Capital Intelligence Ratings (CI Ratings), the international credit rating agency based in Cyprus, announced [25 May 201] that it has affirmed the ratings of Saudi Hollandi Bank (SHB), an award winning major bank based in Riyadh, Saudi Arabia. The Financial Strength Rating (FSR) is maintained at ‘A’, underpinned by continuing improvement in asset quality, strong growth in customer deposits (with consequent improvement in loan-based liquidity ratios and reduction in reliance on more volatile short-term funding), and the bank’s sound franchise in trade finance. The rating is constrained by the high share of loans in the balance sheet and a high level of sector concentration, by the still relatively tight loan-based liquidity ratios, and by the falling ROAA (return on average assets), which is partly the result of a higher cost of risk.
For the same reasons, the Long-Term Foreign Currency Rating (FCR) is maintained at ‘A’ and the Short-Term FCR at ‘A2’. While official support in some form is expected to be forthcoming if needed, the bank is not systemically important to the Saudi banking system and the ability and willingness of the foreign parent to support the bank in extremis is not a certainty. Accordingly, the Support Level remains at ‘3’. Because of the deteriorating operating environment, the Outlook for all ratings is revised to ‘Negative’ from ‘Stable’.
SHB continues to improve its asset quality following a very significant deterioration as the result of large 2009 increase in its non-performing loan (NPL) portfolio. Since that time, the bank has been making steady progress on improving its asset quality. As to the income statement, continual progress had been made, but that progress faltered somewhat in 2015.
Asset quality improvement continued, as both the stock of NPLs and the NPL ratio declined and coverage by both loan-loss reserves and free capital increased. That said, the decrease in the NPL ratio was also partly attributable to the strong growth in loans last year. In terms of concentration, the Bank’s sector concentration (the bank does not supply individual borrower concentration) remains fairly high, despite continual increases in the share belonging to the consumer sector. Even so, one of the most important sectors is the commerce sector – a natural outcome of the bank’s traditional strength in trade finance.
The robust loan growth was accompanied by an even stronger growth in customer deposits. However, despite the fact that the bank has been successfully courting the consumer sector (on the asset side) in recent years, the largest share of the deposit increase was in time deposits. Even so, the customer deposit growth served to ease loan-based liquidity ratios, which – while adequate in a global context – had been significantly tighter than those of the bank’s peers.
There has been another aspect of the relatively strong loan growth of the past few years, in that capital has not been increasing at a commensurate pace. The result has been a gradual weakening of capital ratios. Although SHB’s Basel III capital adequacy ratio remains very sound, it is the second-lowest in the peer group, and the bank’s Tier 1 ratio is the lowest.
Of all 12 locally incorporated banks in operation, SHB ranked eighth by total assets and effectively tied for eighth by total capital as of year end 2015. Its balance sheet showed total assets of SAR108.0 billion (equivalent to US$28.8 billion and a market share of about 5%) and total capital of SAR12.0 billion (equivalent to US$3.2 billion). At year end 2015, SHB operated 60 domestic branches (2014: 55).