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Riyad Bank's ratings affirmed; FCR outlook remains 'Negative'.

Jessica Combes

The FSR is supported by good asset quality and strong loan loss reserve (LLR) and effective coverage ratios, strong liquidity, sound profitability at both operating and net levels, and by strong capital adequacy. With generally sound financial metrics, the main constraining factor is the potential impact of what continues to be a challenging economic environment. The Support Rating remains at '2', based on both the high probability of support from the major shareholders (which are all semi-government agencies) and the strong likelihood of official support if needed for what is the fourth largest bank in the Kingdom.

The same factors also support the affirmation of the long-term foreign currency rating (FCR) of 'A+' and the short-term FCR of 'A1', but with a 'Negative' outlook. The latter was assigned in December 2017 and reflected the 'Negative' outlook assigned to the rating of the Sovereign at that time. Should the Sovereign Rating be lowered further, it is certain that both RB's FCR and FSR would also be lowered.

Although asset quality was still good at end 2017, two years of high NPL accretion had begun to exact a toll in terms of loss reserve coverage. As CI Ratings' methodology adds past due not impaired (PDNI) loans over 90 days past due to formally impaired loans to arrive at an NPL figure, the steep rise in this category of loan in 2017 sharply increased the NPL figure -- and substantially reduced the LLR and effective coverage ratios.

Although the resulting effective coverage ratio remained strong in global terms, the less than full LLR coverage is not a normal characteristic for an 'A+' rated bank. Information on PDNI over 90 days for Q1 2018 provided by management confirms that LLR coverage has been restored to more than full.

While liquidity ratios are at the averages for the sector, these averages are good by global standards and liquidity is not really an issue for any KSA bank at present. In the case of RB the retail growth strategy (and the focus on high net worth and mass affluent banking) should raise the pace of customer deposit growth in general and of NIBs in particular -- something that will also support margins by helping to control funding costs. Capitalization ratios are also at sector averages -- but this is for a sector where capital adequacy ratios are very strong by global standards. RB is solidly profitable and likely to remain so unless there were to be a sudden rise in the cost of credit -- something that would appear unlikely from the Q1 2018 numbers.

The strategy for 2018-22 stresses development and expansion of the current retail banking proposition, as well as increased emphasis of the SME segment. These efforts are being supported by investment in digitization and automation -- to allow volumes to rise without a matching rise in costs. The result should be higher margins, as well as higher volumes -- and a lower funding cost. CI expects RB to maintain reasonably strong financial metrics this year unless there were to be a sudden deterioration in the operating environment -- something that is looking increasingly less likely with higher oil prices and an expansion of output levels.

The application of IFRS 9 added very significantly to LLR coverage, raising both the LLR and effective coverage ratios to a rather stronger level. The effects of the new standard are such that good coverage should be automatically retained as provisioning is no longer at the discretion of management at any bank. However, there may be effects on profitability going forward if the net NPL accretion rate were to remain high. Thus, while asset quality per se is unlikely to put pressure on the FSR (and therefore the other ratings), the follow-on effects on profitability and on what is an already below average rate of internal capital generation may do so.

That said, earnings performance in Q1 was good with profitability rising at both the operating and net levels helped by an overall cost of credit that was below that of full year 2017 (although similar to Q1 2017). As long as the cost of credit can be maintained at a level near to that of Q1, ROAA should remain above two per cent.

Riyad Bank was founded in 1957 as Saudi Arabia's first joint-stock banking company. The three largest single shareholders are state entities and together own 52.3 per cent. The Public Investment Fund holds 21.8 per cent, while General Organization for Social Insurance holds 21.3 per cent. The Bank is quoted. Total assets as at end Q1 2018 were the equivalent of $57 billion. Shareholders' funds were equivalent to $9.6 billion.

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Publication:CPI Financial
Date:Jul 24, 2018
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