Fitch Ratings has affirmed Riyad Bank's (RB) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

Fitch has also affirmed RB's Viability Rating (VR) at 'bbb+'.

Key Rating Drivers

RB's 'A-' Long-Term IDR is driven by potential support from the Saudi Arabian authorities, as reflected by its Government Support Rating (GSR) of 'a-'. RB's GSR is in line with that of other Fitch-rated Saudi banks, reflecting Fitch's view on the Saudi authorities' strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership.

RB's VR reflects the bank's well-rounded business profile, sound profitability and capitalisation, good asset quality and healthy funding and liquidity. It also captures high deposit concentration. RB's National Rating reflects its creditworthiness relative to Saudi Arabian issuers'.

Favourable Operating Environment: High oil prices, reduced risks from the pandemic, the government's strategy to diversify the economy as part of their Vision 2030, and solid GDP (including non-oil) growth provide Saudi banks with solid business growth opportunities.

Well-Established Domestic Franchise: RB is the third-largest bank in Saudi Arabia, with solid market shares of domestic credit in both corporate (13% at end-3Q23) and retail (8.7%) banking. Its business profile is underpinned by a well-established franchise, strong brand recognition, a large branch network and improved market position in retail.

Risk Profile in Line with Sector: Our assessment of RB's risk profile considers the dominance of large public- and private-sector companies in the bank's loan book, appropriate underwriting standards, and strong growth in the lower-risk retail mortgage segment.

Sound Asset Quality: RB's net loans were 71% of end-3Q23 total assets. Non-performing loans (NPLs) fell to 1.4% of gross loans at end-3Q23 (end-2022: 1.7%). Reserve coverage of NPLs improved significantly to 128% from 112% at end-2022. The bank's Stage 2 loans ratio was 5.6% at end-2022, close to the 5% sector average. Fitch expects RB's asset quality metrics to remain broadly stable in 2024.

Sound and Improving Profitability: High loan growth and stronger net interest margin (NIM)underpin RB's earnings generation. The Fitch-calculated NIM was 3.7% in 9M23, one of the highest in the sector. Fitch expects RB's profitability metrics to be maintained in 2024, as potential NIM pressures would be offset by a lower cost of risk, given the bank's improved Stage 2 and Stage 3 loans coverage.

Sound Capitalisation: RB's capitalisation remained sound despite years of high loan growth. The bank's common equity Tier 1 (CET1) ratio fell slightly to 15.6% at end-3Q23 (end2022: 15.9%) due to high lending growth and dividend payments, but remains commensurate with the bank's risk profile. RB's leverage compares well with that of international peers with a Basel III leverage ratio of 12.1% at end-3Q23.

Sound Funding; Good Liquidity: RB is mainly funded by stable customer deposits, which were 83% of total non-equity funding at end-3Q23. Deposit concentration has reduced in recent years but remains high by international standards, due to large government deposits. Liquidity is comfortable with high-quality liquid assets covering 21% customer deposits at end-3Q23.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of RB's IDRs would require a downgrade of its GSR, which would be triggered by a sovereign downgrade. RB's VR could be downgraded on sharp or sustained deterioration in asset quality and profitability metrics, leading to the bank's CET1 ratio falling closer to 13%.

RB's National Rating is sensitive to a negative change in the bank's creditworthiness relative to other Saudi Arabian issuers'.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of the IDR would require an upgrade of the bank's GSR, which would be triggered by a sovereign upgrade. A VR upgrade is unlikely without a material and sustained improvement in the Saudi Arabian operating environment.

The bank's National Rating is sensitive to a positive change in the bank's creditworthiness relative to other Saudi Arabian issuers'.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

RB's 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' because a significant proportion of Saudi banks' funding is related to the government, and RB would likely need support at a time when the sovereign itself is experiencing some form of stress.

RB's 'X' Long-Term IDR (xgs) is at the level of its VR. RB's 'X; Short-Term IDR (xgs) is mapped to its Long-Term IDR (xgs).

RB's debt and trust certificate issuance programme are housed under its special-purpose vehicle (SPV) Riyad Sukuk Limited. Senior debt and the trust certificate issuance programme are rated in line with RB's Long- or Short-Term IDRs and Long- or Short-Term IDRs (xgs) because Fitch views the likelihood of default on any senior unsecured obligation issued under the SPV as the same as that of the bank. The rating alignment reflects Fitch's view that a default of these senior unsecured obligations would reflect a default of RB in accordance with Fitch's rating definitions, as RB would be required to ensure full and timely repayment of SPV's obligations due to the bank's various roles and obligations under the sukuk structure and documentation.

RB's USD1.5 billion Tier 2 certificates are rated two notches below its IDR to reflect the certificates' subordinated status and Fitch's view of a heightened likelihood of poor recoveries in a default. We do not notch down the certificates for incremental non-performance risk because the terms of certificates do not provide for loss absorption on a 'going-concern' basis (eg coupon omission or write-down/conversion). In our opinion, the risk of incremental non-performance is low, especially given our view of the sovereign support that could be made available.

We use the bank's Long-Term IDR as the anchor for debt ratings, reflecting Fitch's view that the probability of sovereign support remains sufficiently strong to extend to the bank's subordinated noteholders. Fitch is not aware of any precedent set by the Saudi authorities in their approach to restructuring that would result in loss mitigation for Tier 2 debt.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

RB's Long-Term IDR (xgs) would mirror changes to its VR.

A downgrade of RB's Short-Term (xgs) could come from a downgrade of its Long-Term IDR (xgs). An upgrade of RB's Short-Term IDR (xgs) could come primarily from an upgrade of its Long-Term IDR (xgs).

Senior debt and the trust certificate issuance programme housed under Riyad Sukuk Limited are sensitive to changes in RB's Long- and Short-Term IDRs and its Long- and Short-Term IDRs (xgs). Sukuk ratings may also be sensitive to adverse changes to the roles and obligations of RB under the sukuk's structure and documents.

The subordinated certificates' rating is sensitive to an upgrade of RB's IDRs, from which it is notched. The subordinated certificates are also sensitive to a reassessment of loss severity or relative non-performance risk. A narrowing of notching to one from two currently below the anchor rating is unlikely in the near term without any precedent being set by the Saudi authorities through bank resolution or prior cases resulting in loss mitigation for Tier 2 subordinated notes.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

RB's IDRs are linked to the IDRs of Saudi Arabia.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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