AL RAJHI BANKING AND INVESTMENT CORPORATION
Fitch Ratings has affirmed
Fitch has also affirmed the bank's Viability Rating (VR) at 'a-'.
Key Rating Drivers
ARB's 'A-' Long-Term IDRs are driven by its 'a-' VR and underpinned by its Government Support Rating (GSR) of 'a-'. ARB'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.
ARB's VR is underpinned by strong business and funding profiles, solid profitability and healthy asset quality. It also reflects comfortable capitalisation and a favourable operating environment supported by high hydrocarbon prices. ARB's National Rating reflects its creditworthiness relative to Saudi Arabian issuers' and is the highest in the sector, reflecting the bank's strongest retail franchise in the country and some of the sector's best financial metrics.
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, and solid GDP (including non-oil) growth provide Saudi banks with solid business growth opportunities.
Strong Franchise; Retail Market Leader: ARB is the second largest bank by total financing in
Moderating Financing Growth: ARB's risk profile benefits from its focus on low-risk mortgage financing, which the bank has been rapidly increasing in recent years, resulting in pressure on capital ratios. In 9M23 annualised financing growth was 5.3%, down from 25% in 2022. Interest-rate risks are fairly higher than for domestic peers, translating into moderate margin compression in 2022-9M23, given that ARB's retail financing book (54% of total assets) is fixed-rate, while the cost of funding has risen since 2021.
Strong Asset Quality: ARB's Stage 3 financing ratio increased to 1.1% at end-3Q23 (end-2022: 0.8%) due to slower financing growth and crystallisation of credit risks after high growth in 2021-2022. The Stage 2 ratio also increased to 2.2% from 1.7% over the same period. Nevertheless, ARB's asset quality ratios remain the strongest in the sector, and the cost of risk in 9M23 was a low 25bp. Reserve coverage of Stage 3 financing was 132% at end-3Q23.
Narrower Margin, but Healthy Profitability: ARB's net financing margin decreased to 3% in 9M23 (2022: 3.5%) due to a higher cost of funding, while the financing book is mostly in fixed rates and long term. At the same time, ARB's performance metrics are supported by good asset quality and strong cost efficiency. Its annualised net operating profit was 3.6% of risk-weighted assets in 9M23 and the strongest among Fitch-rated Saudi banks (2.9% average in 9M23).
Comfortable Capitalisation: ARB's common equity Tier 1 (CET1) ratio decreased to 16.5% at end-3Q23 (end-2022: 17%) due to dividend payments and financing growth. We expect the bank's financing will grow in line with internal capital generation in 2024, so its capital ratios will be stable with CET1 ratio fluctuating in the 16%-17% range depending on dividend payments.
Strong Funding Profile; Liquidity Tightening: The share of non-profit-bearing deposits has been decreasing, to 67% at end-3Q23 from 91% at end-2019 on the back of tightening liquidity in the sector. However, it remains stronger than the sector average of 53%. The Fitch-calculated financing-to-deposit ratio increased to 106% at end-3Q23 (end-2019: 82%) as financing growth outpaced deposit growth. Its regulatory loan-to-deposit ratio (end-3Q23: 81%) was comfortably lower than the 90% regulatory maximum; its regulatory liquidity coverage ratio was 145% at end-3Q23.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of ARB's Long-Term IDRs would be driven by a downgrade of the bank's VR and its GSR. The VR could be downgraded if Fitch believes the operating environment has weakened significantly, or with significant deterioration in asset quality metrics, particularly if this results in pressure on ARB's capitalisation metrics. A downgrade of the GSR would be triggered by a sovereign downgrade, or if Fitch changes its view on Saudi authorities using resolution legislation to bail in senior creditors.
ARB's National Rating is sensitive to a negative change 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 bank's Long-Term IDRs would come from an upgrade of the VR or GSR. An upgrade of the VR is unlikely without a material improvement in the Saudi Arabian operating environment. An upgrade of the GSR would be triggered by a sovereign rating upgrade.
ARB'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
ARB's 'F2' Short-Term IDR is the lower of two options mapping to its Long-Term IDR 'A-' as per Fitch's Bank Rating Criteria because the bank's funding and liquidity score does not support a higher Short-Term IDR.
The ratings of senior debt (sukuk) issued by ARB through
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Sukuk ratings are sensitive to changes in ARB's Long-Term and Short-Term IDRs. The ratings may also be sensitive to adverse changes to the roles and obligations of ARB under the sukuk's structure and documents.
VR ADJUSTMENTS
The business profile score of 'a-' is above the 'bbb' category implied score due to the following adjustment reasons: market position (positive) and business model (positive).
The asset quality score of 'a-' is above the 'bbb' category implied score due to the following adjustment reason: underwriting standards and growth (positive).
The earnings and profitability score of 'a-' is above the 'bbb' category implied score due to the following adjustment reason: earnings stability (positive).
The funding and liquidity score of 'a-' is 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
ARB's GSR is linked to the
ESG Considerations
ARB has an ESG Relevance Score of '4' for Governance. Islamic banks 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 a Governance Structure ESG Relevance Score of '4' (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profiles and is relevant to the ratings in combination with other factors.
ARB has an ESG Relevance Score of '3' for Exposure to Social Impact, in contrast to a typical ESG relevance score of '2' for comparable conventional banks. This reflects that Islamic banks have certain sharia limitations imbedded 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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