Sunday 11, June 2017 by Nabilah Annuar

CI affirms Banque Saudi Fransi’s rating

Ratings affirmed with a stable outlook.

Capital Intelligence Ratings (CI) has affirmed the ratings of Riyadh-based Banque Saudi Fransi (BSF). The Financial Strength Rating (FSR) is affirmed at 'A+'. The rating is supported by the Bank's very sound liquidity ratios, low reliance on short-term funding, very sound capital ratios, solid cost control, and the ongoing support from its strong principal shareholder, a unit of the Crédit Agricole Group. The rating is constrained by the deteriorated asset quality (notwithstanding the bold measures taken by the Bank to provide for that deterioration), the reduction in net profit and ROAA, and the current operating environment.

Supported and constrained by the same factors, the Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at 'A+' and 'A1', respectively. In view of the Bank's position in the Saudi banking sector, support from either official quarters or its shareholders, or both, would be expected to be forthcoming in the unlikely event it is needed. Consequently, the Support Rating remains at '2'. All ratings continue to carry a 'Stable' Outlook. A further deterioration in the operating environment which led to degraded asset quality could be a trigger for a reduction in either the ratings or the outlook.

The continual improvement in the asset quality of BSF was interrupted last year, as a result of the weakening economy and the more fragile operating environment. However, the Bank had already positioned itself in terms of capital and loan-loss reserves to withstand the expected increase in the cost of risk. That positioning was a direct result of a 2011-13 restructuring programme. Before, during and after the restructuring programme, the Bank has benefitted from strong logistical and financial support from its long-standing French parent.

While the expected deterioration (as seen elsewhere in the Saudi banking system) may have been worse than anticipated, the Bank's previous preparation proved effective. Although the stock of NPLs and the NPL ratio both rose, BSF incurred a greatly increased loan-loss provisioning expense to maintain a high level of coverage by loan-loss reserves. In addition, the Bank's very sound positions relative to capital and to free capital allowed it to maintain a very strong effective NPL coverage ratio.

The weaker economy of 2015 and 2016 was marked by a liquidity squeeze, which affected most Saudi banks in some way in H2 2015 and 2016. Although most Saudi banks lost customer deposits last year, BSF defied the trend by increasing customer deposits at the fastest rate among all banks in the peer group. At the same time, the Bank tempered its loan growth, increased its liquid assets and maintained its low reliance on short-term funding.

Maintaining the very sound balance sheet came at a cost to BSF's income statement, however. As a largely corporate bank, its net special commission margin has typically been below the average of its peers, and that continued to be the case. Even so, a small improvement in that margin translated into growth in net special commission income. Moreover, continued cost control allowed the Bank's cost ratio to remain among the best in a sector which displays strong cost ratios. The result was a small increase in operating profit but that increase was erased as a result of the increased provisioning, so that both net profit and ROAA suffered significant decreases.

When ranked by total assets, BSF is the fifth-largest of the twelve locally incorporated commercial banks in Saudi Arabia; by total capital it ranks sixth. It is also the largest of the four banks in the kingdom with significant foreign ownership. At year end 2016 its assets totalled SAR 203.4 billion (equivalent to USD54.2 billion), representing a market share of 9.2 per cent by total assets. On the same date it operated 86 full domestic branches (2015: 83).

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