Riyad, SAMBA, ANB, SHB, SAIB, Alinma and BAJ) are driven by support from the authorities as their SRFs are higher than their respective VRs.

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

Despite AJC being a separate legal entity, Fitch believes it is not meaningful to analyse AJC in its own right, viewing it more as a BAJ business line. Moreover, Fitch does not usually assign VRs to non-banking financial institutions.

The Negative Outlook of Al Rajhi, NCB, Riyad, SAMBA, ANB, SHB, SAIB, Alinma and BAJ reflects the corresponding Negative Outlook on the sovereign rating.

VRs FOR ALL 11 BANKS; IDRs FOR ANB, BSF, BSF SUKUK LTD AND SABB

The VRs of Al Rajhi, NCB, Riyad, SAMBA, SABB, ANB and BSF are highly influenced by the operating environment in Saudi Arabia, which is also a key driver for the other Saudi banks. The operating environment is characterised by a narrow economy, including a reliance on government capital expenditure and indirectly, oil revenues for growth opportunities. The operating environment also reflects the benefit of high barriers to entry, a strict and hands-on regulator, low, albeit rising, funding costs and sound capital ratios.

The operating environment has been weakening due to lower oil prices, slowing both loan and revenue growth. In addition, the impact of lower oil prices has reduced liquidity in the system, through an outflow of government-linked deposits and an increased cost of funding. Over time we also expect asset quality to be negatively affected, all of which could result in lower capital ratios in the longer term. The weakening operating environment is effectively capping the Saudi banks' VRs at 'a-'.

The IDRs of BSF and SABB reflect their intrinsic creditworthiness and financial strength, as underlined by their respective VRs, but are also underpinned by potential sovereign support, as underlined by their respective SRFs.

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.

The Negative Outlook of BSF and SABB reflects both the Negative Outlook on the sovereign rating and our continued negative view of the operating environment.

Al Rajhi

Al Rajhi's VR reflects the bank's leading domestic retail franchise, which provides a stable cheap funding base helping to drive strong profitability, and lower balance sheet concentrations than peers. The VR also reflects sizeable capital buffers and improving risk controls under new management.

NCB

NCB's VR reflects the bank's leading domestic franchise and more diversified business model than peers'. It also reflects, sound financial metrics, in particular strong profitability, albeit under pressure, and stable funding. The VR also takes into consideration falling core capital ratios and faster loan growth than other large Saudi banks.

Riyad

Riyad's VR reflects the bank's solid capital ratios, which provide a buffer against potential asset quality deterioration. The VR also reflects solid core earnings generation, but also factors in weakening liquidity and high concentrations on both sides of the balance sheet.

SAMBA

SAMBA's VR reflects the bank's strong capital ratios, stable funding and strong liquidity. It further reflects strong financial metrics, strong and stable earnings and sound asset quality. The rating also reflects high single obligor concentration in the loan book, which exposes the bank to event risk.

BSF

BSF's VR reflects the bank's strong asset quality, driven by a lower risk appetite than peers, and lower single obligor concentration. The VR also factors in the benefits of being an associate bank of Credit Agricole Corporate and Investment Bank (CACIB: A/Positive), including a technical services agreement covering the provision of management, collaboration on operations and risk and governance frameworks. The VR also reflects sound earnings and a capital base that is sufficient for the bank's risk profile. The VR takes into account weakening liquidity over 2015 and 1H16, which may constrain future earnings growth.

SABB

SABB's VR reflects sound financial metrics, including the bank's consistently strong profitability and core earnings generation. The rating also reflects the benefits of being an associate bank of HSBC Holdings plc (AA-/ Stable) governed by a technical services agreement with the HSBC group, benefitting the bank's governance, risk framework and management quality. The VR also factors in very high single obligor concentration compared with peers.

ANB

ANB's VR reflects solid financial metrics, which are slightly weaker than larger peers'. This includes adequate, but weakening, funding and liquidity, including deposit concentration. The VR also takes into account a solid franchise and stable business model.

SHB

SHB's VR is constrained by the bank's limited core capital buffers, which are the lowest of all rated Saudi banks and doubts over the bank's ability to access new equity due to uncertainty around the stake of the bank's largest shareholder (ABN AMRO Bank N. V.: 40%), which is considered non-core for the Dutch bank and for sale. It also reflects previous fast loan growth, very high funding concentrations and a smaller franchise than peers'. The VR also factors in strong earnings generation and sound liquidity and asset quality.

SAIB

SAIB's VR reflects the bank's previous rapid loan growth, which is likely to put pressure on asset quality metrics in the medium-term, although this has slowed since end-2014. The VR also reflects weaker underwriting standards than larger peers', a limited franchise and smaller liquidity buffers than peers'. The VR further reflects adequate financial metrics, including sound asset quality metrics and stable earnings.

Alinma

Alinma's VR reflects the bank's small, albeit growing, Islamic banking franchise. It also reflects the bank's fairly high loan growth since inception, a limited track record of performance, as well as concentrations on both sides of the balance sheet. The expected continued expansion of the bank's operations, albeit at a slower pace, will inevitably bring the bank's current strong capital ratios more in line with peers. The VR also reflects the bank's sound financial metrics, including funding, asset quality and improving profitability.

BAJ

BAJ's VR is constrained by the bank's low capital ratios. The bank has announced plans to raise equity, but the rights issue has been delayed once due to pricing and there remain doubts over the bank's ability to raise core capital. Low capital ratios reflect rapid financing growth and weaker profitability than peers'.

The VR also factors in a limited franchise and control framework compared with domestic peers'. The VR further considers sound asset quality and an adequate stock of liquid assets, which help mitigate an expensive and concentrated deposit base.

RATING SENSITIVITIES

SUPPORT RATINGS AND SUPPORT RATING FLOORS FOR ALL 11 BANKS; IDRs FOR AL RAJHI, NCB, RIYAD, SAMBA, ANB, SHB, SAIB, ALINMA, BAJ AND AJC

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

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 remains unchanged and is demonstrated by the authorities' strong track record of support for local banks. However, the Negative Outlook on the sovereign reflects a weakening ability of the sovereign to support the banks due to significant deterioration in its fiscal position. All Saudi banks' SRFs will be revised down by one notch if the sovereign rating is downgraded by one notch. Furthermore, a sovereign downgrade would result in a downgrade to '2' (from '1') of the SRs of ANB, BSF, SABB, SHB, Alinma, SAIB, and BAJ.

A one-notch downgrade of Saudi Arabia would lead to a one-notch downgrade of the Long-Term IDRs of Al Rajhi, NCB, Riyad, SAMBA, ANB, SHB, SAIB, Alinma, BAJ and AJC, as their ratings are driven by their SRF.

The Outlook on Al Rajhi, NCB, Riyad, SAMBA, ANB, SHB, SAIB, Alinma, BAJ and AJC will be revised to Stable if the Outlook on the sovereign rating returns to Stable.

AJC's IDRs and Support Rating are sensitive to a change in BAJ's ratings or in Fitch's view of BAJ's willingness to support AJC. However, Fitch views this as unlikely given the high 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 under the programme are subject to the same sensitivities as BSF.

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

VRs FOR ALL 11 BANKS; IDRs FOR BSF, BSF SUKUK LTD AND SABB

The most likely driver of negative rating action on the VR for all banks is a further weakening of the operating environment, resulting in lower loan growth, impacting earnings and profitability through deteriorating asset quality, funding and liquidity. This would ultimately lead to a reduction in capital ratios. The 'a-' VRs are potentially more sensitive, being closer to the sovereign rating level, while lower VRs have somewhat more tolerance in them.

A downgrade of the VRs of BSF, or SABB, accompanied by a sovereign downgrade would lead to a downgrade of their respective Long-Term IDRs. This is because their IDRs are driven by both the probability of support and their intrinsic creditworthiness as defined by the VR.

The Outlook on BSF and SABB will return to Stable if the Outlook on the sovereign rating is revised to Stable.

Al Rajhi

Upside to Al Rajhi's VR is limited in the current operating environment given its high level. The VR could be downgraded upon a notable deterioration in asset quality indicators, capital ratios, or profitability to a level that will significantly affect internal capital generation.

NCB

Upside to NCB's VR is limited in the current operating environment given its high level. Pressure on NCB's VR could come from further deterioration in capital ratios, most likely to result from weakening asset quality, possibly as a result of previous fast loan growth, especially at NCB's Turkish subsidiary.

Riyad

Upside to Riyad's VR is unlikely given today's downgrade. Downside could result from further deterioration in liquidity, which has tightened since end-1H15. Tightening liquidity may result from large deposit outflows, particularly considering funding concentrations in the deposit base.

SAMBA

Upside to SAMBA's VR is limited in the current operating environment given its high level. Negative pressure on the VR could result from deterioration in the bank's asset quality, both in loans and investments. However, capital buffers are strong and can absorb sharp increases in impairment charges.

BSF

Upside to BSF's VR is limited in the current operating environment given its high level. Negative pressure on the VR may arise from further tightening of liquidity, which has been affected by weak deposit growth that has been unable to mitigate large deposit outflows. This has reduced the bank's stock of liquid assets and further erosion in the bank's liquidity buffer would put pressure on the VR. This may also put pressure on earnings, given limited headroom below the regulatory loans/deposits ratio of 90%. A termination of the technical services agreement between BSF and CACIB could also put pressure on the VR but this is not our base case.

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

SABB

Upside to SABB's VR is limited in the current operating environment given the current high rating level. Negative pressure on SABB's VR could be driven by a significant weakening of the bank's capital base. This is most likely to result from deterioration in asset quality, which may be exacerbated by the bank's significant single obligor concentration. A termination of the technical services agreement between SABB and HSBC could also put pressure on the VR but this is not our base case.

ANB

Upside to ANB's VR is unlikely given today's downgrade. Negative pressure on the VR may arise from further tightening of liquidity, which has been affected by weak deposit growth that has been unable to mitigate large deposit outflows. This may also put pressure on earnings, given limited headroom below the regulatory loans/deposits ratio of 90%.

SHB

An illustration of an ability to raise core capital, possibly as a result of increased clarity around the bank's 40% shareholder, may result in an upgrade of SHB's VR. The VR could be downgraded as a result of high loan growth having a negative impact on asset quality, causing an erosion of already limited capital buffers.

SAIB

Upside for SAIB's VR could result from more sustainable loan growth rates, increasing internal capital generation and declining asset quality cyclicality. The VR may also benefit from a stronger franchise. Downward pressure on the VR could arise from sharp deterioration in asset quality, following the seasoning of high loan growth before 2015, contributing to erosion of capital buffers.

Alinma

Diversification on both sides of the balance sheet, increasing and extending the bank's funding profile, could result in an upgrade of the VR. Rapid growth leading to asset quality deterioration could put pressure on Alinma's VR, but capital buffers are sound, albeit declining with balance sheet growth.

BAJ

Upward potential for BAJ's VR may arise from a successful Tier 1 capital increase, following plans re-initiated for 2H16. The VR would also benefit from more consistent asset quality metrics, which would improve earnings stability. Downward pressure on BAJ's VR could come from deterioration in core capital buffers, most likely attributable to fast financing growth or deteriorating asset quality.

The rating actions are as follows:

Al Rajhi Bank

Long-Term Foreign Currency IDR affirmed at 'A', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F1'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A'

National Commercial Bank

Long-Term Foreign Currency IDR affirmed at 'A', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F1'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A'

Riyad Bank

Long-Term Foreign Currency IDR affirmed at 'A', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F1'

Viability Rating downgraded to 'bbb+' from 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A'

SAMBA Financial Group

Long-Term Foreign Currency IDR affirmed at 'A', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F1'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A'

Banque Saudi Fransi

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

BSF Sukuk Limited

Trust certificate issuance programme affirmed at 'A-'

Senior unsecured trust certificates affirmed at 'A-'

Saudi British Bank

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Long-Term Local Currency IDR affirmed at 'A-', Outlook Negative

Viability Rating affirmed at 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

EMTN programme affirmed at 'A-'/'F2'

Arab National Bank

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating downgraded to 'bbb+' from 'a-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Saudi Hollandi Bank

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Saudi Investment Bank

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Alinma Bank

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Bank Aljazira

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A-'

Aljazira Capital

Long-Term Foreign Currency IDR affirmed at 'A-', Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F2'

Support Rating affirmed at '1'