Fitch revises Saudi National Bank's outlook to stable

Fitch Ratings has revised the Saudi National Bank's (SNB) Outlook to Stable from Negative, while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'A-'. The. The agency has also assigned SNB a National Long-Term Rating of 'AA+(sau)' with a Stable Outlook.

The revision of the Outlook reflects our view that pressures on the operating environment from the pandemic and lower oil prices have eased sufficiently, and that the financial metrics of the bank have been resilient in the past quarters, despite these pressures. Strong financing growth will continue to support the bank's metrics in 2021, in the agency's view.

The 'A-' Long-Term Foreign- and Local-Currency IDRs of SNB are driven by its standalone credit profile as captured in its 'a-' Viability Rating (VR).

We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. A Long-Term IDR of 'A-' can correspond to a Short-Term IDR of either 'F2' or 'F1'. The 'F1' Short-Term IDR of SNB reflects our view that the bank's funding and liquidity profiles are a rating strength.

SNB's VR is underpinned by a strong company profile supporting well-diversified and resilient earnings, strong funding and liquidity, as well as sound asset quality and capitalisation. It also reflects that pressures from the economic environment, due to the coronavirus crisis and lower oil prices, have eased and are now less likely to affect the bank's financial profile.

The VR is highly influenced by SNB's company profile as Saudi Arabia's largest bank, with a market share in domestic assets of around 26% at end2020. On a pro-forma basis for its merger with another Saudi lender Samba Financial Group, SNB's exposure to the retail segment declined to 39% of total loans at end-2020 from 50%, due to Samba's strong corporate focus. However, we expect SNB's retail loans to gradually ramp up in 2021-2022 due to a high appetite for that segment, supported by a strong domestic franchise.

As per end-2020 pro-forma estimates by Fitch, SNB's Stage 3 loans ratio stood at a sound 1.8%, which is one of the lowest among domesticrated banks, while the Stage 2 loans ratio was 5.1%, also at the bottom end of the sector's. Exposures deferred due to the pandemic were a moderate 6.2% and 1.9% of gross loans, respectively, at end-2020 at SNB and Samba. Some of these exposures may become impaired in the medium term; however, recovering economic conditions will limit migration to Stage 3. High loan growth will support a stabilisation of the stage 3 loans ratio in 2021-2022, and mitigate increases in the stock of stage 3 loans.

On a pro-forma basis, SNB's core profitability metric, operating profit/risk-weighted assets (RWAs), stood at 2.6% in 2020, down from 3.1% pre-merger. This reflects weaker profitability at Samba and a higher risk-weighted density. We believe the strengthening of the franchise fostering non-interest bearing (NIBs) customer deposits and rapid loan growth in the high-yielding mortgage segment will support SNB's earnings generation. In addition to improving business conditions, this should support a recovery in the core profitability metric by 2022.

We expect SNB's capital position to benefit from Samba's stronger capitalisation, which should be supportive of a sound common equity Tier 1 (CET1) ratio. However, this will depend on the outcome of the purchase price allocation (PPA) exercise, which is expected to be finalised in 2021. We do not expect the outcome of the PPA exercise to significantly inflate the value of goodwill in light of Samba's sound asset quality. Capital is also subject to high future loan growth.

SNB's strong and stable funding base is supported by a solid customer deposit base, which represented 85% of total non-equity funding at end2020, including the effect of the merger with Samba. NIBs at SNB are among the largest of Saudi banks', representing 70% of total customer deposits on a pro-forma basis at end2020. Reliance on retail deposits is estimated to have declined to 50% at end-2020 on a pro-forma basis, from 57% pre-merger.

SNB's pro-forma loans-to-customer deposits ratio was 83% at end2020, as estimated by Fitch, which is one of the lowest among domesticrated banks'. At end-1Q21, its premerger Basel III liquidity coverage ratio was 180% while high-quality liquid assets covered a sound 32% of total customer deposits.