Fitch Ratings has affirmed The Saudi National Bank's (SNB) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

Fitch has also affirmed SNB's Viability Rating (VR) at 'a-' and Short-Term IDR at 'F2'.

Key Rating Drivers

SNB's 'A-' Long-Term IDRs are driven by its VR and underpinned by its Government Support Rating (GSR) of 'a-'. SNB'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.

SNB's VR is underpinned by a strong business profile supporting diversified and resilient earnings, a strong funding profile, sound asset quality and healthy capitalisation. The VR is one notch above the 'bbb+' implied rating due to the following adjustment reason: business profile.

SNB's National Rating reflects its creditworthiness relative other Saudi Arabian issuers and is the highest among Saudi banks as the bank is the largest in the country and its financial metrics are at the higher end of the sector.

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.

Largest Bank in Saudi Arabia: SNB had a market share of domestic assets of 28% at end-3Q23. Despite the bank's market share in the corporate segment having decreased since 2021, it remains a clear leader in wholesale banking, with a market share of 20% at end-3Q23.

Low Risk Appetite: SNB's higher proportion of retail assets relative to most domestic banks reduces concentration risk and supports asset-quality metrics through the cycle. SNB's risk profile benefits from its market position and access to top-tier corporate clients in the country.

Sound Asset Quality: SNB's Stage 3 loans ratio was a sound 1.4% at end-3Q23 (1.9% including purchased or originated credit-impaired loans), one of the lowest in the sector. The Stage 2 loans ratio of 4.2% is also at the bottom end of the sector. We expect the bank's Stage 3 loans ratio (including purchased or originated credit-impaired loans) to increase slightly above 2% in 2024-2025 as lending growth moderates and high interest rates add pressure to some higher-leveraged corporates.

Diversified and Resilient Earnings: Operating profit/risk-weighted assets (RWAs), Fitch's core profitability metric, improved to 3.4% in 9M23 (annualised) from 3.1% in 2022, mainly supported by lower loan impairment charges. We expect the core metric to average around 3.5% over 2023-25, on the back of strong balance sheet growth underpinning revenues and controlled growth in operating expenses and only a moderate uptick in the cost of risk, which was at very low levels in 9M23.

Healthy Capitalisation: SNB's common equity Tier 1 (CET1) ratio recovered to 16.4% at end3Q23 (end-2022: 16.1%), driven by improving profitability and muted RWAs growth. Final Basel III rules have had limited impacts on the bank's capital ratios. We expect the bank's CET1 ratio to remain above 16% by end-2025 as financing growth should not exceed internal capital generation.

Increased Cost of Funding: The share of current and savings accounts (CASA) deposits decreased to 72% at end-3Q23 from 77% at end-2021, due to liquidity tightening in the sector, which coupled with higher rates, increased the bank's cost of funding by around 200bp in 9M23 year-on-year. However, the share of CASA is the highest in the sector, and SNB's cost of funding (2.7% in 9M23) is line with the sector average as a result of a higher reliance on wholesale funding. Nevertheless, SNB retains one of the best funding franchises in the sector.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of SNB's Long-Term IDRs would be driven by a downgrade of the bank's VR and GSR. The VR could be downgraded if Fitch believes the bank's business profile (including business model stability) no longer benefits SNB's financial profile, including stability of asset quality ratios and earnings through the cycle. 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.

The bank'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 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 upgrade.

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

SNB's 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' as per Fitch's Bank Rating Criteria because the bank's funding and liquidity score ('a-') does not support a higher Short-Term IDR.

SNB's EMTN programme hosted under SNB Funding Limited, and the senior unsecured notes issued within it are rated in line with SNB's IDRs because Fitch views the likelihood of default on senior unsecured obligations issued by the SPV as being the same as that of the bank.

SNB Sukuk Limited (SSL) is a SPV incorporated in the Cayman Islands established solely to issue certificates (sukuk) under a USD5 billion trust certificate issuance programme and enter into the transactions contemplated by the transaction documents. The programme is rated in line with SNB's IDRs because Fitch views that default on senior unsecured obligations issued by SSL would reflect a default of SNB in accordance with Fitch's rating definitions as SNB would be required to ensure full and timely repayment of 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

The ratings of the EMTN programme housed under SNB Funding Limited and the trust certificate programme housed under SSL are subject to changes in SNB's Short- and Long-Term IDRs. Sukuk ratings may also be sensitive to adverse changes to SNB's roles and obligations under the sukuk's structure and documents.

VR ADJUSTMENTS

The business profile score of 'a-' has been assigned above the 'bbb' category implied score, due to the following adjustment reason: market position (positive).

The funding and liquidity score of 'a-' has been 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

SNB's GSR of 'A-' is linked to the IDRs of Saudi Arabia.

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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