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

Fitch has also affirmed SNB's Viability Rating (VR) at 'a-' and downgraded its Short-Term IDR to 'F2' from 'F1'.

The downgrade of SNB's Short-Term IDR to 'F2', which is the lower of two options mapping to a Long-Term IDR of 'A-' as per our bank rating criteria is due to a weakening of the bank's funding and liquidity profile, as reflected by an increased cost of funding, a decreasing share of non-interest-bearing deposits and a higher loans/deposits ratio. The downgrade also incorporates our expectations that Saudi banks will continue to face tight liquidity conditions in the near term due to changes in how authorities redeploy liquidity in the economy and of banks' strong growth plans over the near term, which should underpin demand for liquidity.

Key Rating Drivers

SNB's 'A-' Long-Term IDR is driven by its VR. Its 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' as per our bank rating criteria because the bank's funding and liquidity score do not support an 'F1' Short-Term IDR.

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 positive adjustment reason: business profile.

SNB's National Rating 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 authorities' strategy to diversify the economy as part of Vision 2030, and solid GDP growth provide Saudi banks with solid business growth opportunities.

Largest Bank in Saudi Arabia: SNB had a market share of domestic assets of 29% at end-1H22. Despite a decrease in the bank's market share in the corporate segment since 2021, SNB remains a clear leader in wholesale banking with a market share of 20.8% at end-3Q22. SNB is the second-largest retail lender with a market share of 29%.

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.

Sound Asset Quality: SNB's Stage 3 loans ratio was a sound 1.6% at end-3Q22 (2.1% including purchased or originated credit-impaired loans) and is one of the lowest in the sector. The Stage 2 loans ratio of 4% is also at the bottom end of the sector. We expect the bank's stage 3 loans ratio to remain broadly stable in 2023, while the stock of stage 2 loans is likely to increase given the adverse impact of higher borrowing costs on some corporate borrowers.

Diversified and Resilient Earnings: Fitch's core profitability metric, operating profit/risk-weighted assets (RWAs), recovered to 3.1% in 9M22 from 2.2% in 2021, supported by rising rates and lower operating costs and impairment charges. We expect the core metric to pick up further to 3.5% in 2023-2024 due to rising rates, strong financing growth and continuing realisation of cost synergies.

Healthy Capitalisation: SNB's common equity tier 1 (CET1) ratio declined to 15.6% at end-3Q22 from 16.6% at end-2021 due to mark-to-market (MTM) losses and dividend distribution. Without MTM losses, the bank's CET1 ratio would have been 16.4% at end-3Q22. We expect the bank's CET1 ratio to pick up to above 16% by end-2023, supported by improving internal capital generation and MTM losses reversals.

Strong Funding profile; Liquidity Tightening: The share of current and savings accounts (CASA) deposits decreased to 73% at end-3Q22 from 77% at end-2021, due to liquidity tightening in the sector. Nevertheless, the portion of CASA is much higher than the sector average of 61%. The Fitch-calculated loan-to-deposit ratio (LDR) increased to 91.7% from 86.4% over the same period as the bank shed expensive time deposits amid a sharp increase in domestic interbank rates. We expect the bank's LDR to continue to increase as strong loan growth should outpace deposit growth but we expect it to remain below the sector's LDR.

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. The VR could be downgraded if Fitch believes the operating environment has weakened significantly or if the bank's financial profile deteriorates.

SNB's National Rating is sensitive to a negative change in its Long-Term Local-Currency IDR and 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, which is unlikely without a material improvement in the Saudi Arabian operating environment.

SNB's National Rating is sensitive to a positive change in its Long-Term Local-Currency IDR and the bank's creditworthiness relative to other Saudi Arabian issuers.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

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 special purpose vehicle 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.

SNB's Government Support Rating (GSR) of 'bbb+' reflects potential support from the Saudi authorities and is in line with all other rated Saudi banks. The Saudi authorities have 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.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The EMTN programme housed under SNB Funding Limited and the trust certificate programme housed under SSL are subject to the same sensitivities as SNB's IDRs. A downgrade/upgrade of SNB's IDR would lead to a downgrade/upgrade of the programme's ratings.

SNB's GSR is sensitive to changes in the Saudi sovereign rating.

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).

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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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.

ESG Considerations

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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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