Saudi Awwal Bank– Ratings 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 Saudi Awwal Bank (SAB) at ‘A’ and ‘A2’, respectively. At the same time, CI Ratings has affirmed SAB’s Bank Standalone Rating (BSR) of ‘bbb+’, with a Stable Outlook, Core financial Strength (CFS) rating of ‘bbb+’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR remains Positive.

The Bank’s LT FCR is set two notches above the BSR to reflect the high likelihood of timely and sufficient extraordinary support from the government if needed (Saudi Arabia sovereign ratings: ‘A+’/ ‘A1’/Positive). All Saudi domestic banks are considered systemically important institutions that play a major role in building and nurturing the economy, underpinning the Saudi government’s willingness to maintain stability in the domestic financial system. Hence, the authorities have a strong track record of supporting banks and the financial capacity to provide assistance in the event of stress.

The Bank’s BSR is based on a CFS rating of ‘bbb+’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The OPERA for Saudi Arabia reflects 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 SAB’s position as the fourth-largest bank in KSA, with close and long-standing links to HSBC (its largest shareholder with a 31% stake), as well as the Bank’s solid corporate banking franchise. The CFS is also supported by the Bank’s robust liquidity profile with stable customer-based funding, strong capitalisation, and sound (and improving) underlying asset quality with strong credit loss absorption capacity, as well as good and rising overall profitability. In terms of credit challenges, there is likely concentration in both lending and deposits, in line with the KSA banking sector (and wider GCC). In addition, the Bank has above peer group average Stage 2 loan ratios, although declining and at a satisfactory level.

SAB’s business model, with a very good record of execution and good performance, benefits from its link to HSBC through its management and franchise. SAB maintains full operational connectivity with HSBC providing full product and services slate. The technical services agreement (TSA) with HSBC has been in place since the Bank’s incorporation and extended until 2027. A core value at SAB (as with other members of the wider HSBC Group) is to maintain good loan asset quality and ensure strong risk management policies are in place. Asset quality metrics are good, and the balance sheet contains a high level of liquid assets, mainly KSA government securities.

The NPL ratio continued to improve in 2023 and H1 24, maintaining a trend established over the past four years, although it remains slightly higher than the peer average (which is at a low level). NPLs remained fully provisioned in H1 24, while the extended NPL coverage ratio was strong. SAB’s Stage 2 exposure is higher than its peers, but the level has fallen. The Bank is considered to be relatively more stringent in its application of IFRS 9, and Stage 2 loans are still performing (mainly unrated retail portfolio).

SAB’s overall profitability is good and has shown consistent improvement over the past four years. The Bank’s underlying profitability is sound and comparable to its well-performing peers, supported by its strong franchise and high brand recognition, leading to a lower cost of funds and a solid net interest margin. Moreover, the Bank benefits from good investment income and operating efficiency, and a low cost of risk. Results for H1 24 were very good, with both operating profit and return on average assets higher, as was the case in 2023.

SAB has a robust liquidity profile. The balance sheet is largely funded by a stable and deep customer deposit base. Its solid franchise and entrenched customer base in corporate and retail banking leads to a good proportion of non-interest bearing deposits, and the lowest cost of funds in the peer group. Liquidity risk for the Bank is considered low. The Saudi banking system has a healthy liquidity profile, while SAB in particular has a very comfortable liquidity and funding position with sound buffers.

SAB has strong capitalisation in what is a well-capitalised Saudi banking system. Leverage is low. Moreover, the quality of the Bank’s capital base is very high, with core capital (CET-1) comprising most of Tier 1 and the bulk of total capital, giving it ample scope to raise AT1 and Tier 2 capital if needed. In October 2023, SAB issued SAR4bn Additional Tier 1 Capital Sukuk (SAR-denominated) by way of private placement. These Sukuk are perpetual securities with no fixed redemption dates. Capital flexibility is considered strong, reflecting SAB’s market reputation and supportive shareholders.

Rating Outlook

The Positive Outlook for the LT FCR, in line with the Positive Outlook for KSA, indicates that the rating is likely to be raised 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 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. Nonetheless, continued improvement in financial metrics may see a positive Outlook in the future.

Rating Dynamics: Downside Scenario

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

Contact

Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Karti Inamdar, 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 source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2020-23 and H1 2024. 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 February 1986. The ratings were last updated in October 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 initiated by CI. The following scheme is therefore applicable in accordance with EU regulatory guidelines.

Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No

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

MENAFN03102024002960000411ID1108743879