Saudi National Bank’s Riyal-denominated AT1 Sukuk Offering: A Strategic Move to Bolster Capital Amid Regulatory and Market Demands

The Saudi National Bank (SNB) has launched its SAR-denominated Additional Tier 1 (AT1) Sukuk offering, marking a critical step in strengthening its capital base to align with Basel III regulatory standards. This perpetual, Sharia-compliant instrument—structured as a mandatory convertible sukuk—aims to enhance the bank’s financial resilience while capitalizing on domestic institutional investor demand. With an issuance size of SAR 2.5 billion and a 6.5% coupon rate, the offering reflects both strategic foresight and the evolving dynamics of Saudi Arabia’s financial sector.

Key Features of the Offering

The Sukuk’s terms highlight its dual purpose of regulatory compliance and growth financing:
- Issuance Size: SAR 2.5 billion, positioning it as a significant capital-raising effort in a market where banks are under pressure to meet Basel III’s stringent requirements.
- Coupon Rate: 6.5%, a notable increase from the bank’s existing 5% perpetual AT1 Sukuk (issued in earlier years). This higher yield aligns with prevailing market conditions, including competitive offerings such as Al Rajhi Bank’s 2024 SAR-denominated AT1 Sukuk, which priced at 6.375%.
- Structure: Perpetual and subordinated, with no fixed maturity date. SNB retains the right to redeem the Sukuk at par on any “Call Date,” subject to regulatory approval.

The offering is targeted at institutional and qualified investors in Saudi Arabia, underscoring SNB’s focus on domestic capital markets. The bank’s appointment of SNB Capital as sole lead manager and arranger signals confidence in its ability to navigate the complexities of Sukuk issuance in a regulated environment.

Regulatory and Market Context

SNB’s move is part of a broader trend among Saudi banks to bolster capital adequacy ratios. Basel III requires banks to maintain a minimum Common Equity Tier 1 (CET1) ratio of 7% and a Total Capital Ratio (TCR) of 10.5%, with additional buffers for systemically important institutions. Saudi Arabia’s Central Bank has set even stricter requirements, demanding a CET1 ratio of at least 10% for major lenders.

The bank’s decision to issue AT1 capital—subordinated debt that absorbs losses before equity—is critical to meeting these benchmarks. With Saudi Arabia’s loan portfolio projected to reach SAR 2.95 trillion by 2029 (driven by Vision 2030 infrastructure and economic diversification initiatives), robust capital buffers will be essential to support lending growth without compromising stability.

Market Reception and Risks

The 6.5% coupon rate reflects a balance between attracting investors and managing SNB’s cost of capital. While higher than its existing AT1 Sukuk, the rate remains competitive with regional peers, such as Emirates NBD’s 2023 AT1 sukuk, which priced at 6.875%. However, investors must weigh the trade-offs:
- Perpetual Tenor: The absence of a fixed maturity date introduces uncertainty, though the call option provides SNB flexibility to retire the debt when conditions permit.
- Subordination: As a Tier 1 instrument, holders rank behind senior creditors in case of default—a risk mitigated by SNB’s strong credit profile (rated A+ by Fitch).
- Economic Exposure: The Sukuk’s performance is tied to Saudi Arabia’s economic trajectory, including oil price volatility and the success of Vision 2030 reforms.

Conclusion: A Strategic Move with Long-Term Benefits

SNB’s SAR-denominated AT1 Sukuk issuance is a prudent response to regulatory demands and market realities. By raising SAR 2.5 billion at a 6.5% coupon, the bank strengthens its capital position to support lending growth in a rapidly expanding economy. The offering also signals confidence in Saudi Arabia’s institutional investor base, which is increasingly active in domestic debt markets.

While the perpetual structure and subordination pose risks, SNB’s robust credit standing and the Sukuk’s alignment with Sharia principles mitigate these concerns. For investors, the instrument offers an attractive yield in a region where high-quality Islamic finance opportunities are in demand. As Saudi Arabia’s financial sector matures, such issuances will likely become a cornerstone of capital management—a trend SNB is strategically positioned to lead.

In sum, this offering underscores SNB’s role as a pillar of Saudi finance, leveraging regulatory frameworks and market dynamics to secure its future in an era of rapid transformation.