Outlook Stable

Fitch Ratings-London-10 December 2012: Fitch Ratings has affirmed Al Rajhi's (Al Rajhi) Long-term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. At the same time, the agency affirmed the Viability Rating (VR) at 'a'. A full list of rating actions is at the end of this rating action commentary.

RATING DRIVERS AND SENSITIVITIES - IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Al Rajhi's IDRs, Support Rating and Support Rating Floor reflect Fitch's view that there is an extremely high probability that the Saudi Arabian authorities would support the bank, if needed. This view is based on Al Rajhi's leading retail franchise in the Kingdom and its systemic importance within the domestic banking system.

These ratings are therefore sensitive to a rating action on the Saudi sovereign rating ('AA-'/Stable) or a change in Fitch's assumptions around the propensity for the Saudi authorities to provide timely support to Al Rajhi.

RATING DRIVERS AND SENSITIVITIES - VR

The affirmation of the VR reflects Al Rajhi's strong profitability, healthy asset quality indicators and large retail deposit base, whilst also considering some name concentration within the corporate loan portfolio, in line with other Saudi banks.

Al Rajhi continues to report healthy profitability, with an operating ROAA and ROAE of 3.4% and 23.7%, respectively, in 9M12. Revenues are supported by high (albeit under increasing pressure) margins, robust growth in fee income and good operating efficiency (9M12: cost/income ratio of 27%). The net profit margin (9M12: 4.6%) benefits from extremely low funding costs from Al Rajhi's significant pool of non-remunerated customer deposits. Fitch expects operating profitability to remain strong in 2013.

Fitch notes the non-performing loan (NPL) ratio is on a mildly deteriorating trend, but still compares well with peers' (9M12: 2.1%) and the reserve coverage ratio remains strong at 130%. Fitch does not expect a material deterioration in asset quality, due to the benign operating environment in Saudi Arabia. Al Rajhi has an ample stock of liquid assets on its balance sheet, most of which are placed with the Saudi Arabia Monetary Agency (SAMA). At end-9M12, the Fitch calculated loans/deposits (L/D) ratio was healthy at 87%.

Al Rajhi has a substantial customer deposit base, representing about 95% of total non-equity funding. Given that most of the deposit base consists of current accounts, there is a large asset and liability maturity mismatch in the 'less than three months' bucket. However, Fitch takes comfort from the granular nature of Al Rajhi's deposits, which have historically been very stable during challenging market environments. At end-9M12, the regulatory Tier 1 and Fitch core capital ratios were comfortable at 14.7% and 17.7%, respectively. These do not include year-to-date 2012 profits.

Upside to the VR is somewhat limited, given its current high level. The VR could be downgraded if the current volatile global economic backdrop affected the Saudi Arabian economy, translating into notable deterioration in asset quality indicators and/or capitalisation. Fitch does not view this as likely at present.

Al Rajhi is the largest Islamic bank globally and operates the largest branch network in Saudi Arabia. The main shareholders are members of the founding Al Rajhi family. The bank commenced operations in Malaysia through a wholly-owned Islamic banking subsidiary in 2007 and more recently set up small operations in Kuwait and Jordan.

The rating actions are as follows:

Long-term IDR affirmed at 'A+'; Stable Outlook

Short-term IDR affirmed at 'F1'

Viability Rating affirmed at 'a'

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'A+'

Contact:
Primary Analyst
Shaun Miskell
Analyst
+44 20 3530 1504
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Secondary Analyst
Philip Smith
Director
+44 20 3530 1091
Committee Chairperson
Eric Dupont
Senior Director
+33 1 44 29 9131

Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com.

© Press Release 2012