PARIS: Standard & Poor’s Ratings Services affirmed its A/A-1 long- and short-term counterparty credit ratings on Arab National Bank (ANB). The outlook remains positive.
“The affirmation reflects our view of ANB’s sound business and financial profiles, supported by its strong operational performance and sound funding and liquidity metrics. These strengths are partly balanced by structural concentrations its risk profile features. While we have maintained our “strong” assessment of ANB’s capital and earnings, we now see a higher likelihood of an improved assessment of this rating factor, given moderate risk asset growth, strong efficiency, low cost of risk, and a regulatory drive for higher capital. We calculated the bank’s risk adjusted capital (RAC) ratio before concentration adjustments at 15.5% as of Dec. 31, 2013. We’ll monitor
the bank’s internal capital generation, earnings retention, and loan growth in the upcoming 18-24 months to decide if the bank could sustainability maintain this metric,” S&P in a statement said.
The starting point for assigning our ratings on ANB is its ‘a-‘ anchor, which we base on our opinion of the banking system in the Kingdom of Saudi Arabia (AA-/Positive/A-1+), under our criteria.
Our assessment of ANB’s business position as “adequate” is supported by ANB’s
better business balance between retail and corporate banking than most domestic peers, and its average market position, with an about 8%-9% market share in loans and deposits. Our risk position assessment for ANB is “moderate,” primarily reflecting our view that business and geographic concentration risks are materially higher than those of peers that are located
in countries with comparable economic risks. Funding is “average” and liquidity is “adequate,” in our view. ANB is a self-funded entity, mainly relying on stable domestic customer deposits for its funding. About one-third of its assets is held in cash with the central bank or in Saudi government debt. We assess ANB’s stand-alone credit profile (SACP) at ‘a-‘.
The long-term rating on ANB is one notch higher than the SACP, as we consider the bank to be of “high systemic importance” in Saudi Arabia, a “highly supportive” country toward its banking system, in our view. We therefore assume a “high” likelihood of extraordinary government support in case of need. The bank’s affiliation with Arab Bank Group, its main shareholder, does not affect the ratings.
“The positive outlook mirrors the positive outlook on Saudi Arabia. We also take into account the probability that the bank’s capitalization could continue to improve–benefited by moderate risk asset growth, strong earnings backed by good efficiency and low cost of risk, and the regulator’s drive for
higher capital–leading its RAC ratio to remain sustainably above 15%.
“The long-term rating on the bank currently includes one notch of uplift for potential extraordinary government support. In our view, an upgrade of the sovereign would translate into an increased likelihood of extraordinary
government support in case of need for ANB. All other things being equal, if we were to raise the sovereign ratings on Saudi Arabia by one notch, we would also likely raise the ratings on ANB by one notch. Excluding an upgrade of the sovereign, for us to consider a positive rating action on the bank, we would look for the bank’s RAC ratio to remain sustainably higher than 15%.
Therefore, we could raise our ratings on the bank over the next 18-24 months should one of the aforementioned scenarios happen.
“We would revise the outlook to stable if we were to revise our outlook on the sovereign to stable, and if we concluded that the bank’s RAC ratio would not remain above 15%.”