"We consider that the capitalization of the banks we rate in Saudi Arabia ranges from adequate to solid and is a supportive rating factor," said Standard & Poor's credit analyst Nicolas Hardy. "Consequently, we think these banks carry sizable capital cushions to absorb unexpected losses."
Standard & Poor's introduced in April 2009 its new risk-adjusted capital framework (RACF) to assess financial institutions' capital adequacy and facilitate comparisons among countries and regions. The RACF aims to provide a measure that is independent from - national regulations, Basel II methodological options, and banks' internal risk measurement systems. Standard & Poor's notes, however, that capitalization is only one aspect of our overall rating methodology and that the RACF does not account for all risks.
Our analysis showed that our weighted average risk-adjusted capital (RAC) ratio for the eight Saudi commercial banks we rate stood at 10.6 percent as of June 30, 2009. These eight banks account for about 90 percent of Saudi system assets and are therefore representative of the whole Saudi banking system, Hardy said.
"Our RAC calculation illustrates Saudi banks' dominant exposure to corporate credit risk, and for some banks, the risks they bear associated with equity investments," said Hardy.
Our methodology also intends to capture concentration risks that the Saudi banks face. These risks stem from their lack of geographic diversification and relatively high single-name exposure in the corporate loan book, he added.
The RAC ratios on the Saudi banks we rate range from 8.3 percent to 14.6 percent, based on data at end-June 2009. These RAC ratios compare well with the 6.7 percent average RAC ratio for the 45 largest international banks that we estimated with data as of the same date. We expect capitalization to remain a supportive rating factor for these banks, he said.
"We think the Saudi banks we rate will likely continue to control credit growth this year, while maintaining resilient operating performances that enable capital generation," added Hardy.
