Limassol, July 01, 2021 -- Moody's Investors Service ("Moody's") has today downgraded the local and
foreign currency long-term bank deposit ratings of Saudi British
Bank (SABB) to A2 from A1. In addition, the bank's Baseline
Credit Assessment (BCA) and Adjusted BCA were downgraded to baa1 from
a3.
The outlook on the bank's long-term deposit ratings was changed
to stable from negative.
A full list of affected ratings is at the bottom of the press release.
RATINGS RATIONALE
DOWNGRADE OF BCA
The downgrade of SABB's BCA to baa1 from a3 reflects the continued
pressure on the bank's asset quality and moderating profitability.
SABB's nonperforming loans (NPLs, which includes reported
stage 3 loans and purchased or originated credit impaired assets) have
increased following its merger with Alawwal bank (6.2% in
December 2020). Additionally, SABB's profitability
has moderated following the merger due to the increased cost of risk and
merger related expenses, both of which Moody's expects will
normalise going forward (merger expenses concluded in Q1 2021 and cost
of risk expected at 30-60 bps), although profitability will
remain pressured due to low rates and intense competition in the corporate
banking sector. SABB's baa1 BCA also reflects the bank's
strong capital, healthy liquidity buffers and sound funding profile.
-- INCREASED ASSET QUALITY RISKS WILL PERSIST
SABB's asset quality has deteriorated following its merger with Alawwal
Bank and was further pressured by the weakening operating environment
in Saudi Arabia on the back of pandemic induced disruption. As
of December 2020, the bank's problem loans were 6.2%
of gross loans (including contribution from purchased or originated credit
impaired assets), up from 3.3% in 2018, before
the merger. Risks are accentuated by the persistently high credit
concentrations that make the bank more vulnerable to event risk.
However, these risks are structural in Saudi Arabia and are not
specific to SABB although the focus on corporate banking makes the bank
more sensitive to downside risks. Despite the continued pressure
on asset risk, Moody's acknowledges the strong underwriting
standards for SABB due to its risk association with HSBC and the conservative
approach towards risk and NPL recognition compared to the local peers.
-- PROFITABILITY STRAINED BY LOWER MARGINS DESPITE EASING
PROVISIONS
SABB's profitability on a normalised basis is solid but Moody's
expects it to remain pressured for the medium term. The bank's
pre-provision income to average assets continues to decline and
stood at 1.9% as at December 2020 compared to 2.6%
in 2019 and 2.9% in 2018. The significant decline
in margins (2.7% in 2020 compared to 3.3%
in 2019 and 3.1% in 2018) as well as the increase in operating
costs associated with the merger with Alawwal Bank were the key drivers
behind the drop in pre-provision income and resulted in the increase
of the cost to income ratio to 42% in 2020 compared to 30%
in 2018 (on stand-alone basis). The bank's bottom-line
profitability remains pressured with net-income to tangible assets
ratio declining to 0.8% in 2020 (-1.6%
including goodwill impairment) from 1.2% in December 2019
and 1.6% in 2018. In its recent history and up to
2018, SABB had return on assets consistently above 2%.
Despite Moody's expectations of lower cost of risk going forward
(1% for 2020 and 1.4% for 2019) profitability may
continue to be under pressure for the medium term and below pre-covid
historic average on the back of low interest rates given the bank's
focus on corporate lending which has sensitive yields to market rates
and intense competition.
VERY HIGH CAPACITY TO ABSORB LOAN LOSSES
SABB's loan loss absorption capacity is strong, and Moody's
expects the bank to maintain high capitalisation supported by moderate
loan growth and profit retention. The bank's ratio of tangible
common equity (TCE) to risk-weighted assets increased to 17.0%
in 2020 compared to 15.7% in 2019 as a result of optimisation
in the risk-weighted assets and the goodwill write-off.
SABB's loss absorption capacity is further strengthened by the fact
that it has already fully provided for the problem loans with coverage
close to 120% (excluding POCI) as at December 2020. In its
new strategy, the bank aims to maintain a solid CET1 ratio at 18-19%
level.
-- SOUND FUNDING PROFILE AND HEALTHY LIQUIDITY BUFFERS
SABB maintained a solid deposit-funded profile, with customer
balances representing around 84% of the bank's non-equity
funding as at December 2020, coupled with a low reliance on market
funding at 9.6% of tangible banking assets. However,
the bank's funding profile is complicated by large depositor concentrations,
a systemic issue facing all banks in Saudi Arabia including SABB.
Moody's expects SABB to maintain strong liquidity buffers to withstand
any short-term deposit volatility. Liquid banking assets
accounted for a high 37% of the bank's tangible banking assets
as of December 2020, and the agency expects the bank to retain a
strong liquidity position over the outlook horizon.
DOWNGRADE OF DEPOSIT RATINGS
The downgrade of the bank's long-term ratings to A2 from A1 captures
the lowering of its BCA to baa1 from a3.
Moody's continues to incorporate a very high probability of government
support translating into a two-notch uplift from the bank's lower
baa1 BCA. This reflects: (1) SABB's systemic importance
in the domestic financial system; (2) the government's strong capacity
to support banks, indicated by the A1 sovereign rating; and
(3) the strong track record of support from the Saudi authorities.
OUTLOOK
The stable outlook reflects our view that SABB's standalone credit
profile could deteriorate, potentially also reflecting a weakening
operating environment, but that this could be balanced by support
from HSBC Holdings plc (A3 stable, a3), which as of May 2021
holds around 31% of SABB's shares.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
SABB's rating could be upgraded in the event of a significant improvement
in the bank's asset quality and profitability. Before any
upgrade, the sovereign's outlook would need to be moved back
to stable with risks in the operating environment remaining broadly stable.
The ratings of the bank could be downgraded if the sovereign rating is
downgraded, indicating a lower government capacity to provide support
and/or Moody's sees a deterioration in the operating environment
that will lead to significant pressure on the bank's capitalisation
or liquidity.
LIST OF AFFECTED RATINGS
..Issuer: Saudi British Bank
Downgrades:
....Adjusted Baseline Credit Assessment,
Downgraded to baa1 from a3
....Baseline Credit Assessment, Downgraded
to baa1 from a3
....Long-term Bank Deposit Ratings,
Downgraded to A2 from A1, Outlook Changed To Stable From Negative
....NSR Long-term Bank Deposit Rating,
Downgraded to Aa2.sa from Aa1.sa
Affirmations:
....Long-term Counterparty Risk Assessment,
Affirmed A1(cr)
....Short-term Counterparty Risk Assessment,
Affirmed P-1(cr)
....Long-term Counterparty Risk Ratings,
Affirmed A1
....Short-term Counterparty Risk Ratings,
Affirmed P-1
....Short-term Bank Deposit Ratings,
Affirmed P-1
....NSR Short-term Bank Deposit Rating,
Affirmed SA-1
....NSR Short-term Counterparty Risk
Rating, Affirmed SA-1
....NSR Long-term Counterparty Risk
Rating, Affirmed Aa1.sa
Outlook Action:
....Outlook, Changed To Stable From
Negative
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology
published in March 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1261354.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.
The local market analyst for this rating is Ashraf Madani, +971
(423) 795-42.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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
Henry MacNevin
Associate Managing Director
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
