Fitch Ratings has affirmed Saudi Arabia’s National Commercial Bank’s (NCB) long-term issuer default rating (IDR) at A+ and Viability Rating at a. The outlook on the long-term IDR is stable.
NCB’s Long- and Short-term IDRs, Support Rating and Support Rating Floor reflect Fitch’s view that there would be an extremely high probability of support from the Saudi authorities, if required. This is based on the bank’s systemic importance, the government’s majority shareholding and the strong history of support for local banks from the Saudi authorities.
The ratings would be sensitive to a reduced perceived ability from the sovereign to support, such as through a sovereign downgrade. The ratings could also be sensitive to a change in the Saudi authorities’ perceived willingness to support, a reduction in NCB’s leading franchise or a reduced government shareholding.
The bank’s Viability Rating (VR) reflects its leading domestic franchise, strong capital, liquidity and profitability. Negative pressure on the VR could occur if there was deterioration in the domestic operating environment and in the bank’s asset quality, particularly as a result of rapid loan growth, including in Turkey, or if there were a sharp reduction in capital or liquidity levels. Upward movement is unlikely considering the already high level of the VR and in view of the high concentration to a number of large corporate borrowers.
NCB reported higher net income mainly due to higher fee income from banking services in 9M12. There has been a strong improvement in operating return on average assets and return on average equity in 9M12. This was contained by strong competition and the low interest rate environment, which put pressure on margins. The cost/income ratio has improved demonstrating solid cost containment, and is at a satisfactory level. Fitch expects profitability to continue to improve for full-year 2012 and into 2013 due to the expected high loan growth and the higher proportion of non-interest income.
Fitch expects asset quality to continue to stabilise in the medium term, benefiting from the positive effect on the economy from increased government spending. However NCB’s high loan book concentration and fast loan growth, in particular in its Turkish subsidiary, could be a potential risk for the bank’s asset quality.
The Fitch Core Capital ratio stood at a high 16.0% at end-9M12, providing NCB with a sound capital buffer. However the capital ratio is decreasing due to strong asset growth.
“NCB’s large investments in highly rated government and corporate securities enable it to comfortably manage liquidity risk. The bank’s large customer deposit base is contractually short term, but it is very stable on a behavioural basis. Moreover, a large portion of customer deposits are non-special commission bearing deposits, which benefits the bank’s cost of funds,” according to Fitch.