Capital Intelligence affirms ratings of Riyad Bank

Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed the ratings of Riyad Bank (RB), based in Riyadh, Saudi Arabia. Supported by the sound and continually improving quality of the Bank's loan portfolio, its superior level of capitalisation, and continuing success in developing a base of consumer loans and deposits, the Bank's Financial Strength Rating is affirmed at 'AA-'.

Ratings are constrained by the Bank's tightening liquidity, by the less than full coverage of the NPL portfolio and by the high rate of new non-performing loan (NPL) formation last year.

For the same reasons as for the Financial Strength Rating, the Long-Term Foreign Currency Rating is maintained at 'AA-' and the Short-Term Foreign Currency Rating at 'A1+', both constrained by the sovereign rating.

All ratings carry a 'Stable' Outlook. In view of the Bank's prominent position in the Saudi banking sector, official support is expected to be forthcoming in the unlikely event it is needed. Consequently, the Support level remains at '2'.

In 2011, RB returned to growth, posting modest increases in the loan book and in total assets. While net NPLs declined, mostly from aggressive write-offs and some recoveries, the volume of new NPLs was somewhat high.

The Bank's NPL ratio fell once again, finishing up the year as the kingdom's second-best. However, the Bank did not take full advantage of its improved operating profitability to make sufficient loan-loss provisions. As a result, the NPL portfolio remained less than fully covered and NPL coverage by loan-loss reserves in percentage terms fell in 2011.

That deficiency is made up for by the Bank's strong free capital position, derived from an overall capital position which is better than the average for its peers.

As a corporate bank, RB continues to address the issues associated with that profile: higher sector, borrower and depositor concentration and a greater use of time deposits and other purchased funds. By expanding into the retail sector, the Bank has made great strides in ameliorating these conditions, but it has the potential for further improvement.

Loan-based liquidity ratios are generally adequate because of the high share of the balance sheet provided by customer deposits. However, a high share of loans in the balance sheet results in a very low liquid asset ratio, which in fact has been declining. Although the Bank meets SAMA minimum requirements, these ratios have moved about as low as they prudently should given the Bank's current ratings.

RB's operating profitability is generally satisfactory, and together with the reduced risk expense referred to above has contributed to a sound ROAA, which rose last year after falling for three consecutive years. In 2011, the performance was assisted by a strong rise in non-special commission income.

In terms of total assets at year-end 2011, RB ranked as the kingdom's fourth-largest bank, with total assets of SAR181bn (a market share of about 12%). However, because of its stronger capitalisation compared to most of its peers, the Bank's SAR28.9bn in total capital ranks it third in size among Saudi banks.