ARAB NATIONAL BANK
Fitch Ratings has affirmed
Fitch has also affirmed ANB's Viability Rating (VR) at 'bbb'.
Key Rating Drivers
The 'A-' Long-Term IDRs of ANB are driven by potential support from the Saudi Arabian authorities, as reflected by its Government Support Rating (GSR) of 'a-'. Its 'F2' Short-Term IDR is the lower of two options mapping to a Long-Term IDR of 'A-' as per our Bank Rating Criteria. This is because a significant proportion of Saudi banks' funding is related to the government and ANB would likely need support at a time when the sovereign itself is experiencing some form of stress.
ANB's VR reflects the bank's reasonable domestic franchise and balanced business model with good market shares, strong capitalisation, sound funding and liquidity and asset-quality metrics, and reasonable profitability metrics. It also reflects high concentration risks.
ANB's National Rating is driven by potential support from the Saudi Arabian authorities.
Sovereign Support: The Saudi authorities have a strong ability and willingness to support domestic banks irrespective of size, franchise, funding structure and level of government ownership. High contagion risk among domestic banks is an added incentive for the state to provide support to any Saudi bank to maintain market confidence and stability. ANB's 'a-' GSR is line with that of other Fitch-rated Saudi banks.
Favourable Operating Environment: High oil prices, reduced risks from the pandemic, the government's strategy to diversify the economy as part of their Vision 2030, and solid GDP (including non-oil) growth provide Saudi banks with solid business-growth opportunities.
Adequate Risk Profile: Our assessment of ANB's risk profile considers its sound underwriting standards, conservative growth, increasing focus on lower-risk retail mortgages as well as high concentration risks. The bank grew broadly in line with the sector average in 2021-2022 but above its internal capital generation.
Sound Asset-Quality Metrics: ANB's asset-quality metrics improved in 2021-2022, due to recoveries, write-offs and strong lending growth. Impaired loans (Stage 3) fell to 1.8% of gross loans at end-2022 (end-2020: 3.5%) and impairment reserves improved to 2.6% of gross loans at end-2022. We expect the impaired loans ratio to be stable in 2023.
Reasonable Profitability: ANB's net interest margin (NIM) improved by about 20bp in 2022 on the back of higher interest rates. In combination with good operating efficiency (cost-income ratio of 36%) and moderate impairment charges (which consumed 19% of pre-impairment operating profit), this led to a reasonable operating profit of 2% of risk-weighted assets (RWAs) in 2022. Fitch's base case expects the ratio to improve by 30bp in 2023.
Strong Capitalisation: ANB's common equity Tier 1 (CET1) ratio declined to 17.6% at end-2022 (end-2021: 18.9%) as lending growth exceeded internal capital generation but the ratio remained above its pre-pandemic levels (end-2019: 17.1%) and compared well with the Fitch-rated banks' average of 16.5% at end-2022. However, we forecast that the CET1 ratio will decrease to 17% by end-2023 as lending growth will continue to outpace internal capital generation.
Sound Funding and Liquidity: ANB has stable and low-cost funding, broadly in line with the peer average. Its loans-to-deposits ratio was sound at 95% at end-2022, slightly below the sector average but up from 86% prior to the pandemic due to high lending growth. We expect the bank's deposit growth to be close to lending growth in 2023, resulting in a stable loans-to-deposits ratio.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of ANB's IDRs would require a downgrade of its GSR. The latter would be triggered by a sovereign downgrade.
ANB's VR could be downgraded on combined sharp and sustained deterioration in asset quality (impaired loans ratio exceeding 4%) and profitability (operating profit below 1.5% of RWAs), leading to the bank's CET1 ratio being sustainably below 14%.
The bank's National Rating is sensitive to a negative change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers'.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of ANB's IDRs would require an upgrade of its GSR. The latter would be triggered by a sovereign upgrade.
An upgrade of the bank's VR is unlikely without a material and sustained improvement in the Saudi Arabian operating environment.
The bank's National Rating is sensitive to a positive change in its Long-Term Local-Currency IDR and in the bank's creditworthiness relative to other Saudi Arabian issuers'.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
ANB's Tier 2 sukuk certificates (issued through
We do not notch the certificates for incremental non-performance risk because the terms of the certificates do not provide for loss absorption on a 'going-concern' basis (eg coupon omission or write-down/conversion). In our opinion, the risk of incremental non-performance is low, especially given our view of the potential sovereign support that could be made available.
We use the bank's Long-Term IDR as the anchor rating for the Tier 2 sukuk certificates as we believe that potential extraordinary sovereign support for ANB is likely to flow through to the bank's subordinated certificate holders. Fitch is not aware of any precedent set by the Saudi authorities in their approach to restructuring that would result in loss mitigation for Tier 2 debt.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
ANB's Tier 2 sukuk certificates are subject to the same sensitivities as ANB's IDRs. The Tier 2 subordinated certificates' rating is also sensitive to a change in notching should Fitch change its assessment of loss severity and/or relative non-performance risk.
A narrowing of notching to one from two currently below the anchor rating is unlikely in the near term without any precedent being set by the Saudi authorities through bank resolution or loss mitigation for Tier 2 subordinated notes.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
ANB's IDRs are linked to
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg .
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