Credit Rating

Karachi, June 30, 2022: VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Samba Bank Limited (‘SBL’ or ‘the Bank’) at ‘AA/A-1’ (Double A/A-One). Outlook on the assigned ratings has been revised from ‘Positive’ to ‘Stable’. The long term rating of ‘AA’ signifies high credit quality; protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. The short term rating of ‘A-1’ signifies high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Previous rating action was announced on May 23, 2021.

The assigned rating of SBL is underpinned by strong profile of the new sponsor Saudi National Bank (formerly Samba Financial Group). SNB is the largest bank of KSA, having an asset base of more than USD 240b (SAR 914b) as at end-Dec 2021. In May’22, the Bank notified that SNB was terminating the process for the sale of SNB's equity stake in SBL. In recent communication to the Bank’s management, SNB has communicated its intent to remain committed to SBL, including commitment to invest in the strategy of SBL. With the election of new nominee directors scheduled for Q3’22, future rebranding marketing strategy and business plan for growth shall be devised.

Overall market share of the Bank in terms of advances and deposits has been maintained, albeit it’s considered to be low vis-à-vis peers. The asset quality indicators of the Bank were impacted by non-performance of a single client from the Oil & Gas sector, besides a few small-sized nonperformance by a counterpart in the Food & Grains industry. The gross infection of the portfolio remains comparable to peers, while net infection is considered adequately low. Nevertheless, credit risk on the books is a concern, specifically in view of SBL’s elevated ADR. Going forward, given the 400 bpts increase in benchmark rates, concerns of potential increase in NPLs are emerging. Given the increase in net-NPLs, the same constituted 3.3% of the tier-I equity as Mar’22. VIS will continue to monitor this metric in the ongoing period.

Given limited branch operations, SBL’s ability to attract low cost funding is restricted. As future strategic plan of the Bank remains hinged on the changes in the Board, growth in Bank’s deposit base remained lackluster during the period under review. Nevertheless, the management’s efforts towards improving the deposit base composition were effective, as can be noted from the CASA composition increasing from 47.8% to 55.9% during Dec’20-Mar’22. The cost of deposits of the Bank remained elevated for 2021, vis-à-vis similar rated peers. The liquid asset coverage of deposits and borrowings stood at 36.0% as of Mar’22. We have also reviewed the asset liquidity maturity profile of the Bank and found no material maturity mismatch as of Dec’21.

SBL profitability indicators leave room for improvement when compared to the AA rated banks. The short term outlook on SBL’s profitability is stressed mainly as spreads are likely to undergo contraction in the short term and normalize by Q3’22; this is mainly attributable to the upward trajectory in benchmark rates, which should translate in an uptick in spread. Nevertheless, given the lag in repricing of assets vis-à-vis liabilities, the spread is likely to contract in Q2’22 and normalize subsequently. Furthermore, the movement in benchmark rates is likely to impact SBL’s profitability given MTM losses on investment portfolio.

SBL’s capital adequacy has declined slightly since our last review. Given the stressed profitability outlook and growth in risk weighted assets, the Bank’s CAR is likely to recede further in the short term. As of Mar’22, the Bank’s CAR was considered to be adequately high and superior to the peer median. Incorporating our outlook, SBL’s CAR is projected to remain adequately high and in line with VIS benchmarks over the rating horizon.