Fitch: Zakat Settlements Remove Key Uncertainty For Saudi Banks

The extra amounts, due to a backdated change in the zakat calculation, will not materially deplete banks' capital buffers and therefore do not affect their ratings. We do not expect a significant impact on liquidity or profitability as we believe the banks will be allowed to spread payments over several years.

Banks disclosed their extra zakat amounts last month after reaching a settlement with Saudi Arabia's General Authority of Zakat and Tax (GAZT).

However, the settlement amounts for 2018 will be disclosed separately, and the calculation method for future years' zakat is not yet clear. Some banks could still face pressure on ratings if future zakat assessments appear likely to structurally weaken their internal capital generation. 

Zakat is an annual payment obligation under Islamic sharia on wealth, used for charitable and religious purposes. Zakat is one of the five pillars of Islam and obligatory once certain eligibility criteria are met and nisab (zakatable wealth level) is achieved. In Saudi Arabia, it has historically been set at 2.5 per cent of a company's "zakat base". For banks, the zakat base is their net worth, calculated based on a complex set of directives issued by the Ministry of Finance and the GAZT. Banks were in discussions with the authorities for some time over the calculation of historical zakat liabilities, backdated in some cases as far as 2002. Some banks made provisions for the extra zakat, but most did not disclose their size.

Saudi Banks - Zakat Assessments

Al Rajhi Bank (A-/Stable/a-) reported the largest outstanding amount (SAR 5.4 billion, or about $1.4 billion), followed by Riyad Bank (A-/Stable/bbb+; SAR 3.0 billion) and SAMBA Financial Group (A-/Stable/a-; SAR 2.3 billion). Al Rajhi's settlement is also the largest in terms of capital impact, equivalent to a 10.4 per cent reduction in end-3Q18 Fitch Core Capital (FCC), but this is not enough to affect the bank's rating given its strong capital buffers and capacity to generate capital internally. Al Rajhi's end-3Q18 FCC ratio of 20.6 per cent was one of the highest in the Saudi banking sector and we estimate it would be just over 18 per cent net of the settlement amount. 

The capital impact for other banks is modest (under 10 per cent of shareholders' equity). Alinma Bank (BBB+/Stable/bbb) was the only bank to report that it would not have to pay a settlement but that it would receive a credit (of an undisclosed amount) from the GAZT.

We will continue to monitor developments around the calculation method for future years' zakat and provide updates on any implications for banks' internal capital generation and ratings.