Fitch Ratings has affirmed Arab National Bank’s (ANB) long-term issuer default rating (IDR) at ‘A’ with a stable outlook and short-term IDR at ‘F1’.
The agency has also affirmed ANB’s viability rating (VR) at ‘a’.
The affirmation of ANB’s ratings reflects its well-established domestic franchise, good profitability, sound risk profile and sound capitalisation.
As ANB’s IDRs are driven by the bank’s intrinsic strength, the ratings are sensitive to a significant deterioration of capital ratios, a sharp decline of asset quality, which could be caused by a single exposure due to high concentrations, or a tightening in the liquidity position given significant contractual maturity mismatches. However, these scenarios do not represent Fitch’s base case. The extent of a potential downgrade in the Long-Term IDR is limited by the Support Rating Floor of ‘A-‘.
Fitch’s opinion of the extremely high probability of sovereign support is based on the long history of support for banks in Saudi Arabia (‘AA-‘/Stable/’F1+’) and ANB’s systemic importance. Fitch also believes there is a moderate probability of support from Jordan’s Arab Bank Plc (‘A-‘/Stable/’F1’), which owns 40% of ANB and is well-established throughout the region.
Strategically, ANB continues to focus on the retail and corporate segments in which the bank is defending its reasonable market shares. The bank is also looking to grow its asset management, private banking and investment banking/advisory services. ANB’s financial performance benefits from resilient margins, significantly reduced impairment charges and good cost efficiency. Asset quality ratios remain dominated by two large, fully reserved, non-performing exposures. ANB’s funding profile is dominated by low-cost customer deposits, which have been behaviourally sticky but are contractually short term. Liquidity benefits from a large portfolio of Central Bank repoable securities and with a Fitch core capital ratio of 15.4% at end-Q112, capitalisation remains sound.
ANB’s ratings benefit from Fitch’s expectation that Saudi Arabia’s economic outlook and credit environment will stay favourable. After having expanded by 6.8% in 2011, Fitch forecasts Saudi Arabia’s GDP to expand by 4% in 2012 and 3.6% in 2013. The standalone creditworthiness of Saudi banks including ANB also benefits from good business prospects, supported by franchises being well protected from outside competition. Prospects are good in both the retail and commercial/corporate segments as the Kingdom’s population is young and growing and the government has increased its spending, focused on housing, education and infrastructure.
Despite strong competition in the market, Fitch expects the high proportion of unremunerated deposits, which accounted for almost 60% of total customer deposits at end-2011, to continue to support ANB’s interest margin. Profitability is also supported by strong cost efficiency ratios and the significant fall (by around one-third) in loan impairment charges. Capital levels are comfortable and leave scope to accommodate further loan growth.
The risk profile of Saudi banks also benefits from SAMA’s hands-on and conservative regulatory approach, which has limited credit growth through caps on the debt-burden ratio for retail lending and the loan/deposit ratio. Consequently, Fitch considers that this regulatory framework has contributed significantly to maintaining financial stability in Saudi Arabia by restraining credit growth and preventing asset bubbles as seen in other jurisdictions in the region.