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Rating Action:

Moody's affirms deposit ratings of Saudi British Bank, upgrades and withdraws Alawwal Bank deposit ratings

 The document has been translated in other languages

18 Jun 2019

Rating action follows the completion of the merger between the two banks on 16 June 2019

Limassol, June 18, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the long and short-term local and foreign currency deposit ratings of Saudi British Bank (SABB) at A1/P-1, and upgraded the long and short-term local and foreign currency deposit ratings of Alawwal Bank (Alawwal) to A1/P-1 from A3/P-2. At the same time, Moody's has also affirmed the baseline credit assessment (BCA) of SABB at a3. The outlook on SABB's long-term deposit ratings remains stable. The outlook on Alawwal's long-term deposit ratings was changed to stable from positive, in line with the outlook for SABB. Subsequent to the action, Moody's also said that it will withdraw the ratings of Alawwal.

Please refer to end of the PR for a full list of ratings impacted by this action.

Today's rating action follows the completion of the merger between the two banks on 16 June 2019 where SABB remained as the surviving entity absorbing all the assets and liabilities of Alawwal which ceased to exist following the merger.

RATINGS RATIONALE

SABB and Alawwal announced the completion of their merger on the 16th of June 2019, whereby SABB remains the operating entity and has received all liabilities and assets of Alawwal, which has ceased to exist. In exchange, Alawwal's shareholders have received 0.48535396 SABB shares for each Alawwal share.

SAUDI BRITISH BANK

-- RATIONALE FOR RATING AFFIRMATION

-- GREATER BUSINESS DIVERSIFICATION AND LENDING OPPORTUNITIES

Following the merger SABB will become the third largest bank in Saudi Arabia in terms of assets (SAR 253 billion as of March 2019 for the combined entity). It will continue to benefit from the expertise, global reach and extensive product offering of its largest shareholder, HSBC Holdings plc (A2 stable, a2) through HSBC Holdings B.V., which has a 29% stake in the bank. SABB's franchise in Saudi Arabia is also supported by HSBC through a technical service agreement. SABB will have the potential to replicate its profitable relationship model to a wider base of clients, which could result in higher cross selling and cheaper funding. Although Alawwal was also predominantly a corporate lender, the merger will increase the relative size of SABB's retail franchise, which Alawwal had developed in recent years. Alawwal had strong mortgage financing operations, a key growth area for Saudi Arabia, and had been rapidly building its digital banking capabilities.

-- IMPROVED PROFITABILITY POSSIBLE IN THE MEDIUM TERM

In the short term, integration costs and the lower profitability of Alawwal (net income/tangible assets ratio of 1.1% versus 3.0% for SABB as of March 2019) will moderate the combined entity's profitability (2.4% on combined basis). However, Moody's says that successful integration of the entities could lead to revenue synergies and cross-selling opportunities, as well as cost synergies from economies of scale and expense consolidation.

-- HIGHER NON-PERFORMING LOANS SUPPORTED BY HEALTHY LOAN LOSS RESERVES AND STRONG CAPITAL BUFFERS

Moody's affirmation of SABB's a3 BCA also incorporates the impact on SABB of absorbing Alawwal's higher proportion of problem loans. SABB had a problem loan/gross loan ratio of 2.9% as of March 2019 versus 4.4% for Alawwal and 3.4% for the combined entity. The rating agency said that while the increase in nonperforming loans should prove manageable, any further decline in asset quality could pressure SABB's a3 BCA. The combined corporate loan portfolio will also initially increase asset concentrations, although Moody's expects the integration and development of retail businesses to gradually reduce this risk.

SABB's higher asset quality risks are partially mitigated by healthy loan loss reserves of around 151% (on combined basis) as of March 2019. In addition the bank has solid capital buffers with a TCE ratio on combined basis close to 17.8% which takes into consideration a 200 bps dilutive impact following the recognition of goodwill from the merger based on the bank's estimates.

-- VERY HIGH GOVERNMENT SUPPORT LEVELS MAINTAINED

Following the merger SABB continues to benefit from a two-notch rating uplift from its BCA, based on (1) a continued assessment of a very high probability of government support for SABB in case of need and (2) the Saudi government's strong capacity and track record to support banks, indicated by the A1 sovereign rating.

-- STABLE OUTLOOK

The stable outlook on SABB's long-term deposit ratings balances both potential longer-term benefits from the merger against short-term implementation risks. The stable outlook is also in line with the outlook for the A1 long-term issuer rating of the Government of the Saudi Arabia.

ALAWWAL BANK RATINGS WITHDRAWAL

Following the completion of the merger, Alawwal has ceased to exist and all its assets and liabilities have been transferred to SABB. Accordingly Moody's has upgraded Alawwal's deposit ratings to A1/ P-1 from A3/P-2, aligning them with the ratings of SABB. For the same reason, Alawwal's long-term counterparty risk ratings were upgraded to A1 from A2, and its long-term counterparty risk assessment was upgraded to A1(cr), from A2(cr). The outlook on Alawwal's long-term deposit ratings was changed to stable from positive, in line with the outlook for SABB. All of these ratings and assessments will be subsequently withdrawn.

As part of the same rating action Alawwal's baa2 baseline credit assessment and adjusted baseline credit assessment will be withdrawn, since Alawwal no longer exists.

Please refer to the Moody's Investors Service Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

WHAT COULD CHANGE THE RATING -- UP

SABB's deposit ratings are on par with Saudi Arabia's A1 sovereign rating, hence, there is limited upside potential for the bank's ratings.

WHAT COULD CHANGE THE RATING -- DOWN

Downward pressure on SABB's ratings could develop through: (1) a downgrade of the sovereign rating, which would lead to reduced support capacity; (2) potential reassessment of the willingness of the government to provide support; (3) material deterioration in the bank's operating environment, which would lead us to expect a weakening of its financial metrics (4) higher than expected integration costs which could significantly impact profitability on the medium term (5) deterioration in asset quality following the merger.

LIST OF AFFECTED RATINGS

Issuer: Saudi British Bank

..Affirmations:

....Long-term Counterparty Risk Ratings, affirmed A1

....Short-term Counterparty Risk Ratings, affirmed P-1

....Long-term Bank Deposits, affirmed A1, outlook remains Stable

....Short-term Bank Deposits, affirmed P-1

....Long-term Counterparty Risk Assessment, affirmed A1(cr)

....Short-term Counterparty Risk Assessment, affirmed P-1(cr)

....Baseline Credit Assessment, affirmed a3

....Adjusted Baseline Credit Assessment, affirmed a3

..Outlook Action:

....Outlook remains Stable

Issuer: Alawwal Bank

..Upgrades and subsequent withdrawals:

....Long-term Counterparty Risk Ratings, upgraded to A1 from A2, will be withdrawn

....Long-term Bank Deposits, upgraded to A1 from A3, outlook changed to Stable from Positive, will be withdrawn

....Short-term Bank Deposits, upgraded to P-1 from P-2, will be withdrawn

....Long-term Counterparty Risk Assessment, upgraded to A1(cr) from A2(cr), will be withdrawn

..Affirmations and subsequent withdrawals:

....Short-term Counterparty Risk Ratings, affirmed P-1, will be withdrawn

....Short-term Counterparty Risk Assessment, affirmed P-1(cr) , will be withdrawn

...Withdrawals:

....Baseline Credit Assessment, previously baa2

....Adjusted Baseline Credit Assessment, previously baa2

..Outlook Actions:

....Outlook changed to Stable from Positive, will be changed to Ratings Withdrawn

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for Saudi British Bank ratings is Ashraf Madani, +971.4.237.9542.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christos Theofilou, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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