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

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

Key Rating Drivers

RB's 'BBB+' Long-Term IDR reflects potential support from the Saudi Arabian authorities, as reflected in its Government Support Rating (GSR) of 'bbb+' and is underpinned by its standalone credit profile. Its 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'BBB+' 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. The Positive Outlook reflects that on the sovereign.

RB's VR reflects the bank's well-established business profile, sound capitalisation, strong profitability, sound asset quality and healthy funding and liquidity. It also captures high deposit concentration.

The National Rating is driven by potential support from the Saudi Arabian authorities.

'bbb+' GSR: The Saudi authorities have strong ability and willingness to provide support to domestic banks irrespective of size, franchise, funding structure and level of government ownership. High contagion risk among domestic banks is an added incentive for the state to provide support to any bank, if needed, to maintain market confidence and stability. RB's 'bbb+' GSR is in line with all other rated Saudi banks.

Favourable Operating Environment: High oil prices, reduced risks from the pandemic, the authorities' strategy to diversify the economy as part of Vision 2030, and solid GDP growth provide Saudi banks with solid business growth opportunities.

Well-established Domestic Franchise: RB is the third-largest bank in Saudi Arabia, enjoying solid market shares of domestic credit in both corporate (12% at end-3Q22) and retail (9%) banking. Its business profile has strengthened, with an improving franchise underpinned by strong brand recognition, a large branch network and high growth 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: Asset quality is sound. Non-performing loans (NPL) fell to 1.6% of gross loans at end-3Q22 (end-2020: 1.9%). Reserve coverage of NPLs has improved and was 115% at end-3Q22. Fitch expects RB's asset quality metrics to remain broadly stable in 2023.

Strong and Improving Profitability: RB enjoys strong core earnings generation underpinned by loan growth, strong fee income and an improving franchise. In particular, faster growth in higher-yielding retail mortgages has supported the net interest margin (NIM) in recent years. The Fitch-calculated NIM was maintained at a sound 3% in 9M22, not significantly below its pre-pandemic levels. Fitch expects operating profit/risk-weighted assets to improve to 2.7%in 2023 (9M22: 2.4%).

Sound Capitalisation: RB's capitalisation has remained strong despite the pandemic and high growth. The bank's common equity Tier 1 (CET1) ratio reduced to 15.1% at end-3Q22 (end-2020: 16.5%) due to high lending growth but remains adequate and Fitch expects it will remain stable in 2023.

Strong Funding; Good but Pressured Liquidity: RB's strong franchise helps attract low-cost retail deposits but deposit concentration is high due to large government deposits. The Fitch-calculated gross loans/customer deposits ratio (104% at end-3Q22) is at the higher end of the sector and Fitch expects this ratio will increase further in 2023 due to continued credit growth. Nevertheless, liquidity is sufficient with high-quality liquid assets equivalent to 16% of total assets and covering 24% customer deposits at end-3Q22.

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 VR and GSR. The latter would be triggered by a sovereign downgrade, which is unlikely given the Positive Outlook on Saudi Arabia. RB's VR could be downgraded in case of a sharp or sustained deterioration in asset quality and profitability metrics, leading to the bank's CET1 ratio falling closer to13%.

RB's National Rating is sensitive to a negative change in its Long-Term Local-Currency IDR and 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 could come from an upgrade of the bank's VR or an upgrade of the GSR. The latter would come as a result of 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 its Long-Term Local-Currency IDR and the bank's creditworthiness relative to other Saudi Arabian issuers, although an upgrade of RB's Long-Term Local-Currency IDR would not automatically lead to an upgrade of its National Ratings under our methodology.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

RB's debt and trust certificate issuance programme are housed under Riyad Sukuk Limited. Senior debt and the trust certificate issuance programme are rated in line with RB's IDRs because Fitch views that default of these senior unsecured obligations would reflect a default of RB.

The USD1.5 billion Tier 2 certificates are rated two notches below RB's IDR to reflect the certificates' subordinated status and Fitch's view of a heightened likelihood of poor recoveries in the event of default. We do not notch down the certificates for non-performance, as in our opinion, the risk of incremental non-performance is low relative to the anchor rating. The Long-Term IDR, as the anchor, reflects Fitch's view that the probability of sovereign support remains sufficiently strong to extend to the bank's subordinated noteholders.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Senior debt and the trust certificate issuance programme housed under Riyad Sukuk Limited are subject to the same sensitivities as RB's IDRs. 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.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2023 Electronic News Publishing, source ENP Newswire