BANQUE SAUDI FRANSI
Fitch Ratings has affirmed
Fitch has also affirmed BSF's Viability Rating (VR) at 'bbb'.
Key Rating Drivers
BSF's 'A-' Long-Term IDRs are driven by potential support from the Saudi Arabian authorities, as reflected by its Government Support Rating (GSR) of 'a-'. BSF's GSR is in line with that of other Fitch-rated Saudi banks, reflecting Fitch's view of the Saudi authorities' strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership.
BSF's VR reflects the bank's reasonable domestic franchise and balanced business model with good market shares especially in the corporate segment. It also reflects its sound capitalisation, funding and liquidity as well as stronger asset-quality metrics and acceptable performance. It also reflects high concentration risks.
BSF's National Rating is driven by potential support from the Saudi Arabian authorities.
Favourable Operating Environment: High oil prices, the government's strategy to diversify the economy, increased government spending and solid non-oil GDP growth provide Saudi banks with solid business-growth opportunities. We expect Saudi banks to continue growing above banks in other GCC countries in the medium term.
Strong, Niche Corporate Franchise: BSF has a strong corporate franchise. Its long-standing presence in the sector results in stable relationships with a number of the country's largest corporates. Nevertheless, BSF's retail franchise is weaker than peers, which results in a less diversified business mix and a more concentrated and more expensive funding base.
Balanced Risk Profile: Our assessment of BSF's risk profile considers its well-established underwriting standards within the bank's chosen segments, although the bank is focusing on higher risk/return segments than peers. Its greater exposure to higher-risk medium-sized corporates results in a cost of risk that is historically above the sector average. The bank grew lending by 11% in 2023 and we expect it to continue growing broadly in line with the sector average (forecast by Fitch at about 10% in 2024).
Write-offs Underpin Stage 3 Ratio: BSF's Stage 3 loans ratio decreased in 2023 to 1.1% from 2.6% due to significant corporate write-offs of legacy exposures and loan growth. Total reserves were equal to 1.5% of gross loans, with total reserves coverage of impaired loans of 134%. Stage 2 loans made up a moderate 6.7% of total loans at end-2023, slightly above the sector average of 5%. We expect the Stage 3 loans ratio to remain below 1.5% in 2024.
Reasonable Profitability: BSF's operating profit increased to 2.1% of risk-weighted assets (RWAs) in 2023 (2022: 1.9%) but remains below larger peers, mainly due to higher impairment charges at BSF. The bank's net interest margin widened by 40bp in 2023 as it benefited from higher interest rates (due to its high share of non-interest-bearing deposits) and a large share of corporate lending (which is largely floating rate). Cost efficiency is reasonable. We expect the bank's operating profit to remain above 2% of RWAs in 2024 underpinned by a stable net interest margin and stable asset quality.
Sound Capital Ratios: BSF's capital ratios remain sound, with adequate buffers above minimum regulatory requirements, commensurate with its risk profile. BSF's common equity Tier 1 (CET1) ratio was stable at 16.7% at end-2023 (end-2022: 16.6%) as loan growth was compensated by internal capital generation. We expect the CET1 ratio to be within BSF's target range of 16%-17% at end-2024 as loan growth remains in line with internal capital generation.
Solid Funding and Liquidity: Funding is sound and stable, although more concentrated than at peers due to BSF's smaller retail franchise. Similar to peers, the higher rate environment led to a decline in non-interest bearing deposits, although they still represented 47% of deposits at end-2023 (which will drive a rise in funding costs in 2024). The bank's stock of high-quality liquid assets (in line with the Basel III definition) covered 25% of deposits at end-2023, and the fairly stable nature of large government deposits mitigates concentration risk.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of BSF's IDRs would require a downgrade of its GSR. The latter would be triggered by a sovereign downgrade.
BSF's VR could be downgraded on a combined sharp and sustained deterioration in asset quality (impaired loans ratio exceeding 4%) and profitability (operating profit below 1.5% of RWA), leading to the bank's CET1 ratio being sustainably below 14%.
The bank's National Rating is sensitive to a negative change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of BSF's IDRs would require an upgrade of its GSR. The latter would be triggered by a sovereign upgrade.
An upgrade of the bank's VR is unlikely without a material and sustained improvement in the Saudi Arabian operating environment.
The bank's National Rating is sensitive to a positive change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The 'F2' Short-Term IDR is the lower of two options mapping to a 'A-' Long-Term IDR as per Fitch's Bank Rating Criteria because a significant proportion of Saudi banks' funding is related to the government, and BSF would likely need support at a time when the sovereign itself is experiencing some form of stress.
BSF's Long-Term IDR (xgs) is assigned at the level of its VR. BSF's Short-Term IDR (xgs) is mapped to its Long-Term IDR (xgs).
The ratings of senior debt issued by BSF through its special-purpose vehicle BSF Finance are in line with the bank's Long- and Short-Term IDRs, and Long- and Short-Term IDRs (xgs), because Fitch views the likelihood of default on senior obligations (including those issued through the SPV) as the same as the bank's.
The ratings of senior debt (sukuk) issued by BSF through
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
BSF's Long-Term (xgs) would mirror changes to its VR. A downgrade of BSF's Short-Term (xgs) could come from a multi-notch downgrade of its Long-Term IDR (xgs). An upgrade of BSF's Short-Term IDR (xgs) would likely come from an upgrade of its Long-Term IDR (xgs).
The ratings of senior debt issued by BSF through BSF Finance are sensitive to changes in the bank's Long- and Short-Term IDRs and Long- and Short-Term IDRs (xgs).
The ratings of senior debt (sukuk) issued by BSF through
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
BSF's IDRs are linked to
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source
