Banque Saudi Fransi’s Ratings Affirmed, with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Banque Saudi Fransi (BSF) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed BSF’s Bank Standalone Rating (BSR) of ‘bbb+’, Core financial Strength (CFS) rating of ‘bbb+’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR remains Stable.

The Bank’s LT FCR is set three notches above the BSR to reflect the high likelihood of timely and appropriate extraordinary support from the government (Saudi Arabia Sovereign Rating: ‘A+’/‘A1’/Stable) in case of need. The Saudi banks are considered systemically important banks that play an important role in building and nurturing the economy, underpinning the Saudi government’s willingness to maintain stability in the domestic financial system. Hence, the authorities have a strong track record of supporting banks and have the financial capacity to provide assistance in the event of stress.

The BSR is based on a CFS rating of ‘bbb+’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The OPERA for Saudi Arabia reflects the economy’s limited diversification, large fiscal and external buffers, very large oil reserves, low monetary flexibility, and large geopolitical risks. It also takes into account the banking sector’s strong capital buffers and a healthy funding structure, which primarily consists of domestic customer deposits with little dependence on cross-border funding.

The CFS rating is supported by the Bank’s strong corporate banking franchise, overall good asset quality with strong credit loss absorption capacity, sound profitability, and comfortable liquidity underpinned by stable deposit-based funding and high buffers. BSF’s strong capitalisation, in what is considered a well-capitalised Saudi banking system, is also an important rating supporting factor. In terms of credit challenges, the Bank has a high concentration in corporate banking (although diversifying with its growing retail banking business), together with the challenging operating environment due to the economic impact of Covid-19 (although easing).

We consider the risk profile of both the Bank’s business model and the underlying asset portfolio to be prudent and conservative. BSF’s overall asset quality metrics are sound. The NPL ratio declined at end-2021, to the lowest level in five years, while it remained fully covered in terms of loan loss reserve provisions. Credit loss absorption capacity is strong, and both the extended NPL coverage ratio and capitalisation were strengthened. Although the forbearance measures expired end-March 2022, the full impact of the pandemic on asset quality is not expected to be revealed until the end of this year, and CI expects the effect to be moderate. On the other hand, close to one-third of BSF’s balance sheet is in liquid assets and in the investment portfolio, with a significant proportion in Saudi government and other investment grade securities.

BSF’s underlying profitability is sound, supported by good margins and cost efficiency. Operating profitability has been consistently strong due to good growth in and contribution by retail banking, in line with BSF’s strategy, and lower cost of funds from growing retail deposits and SAMA’s zero-interest deposits. For FY21, net profitability was much stronger, as substantial precautionary (Covid-19-related) loan loss provisions were made in FY20. Going forward, BSF’s above-average profitability is expected to continue as the challenging operating environment eases.

BSF has a sound liquidity profile underpinned by stable deposit-based funding, which is further enhanced by SAMA’s liquidity support programs (with large zero-interest deposits from the central bank). While its customer deposits are less retail-oriented and weighted to corporate deposits, these funds are mainly from sovereign public-sector deposits and corporates that tend to be sticky. Although the proportion of wholesale funding has been increasing over the years, the Bank has overall moderate reliance in terms of bank deposits and senior debt. BSF aims to optimize its balance sheet by maintaining a high level of investment securities portfolio, and by growing its retail loan book funded by a higher proportion of non-interest bearing deposits. Liquidity risk for the Bank is considered low. The Saudi banking system in general has a relatively healthy liquidity profile, while BSF in particular has a comfortable liquidity position with strong buffers.

BSF’s capitalisation is strong and better than its Saudi banking peers. The Bank has a track record of robust capital ratios, with CET-1 and Tier 1 ratios gradually strengthening over the years, while leverage is moderate. SAMA has always encouraged Saudi banks to maintain high levels of capital adequacy by global standards. Moreover, BSF has robust capital quality and capital flexibility, with high CET-1 and Tier 1 components.

Rating Outlook

The Stable Outlook for the LT FCR and BSR indicates that the ratings are unlikely to change over the next 12 months. Similarly, there are currently no factors present that make a movement in Outlook in either direction likely in the short to medium term.

Rating Dynamics: Upside Scenario

An upgrade over the next 12 months appears unlikely at this stage as the Bank’s BSR is already at a very high level, unless the sovereign rating and/or the OPERA were to be raised sufficiently, which is also highly unlikely.

Rating Dynamics: Downside Scenario

A downgrade of the Bank’s FCRs or a revision of the outlook to Negative would require a deterioration of the BSR or a downgrade of the sovereign’s ratings, or a change in CI’s view of the government’s willingness and financial capacity to provide support. Given BSF’s current financial metrics, a lowering of its BSR appears unlikely in the short term, and would probably require a very marked deterioration in asset quality and/or liquidity and funding metrics.

Contact

Primary Analyst: Luis Maglanoc, Senior Credit Analyst
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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The following information source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2017-21. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No


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