JEDDAH —

Moody’s has affirmed the local and foreign currency deposit ratings of Saudi British Bank (SABB) at A1/P-1 and those of Alawwal Bank (Alawwal) at A3/P-2. At the same time, Moody’s has also affirmed the baseline credit assessment (BCA), adjusted BCA, Counterparty Risk Assessment and Counterparty Risk Rating of SABB at a3, a3, A1(cr)/P-1(cr), and A1/ P-1, respectively, and those of Alawwal at baa2, baa2, A2(cr)/P-1(cr), and A2/ P-1, respectively. The outlook on Alawwal’s long-term deposit ratings was changed to positive, from stable, while the outlook on SABB’s long-term deposit ratings was maintained at stable.

The rating action last Wednesday follows the official public announcement on Oct. 4, 2018 that the banks have entered into a binding merger agreement. The merger remains subject to regulatory and shareholder approvals and is expected to complete in the first half of 2019. Upon completion, SABB will remain as the operating entity and all of the assets and liabilities of Alawwal will be transferred to SABB in exchange for new SABB shares issued to Alawwal’s shareholders.

The affirmation of SABB’s ratings reflects Moody’s view that this merger upon completion will (1) create the third largest bank in Saudi Arabia (approximately SAR268 billion or $71 billion in total assets) and provide some increased diversification and lending opportunities in a slow economic environment and (2) create medium-term potential for revenue and cost synergies. These strengths should offset integration risks and the absorption by SABB of Alawwal’s loan portfolio, which has a higher proportion of problem loans. The stable outlook on SABB’s ratings balances both potential longer-term benefits from the merger against short-term implementation risks.

The affirmation of Alawwal’s ratings and change of outlook to positive is driven by Moody’s view that the merger will be beneficial for Alawwal’s depositors as they will be transferred to SABB, a higher-rated entity. Upon completion of the merger, when all liabilities are transferred to SABB, Moody’s expects that the ratings on Alawwal would move to the same level as SABB and be withdrawn. — SG