Arab National Bank– Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Arab National Bank (ANB) at ‘A’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed ANB’s Bank Standalone Rating (BSR) of ‘bbb+’, Core Financial Strength (CFS) rating of ‘bbb+’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR remains Positive. The BSR remains on a Stable Outlook.

ANB’s LT FCR is set two notches above the BSR to reflect the high likelihood of timely and sufficient extraordinary support from the government if needed. All Saudi domestic banks are considered as systemically important institutions, which play an important role in building and nurturing the economy, underpinning the Saudi government’s willingness to maintain stability in the domestic financial system. Hence, the authorities have a strong track record of supporting banks and have the financial capacity to provide assistance in the event of stress.

The Bank’s BSR is based on a CFS rating of ‘bbb+’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The OPERA for Saudi Arabia reflects the economy’s limited diversification, low monetary flexibility and geopolitical risks, against strong fiscal and external buffers, and substantial oil reserves. It also takes into account the banking sector’s strong capital buffers and a healthy funding structure, which primarily consists of domestic customer deposits with little dependence on cross-border funding. We expect real GDP to gradually pick up in 2024-26, supported by government initiatives aimed at diversifying the economy via large investments in the non-oil economy, and legal and regulatory reforms to improve the business environment.

The CFS rating is supported by the Bank’s strong capitalisation, sound liquidity and funding profile with stable customer deposit-based funding and robust liquidity buffers, good and rising profitability, and sound overall asset quality with strong credit loss absorption capacity. Non-financial supporting factors include ANB’s close association with its parent Arab Bank plc, aiding its well-established domestic franchise. The Bank mainly focuses on large and mid-size corporates and targets the upper tier segment in its growing retail banking operations.

In terms of credit challenges, there is likely concentration in both lending and deposits, in common with the banking sector in the KSA (and wider GCC). In addition, the Bank faces challenges stemming from its somewhat limited size (it has an asset market share of 6%) in a market where mergers have concentrated activity with a smaller number of bigger banks. Although overall asset quality remains good, ANB’s level of Stage 2 loans is higher than peer banks.

ANB’s asset quality metrics remain very sound. NPLs (stage 3) declined by 13% in 2023 aided by a higher level of write-offs. The NPL ratio fell to 1.5% at end-2023; the ratio remained at this level at end-H1 24. NPLs are more than fully covered in terms of loan-loss reserve provisions. The extended NPL coverage ratio is very strong. Most NPLs are in the manufacturing sector followed by building and construction. At year end-2023, the gross loan portfolio comprised 9.3% stage 2 loans but a lower 8.4% at H1 24. ANB’s stage 2 exposure remains higher than the median of its peers. Stage 2 loans are still performing and most unlikely to transition to stage 3. Over two-thirds of the loan book is represented by commercial/corporate loans with the remainder retail. Just over one half of the retail book is home loans.

The quality of the investment portfolio appears good. The bulk (over three-quarters) of the investment portfolio is in the form of KSA sovereign debt securities – which are available for repo with SAMA. Two thirds of the portfolio are fixed rate securities, and nearly all the portfolio is quoted. In terms of credit quality, all the investment portfolio is classified as Stage 1.

The Bank’s ROAA is solid, supported by a good net interest margin (NIM) and fairly low cost of funds (COF), although the latter has increased over the past two years in line with peer banks as market interest rates increased. Returns have strengthened consistently over the past for years. Despite the rise in the COF, the Bank’s NIM widened as asset yields increased sharply. ANB has a higher NIM than the peer average.

Net profit was up by 21% in H1 24, driven by net interest income and supported by higher fee income. Operating income to average assets was a high 4.0%. With growth in operating income outpacing the increase in operating expenses, operating efficiency improved, with the cost-to-income ratio declining to a low 32%. ANB’s cost efficiency continues to compare well with that of its peers. Operating profit advanced in H1 24, and ANB’s operating profit on average total assets is higher than the peer average. We expect ANB’s full year returns to be good.

ANB has a good liquidity and funding profile. Its deep customer deposit-based funding is supported by a well-established domestic franchise, together with a large nationwide distribution network and the solid position in retail and middle market corporates. The Bank’s balance sheet is largely funded by customer deposits – the Bank has one of the best customer deposits to total assets ratios in the Saudi banking sector. Liquidity risk is low as ANB maintains robust liquidity buffers. Liquidity ratios remained very solid in H1 24, with the Liquidity Coverage Ratio and Net Stable Funding Ratio comfortably above SAMA requirements. The Bank’s wholesale funding ratio is low and better than peer banks. The Saudi banking system in general has a relatively healthy liquidity profile.

ANB has strong capitalisation, with CET-1 and CAR ratios of 17% and 19%, respectively, at H1 24. Leverage is low, and the quality of the Bank’s capital base is exceptionally high. Core capital (CET-1) comprised all of Tier 1 and the bulk of the capital base, giving ANB strong flexibility to raise AT1 and Tier 2 if needed, although at present such reinforcement is not necessary. Internal capital generation has been reasonable, while paid-up capital has seen regular increases through the issuance of bonus shares from reserves.

Rating Outlook

The Positive Outlook for the LT FCR, in line with the Positive Outlook for KSA, indicates that the rating is likely to be raised by one notch in the next 12 months provided the sovereign’s credit strength and its capacity to support the banking system improve as expected.

Rating Dynamics: Upside Scenario

An upgrade of more than one notch in the LT FCR could occur if the BSR was raised. However, reflecting its sound financial metrics, the Bank’s BSR is already at a high level, and therefore is unlikely to be lifted.

Rating Dynamics: Downside Scenario

The most likely downside scenario would be for the rating Outlook of the sovereign to be revised to Stable from Positive if the expected improvement in sovereign credit strength does not occur. If this were to happen, ANB’s LT FCR Outlook would also be amended to Stable from Positive, and the ratings would be unchanged. A downgrade of the Bank’s BSR would require a marked deterioration in asset quality and/or liquidity and funding metrics. This is not expected.

Contact

Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Rory Keelan, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2019-22 and H1 23. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No


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