Fitch Ratings has affirmed Saudi Awwal Bank's (SAB) Long-Term Issuer Default Rating (IDR) at 'A-'.
The Outlook is Stable. Fitch has also affirmed SAB's Viability Rating at 'bbb+'.
Key Rating Drivers
SAB's 'A-' Long-Term IDRs are driven by potential sovereign support, as reflected by its Government Support Rating (GSR) of 'a-'. SAB's GSR is in line with that of other Fitch-rated Saudi banks, reflecting Fitch's view on the Saudi authorities' strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership.
SAB's VR reflects the bank's strong capital base, sound funding and 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'.
SAB's National Rating reflects the bank's creditworthiness relative to other issuers in Saudi Arabia.
Favourable Operating Environment: High oil prices, reduced risks from the pandemic, the government's strategy to diversify the economy as part of its Vision 2030 programme, and solid GDP (including non-oil) growth provide Saudi banks with solid business growth opportunities.
Adequate Business Profile: SAB 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 SAB has a share of about 12%, benefiting from its links with HSBC. The bank's market share in non-interest-bearing deposits was around 10% at end-3Q23, the third-largest in the country, benefiting its business model and underpinning its ability to compete with larger banks for top-tier customers in the country.
Conservative Risk Profile: Our assessment of the bank's risk profile considers SAB's selective growth, good risk control framework and a balance sheet geared towards low-risk assets.
Improving Asset Quality: SAB's impaired loans ratio reduced by 80bp at end-3Q23 to 3.8%, thanks to recoveries and write-offs. Nonetheless, it remains higher than the sector average of 1.9%. Impaired loans comprise Stage 3 and purchased or originated credit-impaired loans, which partly explains the bank's higher headline impaired loans ratio. We expect asset quality metrics to improve again in 2024 due to further write-offs and recoveries.
Sound Profitability: Operating income was up 39% in 9M23 vs 9M22, boosted by stronger net interest income, which offset higher operating expenses. SAB's annualised operating profit/risk-weighted assets ratio reached 2.9% in 9M23 (2022: 2.3%), which is in line with the sector average.
Strong Capitalisation: The bank's end-3Q23 common equity Tier 1 (CET1) ratio was 16.3%, slightly above the Fitch-rated banks' average of16.1%. Its total capital ratio of 18.4% (peer average 19.5%) was comfortably above the minimum requirement. We view SAB's capital ratios as strong for its risk profile. We expect SAB's capitalisation to remain strong as earnings retention continues to offset forecast growth.
Sound Funding, Good Liquidity: SAB has a stable funding base and a high portion of non-interest-bearing deposits (60% of total customer deposits at end-3Q23), which provides the bank with a lower cost of funding than most peers. The bank has ample liquidity, with a liquidity coverage ratio and a net stable funding ratio of 188% and 121%, respectively, at end-3Q23. High-quality liquid assets covered a high 41% of customer deposits at end-3Q23.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of SAB's IDRs would be driven by a downgrade of the bank's GSR. A downgrade of the GSR would be triggered by a sovereign downgrade, or if Fitch changes its view on the Saudi authorities using resolution legislation to bail in senior creditors.
SAB'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%).
SAB's National Rating is sensitive to a negative change in 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 would be driven by an upgrade of the bank's GSR, which would be triggered by a sovereign upgrade. A VR upgrade is unlikely without a material improvement in the Saudi Arabian operating environment.
The bank's National Rating is sensitive to a positive change in the bank's creditworthiness relative to other Saudi Arabian issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SAB's 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' because a significant proportion of Saudi banks' funding is related to the government, and SAB would be likely to need support at a time when the sovereign itself is experiencing some form of stress.
SAB's Long-Term IDR (xgs) is at the level of its VR. Its Short-Term IDR (xgs) is mapped to its Long-Term IDR (xgs).
Senior debt and sukuk programme housed under its special-purpose vehicle (SPV), SAB Sukuk Limited, are rated in line with SAB's Long-Term IDR and Long-Term IDR (xgs). The rating alignment reflects Fitch's view that a default of these senior unsecured obligations would reflect a default of SAB in accordance with Fitch's rating definitions, as SAB would be required to ensure full and timely repayment of the SPV's obligations due to the bank's various roles and obligations under the sukuk structure and documentation.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
SAB's Long-Term IDR (xgs) would mirror changes to its VR.
A downgrade of SAB's Short-Term (xgs) could come from a downgrade of its Long-Term IDR (xgs). An upgrade of SAB's Short-Term IDR (xgs) could come primarily from an upgrade of its Long-Term IDR (xgs).
Senior debt and the trust certificate issuance programme housed under SAB Sukuk Limited are sensitive to changes in SAB's Long-Term IDR and its Long-Term IDR (xgs). Sukuk ratings may also be sensitive to adverse changes to SAB's roles and obligations under the sukuk's structure and documents.
VR ADJUSTMENTS
The asset quality score of 'bbb' is assigned above the 'bb' category implied score, due to the following adjustment reasons: impaired loans formation (positive).
The funding and liquidity score of 'a-' is assigned above the 'bbb' category implied score, due to the following adjustment reason: deposit structure (positive).
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
SAB's Long-Term IDR is linked to the Saudi sovereign's.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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