JEDDAH, 1 February 2006 — Standard & Poor’s Ratings Services has raised its counterparty credit ratings on seven banks in Saudi Arabia (foreign currency A/Positive/A-1; local currency A+/Stable/A-1) and Kuwait (A+/Stable/A-1+) due to a greater weighting of potential government support in the banks’ creditworthiness.
S&P’s has raised its counterparty credit ratings on Monday on the National Commercial Bank (NCB), Al-Rajhi Banking & Investment Corp., Riyad Bank, and Samba Financial Group.
According to Standard & Poor’s the Saudi authorities are strongly committed to maintaining a stable financial system. In the past, they have demonstrated a willingness to intervene in order to rescue distressed financial institutions. The most prominent case in the past decade was that of NCB. Massive asset quality problems led the government to take control of the bank from its private shareholders in the late 1990s, avoiding its failure.
The counterparty credit ratings on Al-Rajhi Bank, Riyad Bank, and Samba stand one notch higher than the respective stand-alone ratings that exclude potential extraordinary government support. The counterparty credit rating on NCB is two notches higher than the stand-alone rating, reflecting the bank’s majority ownership by the government, leading market share, and importance to the banking system in the Kingdom.
Al-Rajhi Bank last week reported a net profit of SR5.63 billion for 2005, an increase of 92 percent from 2004.
Samba said yesterday its net profit jumped 60 percent to SR4.02 billion in 2005 compared to SR2.51 billion in 2004. However, shares of Al-Rajhi Bank and Samba were trading down yesterday at SR3,450 and SR960, respectively.
S&P’s has raised its counterparty credit ratings on Commercial Bank of Kuwait, Gulf Bank, and Al-Ahli Bank of Kuwait. Following this rating action, all Kuwaiti commercial banks rated by Standard & Poor’s (including National Bank of Kuwait S.A.K., A/Stable/A-1; and Kuwait Finance House, A-/Stable/A-2) have counterparty credit ratings that are one notch higher than their respective stand-alone ratings that exclude this potential extraordinary government support.
The Kuwaiti government’s track record of extraordinary support for the banking sector is strong and well documented. After the first Gulf War, the government took on a large proportion of the banks’ problem loans, in exchange for long-term government debt, and formally guaranteed bank deposits and equity (both guarantees have now been lifted).
“The upgrades reflect our opinion that the governments of Kuwait and Saudi Arabia would be likely to provide extraordinary assistance to the systemically important banks in the two countries in the event these banks encounter distress,” said S&P’s credit analyst Emmanuel Volland. Extraordinary government support refers to specific actions — recapitalization, liquidity support, or the purchase of problem assets at below market prices — that would prevent banks, including private sector banks, from failing.
Potential government support for banks in Kuwait and Saudi Arabia is strong on a relative basis. This reflects the dominant role of both countries’ public sectors in their respective economies, and their protective regulatory policies concerning the banking sector, exemplified by the rules governing new banking licenses, branch openings, and foreign investment in domestic banks. Specific past actions in support of troubled banks have gone beyond the liquidity facilities that central banks would typically be expected to offer in their role as lender of last resort. The large and improving net external asset position of Kuwait and Saudi Arabia, largely driven by high oil prices, provides both countries with the financial capacity to provide exceptional support to their banking sectors. It should be emphasized, however, that Standard & Poor’s does not assume that these governments will support all distressed banks under any circumstances.