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.

Contact

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

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial
statements for FY2019-23. CI may also have relied upon non-public financial
information provided by the rated entity and may also have used financial
information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

The principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in August 1991. The ratings were last updated in May 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

Conditions of Use and General Limitations

The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.

Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.

Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market
risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market
price or suitability of any security for a particular investor.

The information contained in this publication does not constitute investment
or financial
advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment
or other business decisions.

Copyright © Capital Intelligence Ratings Ltd 2024



MENAFN16052024002960000411ID1108222120


Capital Intelligence Ltd

Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.