Riyad Bank L-T rating raised to 'A+'; 'A-1' S-T rating affirmed; outlook stable

"The rating action primarily reflects the bank's superior capitalization following the $3.5 billion capital increase made in June 2008," said Standard & Poor's credit analyst Paul Henri-Pruvost.

The ratings on the bank reflect its superior capitalization; strong domestic market position; good funding and liquidity profile; and strong asset quality.

The long-term rating on Riyad (considered as a government related entity (GRE) under our methodology, as a systemically important bank) is one notch higher than its stand-alone creditworthiness. This reflects our expectation of the strong likelihood of extraordinary support from the government (classified as interventionist toward its banking sector) if needed. The ratings are constrained by fast growth in the loan portfolio, largely untested by an economic downturn; concentration risk, as most of its operations take place in an economy largely reliant on oil prices and government spending; and earnings mix still skewed toward interest income, amid heightened competition.

"The stable outlook reflects our expectation that Riyad will retain its leading commercial position and maintain its conservative risk profile and domestically-focused strategy," added Mr. Pruvost.

Assuming the bank maintains its current financial profile, the ratings could be raised under the combination of a better diversified business profile and structural improvements in the Saudi macro-economic environment. The former would include significant economic diversification and liberalization and the establishment of a stronger credit culture among domestic corporate borrowers. We see limited room for further upgrades in the short to medium term, however. If earnings generation, capitalization, or asset quality were to deteriorate sharply, the ratings would come under downward pressure. A significant shift in risk appetite would also be a negative rating factor.