Saudi Awwal Bank – Ratings Affirmed with a Stable Outlook

(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 or the Bank) at ‘A+’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed SAB’s Bank Standalone Rating (BSR) of ‘bbb+’, Core Financial Strength (CFS) rating of ‘bbb+’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR is Stable.

The Bank’s LT FCR is positioned three notches above the BSR, which is the maximum uplift permitted under our criteria when the ESL is assessed as High. This reflects our view that the authorities exhibit a strong willingness to provide timely extraordinary support if needed, and that this willingness is underpinned by the sovereign’s very strong capacity to extend such support. Several of the domestic banks in Saudi Arabia, including SAB, are designated as domestical systemically important banks. Saudi banks play a central role in financing the Kingdom’s development agenda, including in financing contractors involved in large-scale infrastructure and economic diversification projects under Vision 2030. Their strategic importance to the functioning and stability of the domestic economy underpins the authorities’ strong incentive to preserve confidence in the financial system. Reflecting this, the government has an established track record of supporting the banking sector, and maintains substantial financial capacity to provide assistance should the need arise.

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 balances the economy’s limited diversification, low monetary policy flexibility and geopolitical risks against strong external buffers and substantial oil reserves. It also takes into account the banking sector’s strong capital buffers and a good funding structure, primarily consisting of domestic deposits, despite rising cross-border funding to meet the elevated credit demand associated with Vision 2030 projects. Saudi banks continue to benefit from strong access to capital markets.

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, sound asset quality with strong credit loss absorption capacity, solid capitalisation, as well as strong profitability despite systemwide pressures on the net interest margin (NIM). Challenges include broader system-wide pressures stemming from tightening liquidity, which will continue to exert upward pressure on funding costs and squeeze NIM, and in turn could weigh on SAB’s performance. Additional credit challenges are likely concentration in both lending and deposits, in line with the KSA banking sector (and the wider GCC); as well as geopolitical risks.

SAB’s business model and strategy are sound. The Bank operates with clearly defined objectives and an experienced management team, supported by a strong domestic franchise both in corporate and retail banking. SAB benefits from a Technical Services Agreement (TSA) with HSBC, which provides access to global expertise, product development support and technology platforms. The TSA runs until September 2027 and, unless renewed, SAB will need to continue strengthening internal capabilities to ensure that key functions can be fully sustained in-house. Its medium-term strategy, set in 2021 and updated through to 2026-27, focuses on accelerating growth, improving efficiency, digital innovation, and leveraging its HSBC-linked international differentiation with progress on most fronts already achieved.

The NPL ratio – not including legacy purchased or originated credit impaired (POCI) loans – continued to improve through 2024 and Q3 25, remaining at very low levels, though slightly above the sector average. Loan-loss reserves (LLRs) provide more than full coverage. While the inclusion of POCI loans, dating back to the acquisition of Al Awwal Bank, translates into higher NPLs and lower LLR coverage, these do not undermine the Bank’s overall credit profile, as loan asset quality metrics remain strong. LLRs still provide near full coverage. Stage 2 exposures have also declined to healthy levels, extending the multi-year downward trend. Looking ahead, some upward pressure on corporate NPLs could arise from borrowers linked to public projects if budget adjustments or Vision 2030 project reprioritisation create cashflow pressures, though there is currently no evidence of pressure on asset quality and overall credit risk remains well-managed. Retail asset quality is strong, and recent policy measures (rent freeze and tax on undeveloped residential land) aimed at easing housing market pressures are not viewed as posing a material risk to SAB’s mortgage portfolio, which benefits from conservative LTVs, salary assignment, and Real Estate Development Fund subsidies.

SAB’s overall profitability is strong and has remained consistently robust in recent years. Underlying earnings are sound and broadly in line with those of well-performing peers, supported by resilient core income, a strong franchise and high brand recognition. These contribute to a comparatively low funding cost easing the impact of sector-wide pressure on the NIM. Profitability continues to benefit from healthy business volumes, disciplined cost control, and a low cost of risk. Non-interest income remains stable, supported in part by the Bank’s established trade finance franchise. Operating profit performance remained strong through 2024 and into 2025, reflecting solid income generation and continued operating efficiency.

SAB maintains a strong funding profile, underpinned by a resilient customer deposit base that remains its primary source of funding. The deposit mix has adjusted to the high-rate environment, with a decline in non-interest-bearing deposits. Nonetheless, despite some fluctuation, the overall stability of the customer deposit mix is assessed as being satisfactory. Reliance on wholesale funding is low, and notwithstanding tighter system-wide liquidity conditions linked to Vision 2030 credit demand, the Bank’s loans-to-deposits ratio remains better than the sector average. Liquidity risk is low, with regulatory liquidity ratios comfortably above requirements. The Bank’s sizeable buffer of HQLAs includes placements with the Saudi Central Bank, government securities, and other highly rated quoted securities. SAB’s relationship with HSBC also provides access to international funding channels, further supporting financial flexibility.

SAB’s capital levels and balance sheet leverage ratio are strong, and the quality of capital is high, with CET1 forming the majority of total capital. Although the CET1 ratio has moderated due to balance sheet growth and dividends, current levels remain adequate for the Bank’s business profile and regulatory expectations. Capital flexibility is also strong, evidenced by successful AT1 (2023) and Tier 2 (2025) issuances, and supported by the Bank’s solid market reputation and shareholder backing. While future regulatory changes may require additional capital, SAB’s established access to domestic and international markets, enhanced by its affiliation with HSBC, provides ample capacity to raise capital if needed.

Rating Outlook

The Stable Outlook suggests that the ratings are expected to remain unchanged over the next 12 months. This reflects our assessment that the risk profile of SAB is likely to remain steady.

Rating Dynamics: Upside Scenario

An upgrade over the next 12 months appears unlikely, as the Bank’s BSR is already at a very high level. An upgrade of the LT FCR could arise from continued strengthening of financial metrics or from meaningful diversification beyond the domestic market that broadens the Bank’s revenue base without any material deterioration in asset quality.

Rating Dynamics: Downside Scenario

A downgrade of the Bank’s BSR or CFS rating would require a marked deterioration in asset quality, capital and/or liquidity metrics; this is not expected over the next 12 months.
 
Contact

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


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