Fitch revises 8 Saudi banks to positive outlook; affirms IDRs

PHOTO

Saudi Arabia - Fitch Ratings has revised eight Saudi banks' outlooks to Positive from Stable and affirmed their Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB+'

The banks are Riyad Bank, The Saudi British Bank (SABB), Banque Saudi Fransi (BSF), Arab National Bank (ANB), Alinma Bank, Saudi Investment Bank (SAIB), Bank Aljazira (BAJ) and Gulf International Bank - Saudi Arabia (GIB SA). The banks' Viability Ratings (VR) are unaffected by the rating action.

The rating actions follow a similar action on Saudi Arabia's sovereign rating on April 14, 2022.

Intrinsic creditworthiness

The IDRs of the eight banks are driven by their Government Support Ratings (GSRs). The IDRs of Riyad and SABB are also underpinned by the respective banks' intrinsic creditworthiness.

Fitch has also withdrawn BSF's, ANB's, Alinma's, SAIB's, BAJ's and GIB SA's Support Ratings of '2' and Support Rating Floors of 'BBB+' as they are no longer relevant to the agency's coverage following the publication of Fitch’s updated Bank Rating Criteria on November 12, 2021. In line with Fitch’s updated criteria, it has assigned these banks a GSR of 'bbb+'.

Key rating drivers

Riyad's, SABB's, ANB's, BSF's, Alinma's, SAIB's, BAJ's and GIB SA's IDRs are driven by sovereign support, as reflected in the banks' GSRs of 'bbb+', which are in line with Fitch's Domestic-Systemically Important Bank (D-SIB) GSR of 'bbb+'. This is applied to all Saudi banks, reflecting Fitch’s view of a high probability of support for all the country's lenders from the Saudi authorities, if needed.

Fitch's assessment of support from the Saudi Arabian authorities considers the authorities' strong ability and willingness to provide support to domestic banks irrespective of size, franchise, funding structure and level of government ownership. High contagion risk among domestic banks is an added incentive for the state to provide support to any Saudi bank if needed, to maintain market confidence and stability.

The Positive Outlook on these banks' Long-Term IDRs reflects that on the Saudi sovereign rating.

The 'F2' Short-Term IDR for the banks is the lower of two options mapping to a Long-Term IDR of 'BBB+' as per Fitch’s bank rating criteria. This is because a significant proportion of Saudi banks' funding is related to the government and they would likely need support at a time when the sovereign itself is experiencing some form of stress.

Debts and sukuk

Riyad's and SABB's senior debts and sukuk programmes housed under, respectively, Riyad Sukuk Limited and SABB Sukuk Limited, are rated in line with the bank's IDR of 'BBB+' because Fitch views a default of these senior unsecured obligations the same as a default of the banks.

Riyad's and ANB's Tier 2 sukuk certificates, issued through their respective vehicles, Riyad Sukuk Limited and ANB Sukuk Ltd., are rated two notches below the banks' IDR of 'BBB+' to reflect the certificates' subordinated status and Fitch's view of a heightened likelihood of poor recoveries in the event of default. Fitch does not notch down the certificates for non-performance as the risk of incremental non-performance is low relative to the anchor rating.

Fitch uses the banks' Long-Term IDRs as the anchor rating for the Tier 2 sukuk certificates as it believes that potential extraordinary sovereign support for Riyad ANB is likely to flow through to the bank's subordinated certificate holders. Fitch is not aware of any precedent set by the Saudi authorities in their approach to restructuring that would result in loss mitigation for Tier 2 debt.

National ratings

National Ratings for Saudi banks reflect their creditworthiness relative to that of other issuers in Saudi Arabia. The Positive Outlook on BSF's, ANB's, Alinma's, SAIB's, BAJ's and GIB SA's National Ratings reflects Fitch’s view they could be upgraded to the same levels as Riyad's and SABB's following an upward revision of the eight banks' GSRs as sovereign support would then become the sole driver of all eight banks' Long-Term Local-Currency IDRs.

Rating sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of Riyad's and SABB's IDRs would require a downgrade of the respective banks' VRs and downward revision of their GSRs. A downgrade of BSF's, ANB's, Alinma's, SAIB's, BAJ's and GIB SA's Long- and Short-Term IDRs would be driven by a downward revision of these banks' GSRs.

A GSR downgrade for Saudi Arabian banks would be triggered by a sovereign downgrade, which is unlikely given the Positive Outlook on Saudi Arabia.

The banks' National Ratings are sensitive to a negative change in their Long-Term Local-Currency IDRs and the bank's creditworthiness relative to other Saudi Arabian issuers'.

Saudi banks' senior unsecured and subordinated unsecured sukuk ratings are sensitive to negative rating actions on the banks' Long- and Short-Term IDRs.

Positive rating action/upgrade

An upgrade of the banks' IDRs could come from an upward revision of the GSRs, following an upgrade of Saudi Arabia. An upgrade of the Long-Term IDRs for SABB and Riyad could also come from an upgrade of their VRs, although this is unlikely without a significant and sustained improvement in the operating environment.

The banks' National Ratings are sensitive to a positive change in their Long-Term Local-Currency IDRs and the bank's creditworthiness relative to other Saudi Arabian issuers', although an upgrade of Riyad's and SABB's Long-Term Local-Currency IDRs would not automatically lead to an upgrade of their National Ratings under Fitch’s methodology. BSF's, ANB's, Alinma's, SAIB's, BAJ's and GIB SA's National Ratings may be upgraded if their Long-Term Local-Currency IDRs are upgraded.

Saudi banks' senior unsecured and subordinated unsecured sukuk ratings are sensitive to positive rating actions on the banks' Long- and Short-Term IDRs.

Best/worst case rating scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.

The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.

Riyad's, SABB's, ANB's, BSF's, Alinma's, SAIB's, BAJ's and GIB SA's Long-Term IDRs are linked to the Saudi sovereign's.

ESG considerations

As Islamic banks, Alinma and BAJ need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in an ESG relevance score of '4' for governance structure (in contrast to a typical relevance score of '3' for comparable conventional banks), has a negative impact on their credit profiles and is relevant to their ratings in conjunction with other factors.

In addition, Islamic banks have an ESG score of '3' for Exposure to Social Impacts (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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.