Al Rajhi Banking and Investment Corporation – Ratings and Positive Outlook Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Al Rajhi Banking and Investment Corporation (ARB) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed ARB’s Bank Standalone Rating (BSR) of ‘a-’, Core Financial Strength (CFS) rating of ‘a-’, and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR remains Positive. The BSR remains on a Stable Outlook.

ARB’s LT FCR is currently set two notches above the BSR to reflect the high likelihood of timely and appropriate extraordinary support from the KSA government in case of need. Saudi banks are considered systemically important banks that play an important role in building and nurturing the economy, underpinning the Saudi government’s willingness to maintain stability in the domestic financial
system. The authorities have a strong track record of supporting banks and have the financial
capacity to provide assistance in the event of stress. With the authorities’ support capacity improving, this ratings uplift is expected to increase to three notches – the maximum permitted under our criteria in cases where the ESL is considered to be High – if the sovereign rating is upgraded by one notch to ‘AA-’.

ARB’s BSR is based on a CFS rating of ‘a-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The OPERA for Saudi Arabia balances the economy’s limited diversification, low monetary flexibility and geopolitical risks against strong fiscal and external buffers, and substantial oil reserves. It also takes into account the banking sector’s strong capital buffers and a healthy funding structure, which primarily consists of domestic customer deposits with little dependence on cross-border funding.

The CFS rating is supported by the Bank’s strong asset quality, with key metrics the best in the sector, very good profitability, and very high capitalisation. Although profitability remains good, returns have slightly fallen over the last year as ARB’s margin has narrowed, reflecting the increase in the cost of funds, and this is a challenge. Certain liquidity metrics have tightened due to the growth in financing, but the overall position is satisfactory. Saudi banks, including ARB, have little dependence on cross-border funding and liquidity is supported by stable domestic customer deposits. Moreover, the Saudi government remains strongly supportive of the domestic banking sector. Non- financial
supporting factors include ARB’s status as the second largest bank in Saudi Arabia and the largest Islamic bank in the world. In addition, ARB is the leading retail bank in Saudi Arabia with the largest distribution network and client base, and has a leadership position across all main retail segments, including consumer credits and housing mortgages. It has a high market
share in customer deposits, just behind that of Saudi National Bank. Previously, the Bank’s rapid lending growth (although well-managed and largely in low-risk government-encouraged housing mortgages) was a credit challenge, but financing growth was subdued last year.

ARB has strong asset quality. This is underpinned by the granular low-risk retail orientation (around 72% of the customer financing portfolio, much higher than the sector). Asset quality metrics are the best in the Saudi banking sector as demonstrated by a very low level of impaired financing. Credit loss absorption capacity is strong, with high levels of non-performing financing (NPF) provisions, good operating profitability, and a very high extended NPF coverage ratio.

The Bank’s profitability is robust despite the decrease over the past year. Returns are still strong, driven by its extensive retail franchise and Islamic banking status. The margin remains sound despite tightening, and vigorous operational efficiency and a low cost of risk underpin profitability. Margins have tightened as interest rates have increased and depositors have switched away from demand accounts to higher return time deposits. Going forward, CI expects ARB’s profitability to remain good.

ARB has a satisfactory liquidity profile with stable customer deposit-based funding. However, some key liquidity metrics have tightened over the past few years. The Bank’s underlying funding base is supported by an established and extensive retail banking network with a high proportion of sticky demand deposits. However, with loan growth outpacing deposits, the loans to deposits ratio has increased and is slightly elevated. As the majority of customer deposits are sourced through the Bank’s retail channels, ARB’s deposit base is granular and fairly immune from concentration risk – unlike some of its Saudi peers. Wholesale funding has increased but deposits from banks are majority sourced from local banks. A portion of deposits from banks include zero-interest deposits from the Saudi Arabia Monetary Authority (SAMA) with varying maturities. Also included in wholesale funds is a successfully issued (in 2023) USD-denominated senior unsecured sustainable sukuk, amounting to USD1bn (SAR3.75bn), with 5-years maturity. The sukuk represented Al Rajhi Bank’s first issuance in the USD international capital market
s via a USD4bn sukuk programme that has a multi-issuance variability of one or more tranches of senior unsecured or tier 2 subordinated sukuk. Other wholesale funds include a green syndicated loan totalling around USD2.7bn.

ARB has strong capitalisation and good capital flexibility. ARB’s capitalisation has strengthened over recent years due to retained earnings, and Tier 1 issues, with capital ratios at strong levels at year end-2023. Total CAR increased to 21.5% in 2023 and the CET 1 ratio to 17.2%; both are considerably above the regulatory minima. Capital ratios are also above the average for what is a well-capitalised Saudi banking system. ARB has good internal capital generation due to its strong profitability and reasonable distribution.

Rating Outlook

In January 2023, CI had raised the LT FCR Outlook of ARB to Positive from Stable, reflecting a similar action on Saudi Arabia’s sovereign ratings (‘A+’/‘A1’/Positive). The Positive Outlook for the LT FCR indicates that the rating could rise by one notch in the next 12 months provided the sovereign’s credit strength and its capacity to support the banking system improve as expected.

Rating Dynamics: Upside Scenario
An upgrade of more than one notch in the LT FCR could occur if the sovereign rating was lifted and the BSR was raised. However, reflecting its sound financial
metrics, the Bank’s BSR is already at a high level, and therefore is unlikely to be lifted.

Rating Dynamics: Downside Scenario

The most likely downside scenario would be for the sovereign credit Outlook to be amended to Stable from Positive if the expected improvement in sovereign credit strength does not occur. If this were to happen, ARB’s LT FCR Outlook would also be amended to Stable from Positive and the ratings would be unchanged. A downgrade of the Bank’s BSR or CFS would require a marked deterioration in asset quality and/or liquidity and funding metrics. This is not currently expected.


Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: George Panayides, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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