Fitch Ratings has affirmed The Saudi British Bank's (SABB) Long-Term Issuer Default Rating (IDR) at 'BBB+'.

The Outlook is Positive. Fitch has also affirmed SABB's Viability Rating at 'bbb+'.

Key Rating Drivers

SABB's 'BBB+' Long-Term IDR is driven by potential support from the Saudi 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 SABB would likely need support at a time when the sovereign itself is experiencing some form of stress. The Positive Outlook on SABB's Long-Term IDR reflects that on the Saudi sovereign rating.

SABB's VR reflects its strong capital base, sound funding, good liquidity and adequate business profile, which benefits from links with HSBC Holdings plc (A+/Stable). The VR also considers the bank's weaker asset quality and profitability metrics than peers.

SABB's National Rating is driven by potential support from the Saudi 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 Saudi bank, if needed, to maintain market confidence and stability. SABB'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.

Adequate Business Profile: SABB is the fourth-largest bank in the country, with a lending market share of about 8%. Its primary focus is on corporate lending, of which SABB has a share of about 12%, benefiting from its links with HSBC. The bank's market share in non-interest-bearing deposits was 10% at end-3Q22, the third largest in the country.

Conservative Risk Profile: Our assessment of the bank's risk profile considers SABB's selective growth, good risk control framework and a balance sheet geared towards low-risk assets.

Improving Asset Quality; Weaker Than Peers: The Fitch-calculated impaired loans/gross-loans ratio decreased to 4.7% at end-3Q22 (end-2021: 5%) but remains at the higher end of the sector. Impaired loans comprise Stage 3 and purchased or originated credit-impaired loans, which partly explains the bank's higher impaired loans ratio. We expect asset quality metrics to improve further in 2023 owing to further write-offs and recoveries.

Sound Profitability, Below Direct Peers: SABB's overall profitability remains below that of direct peers due to a lower net interest margin combined with higher operating expenses. The bank's operating profit/risk-weighted assets ratio improved to 2.2% in 9M22 (2021: 1.7%), still below the 2.9% peer average. Profitability should continue to strengthen in 2023 in line with higher rates and stronger fee income generation.

Strong Capitalisation: At end-3Q22, the bank's common equity Tier 1 (CET1) ratio and total capital adequacy ratio of 18% and 20.3%, respectively, were among the highest in the sector and we view them as adequate relative to bank's risk profile. We expect SABB's core capitalisation to remain strong, with earnings retention offsetting strong balance sheet growth.

Sound Funding, Good Liquidity: SABB has a stable funding base and a high portion of non-interest-bearing deposits (72% of total customer deposits at end-3Q22), which provides the bank with a lower cost of funding than peers. The bank has ample liquidity, with a liquidity coverage ratio and a net stable funding ratio of 179% and 127%, respectively, at end-3Q22. High-quality liquid assets covered 41% of customer deposits at end-3Q22.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of SABB's IDRs would require a downgrade of the VR and GSR. The latter would be triggered by a sovereign downgrade, which is unlikely given the Positive Outlook on the sovereign rating. SABB's VR is sensitive to a combination of material weakening of its asset quality metrics (with the Stage 3 ratio increasing above 6%) together with weaker capital ratios (with the CET1 ratio falling closer to 13%).

SABB'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 SABB's Long-Term Local-Currency IDRs would not automatically lead to an upgrade of its National Ratings under our methodology.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior debt and sukuk programme housed under SABB Sukuk Limited are rated in line with SABB's IDR because Fitch views a default of these senior unsecured obligations is the same as a default of SABB.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

SABB's senior debt and sukuk programme housed under SABB Sukuk Limited are subject to the same sensitivities as SABB's IDRs.

VR ADJUSTMENTS

The asset quality score of 'bbb' has been assigned above the 'bb' category implied score, due to the following adjustment reasons: impaired loans formation (positive) and non-loan exposures (positive).

The funding and liquidity score of 'a-' has been assigned above the 'bbb' category implied score, due to the following adjustment reason: deposit structure (positive).

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

SABB's Long-Term IDR is linked to the Saudi sovereign's.

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

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