(The following statement was released by the rating agency)

Fitch Ratings-Dubai/London-August 14: Fitch Ratings has affirmed Arab National Bank's (ANB) Long-Term Issuer Default Rating (IDR) at 'BBB+'. It has also affirmed the bank's Viability Rating (VR) and Support Rating Floor (SRF) at 'bbb+' and 'BBB+' respectively. A full list of rating actions is at the end of this rating action commentary. The Outlook on ANB's Long-Term IDR is Stable.

KEY RATING DRIVERS

IDRs

The IDRs of ANB reflect its standalone creditworthiness as defined by its VR and are underpinned by a high probability of support from the Saudi authorities, as reflected by SRF being at the same level as VR.

VR

ANB's VR reflects the bank's solid domestic franchise and diversified business model with a solid market share in both corporate and retail banking, as well as sound financial metrics and adequate capitalisation. It also factors in weakening asset quality and a benign operating environment in Saudi Arabia.

The bank has been one of the kingdom's most successful in building a sustainable and profitable retail banking arm and is among one of the sector's more diversified banks. The bank also benefits from being an associate of Arab Bank Plc (BB/Stable), which has a sizeable presence across the Middle East and North Africa.

Asset quality metrics are sound and generally in line with peers', with a non-performing loans-to-gross loans ratio of 1.6% at end-1H18. Our assessment of asset quality reflects ANB's sound and consistent underwriting standards, slightly lower concentration than peers' and adequate coverage of impaired loans (138% at end-1H18), which should act as a buffer against the effect of weaker asset quality.

Capitalisation is adequate and improved due to slower asset growth. ANB's Fitch Core Capital (FCC) ratio stood at 15.8% at end-1Q18. Liquidity is sound as reflected by a Basel III liquidity coverage ratio of 229% at end-1Q18, which helps mitigate deposit concentration. Funding costs are in line with peers'.

Profitability improved in 2017, as reflected by the bank's return on risk-weighted assets increasing to 1.9% from 1.8%, driven by upward loan repricing that resulted in a widening of ANB's net interest margin.

The operating environment in Saudi Arabia is benign. Domestic credit contracted in 2017 and any growth in 2018 is likely to be muted. Banking sector asset quality remains under pressure, albeit from a strong base. Exposure to internal and external political shocks, as well as the concentrated economy, mean that there is a risk that asset quality could deteriorate suddenly. However, this is not our base case.

SUPPORT RATING AND SUPPORT RATING FLOOR

ANB's IDRs, Support Rating (SR) of '2' and SRF of 'BBB+' reflect a high probability of support from the Saudi authorities in the event of need. Fitch's assessment takes into account a long track record of support for Saudi banks, continued government willingness to maintain stability in the domestic financial system and a strong ability to support the bank, given large external reserves and good access to external markets. The SR and SRF also reflect the systemic importance of ANB given its solid market share.

ANB's SR and SRF also reflect Fitch's view that the large stake held by Arab Bank plc could result in slightly lower, but still high, willingness of the sovereign to support the bank.

RATING SENSITIVITIES

IDRS

As ANB's IDRs reflect both the bank's VR and SRF, a downgrade of the IDR would require a simultaneous downgrade and downward revision of these ratings. An upgrade of ANB's Long-Term IDR could be driven by either an upgrade of the VR or an upward revision of the SRF. This is because under Fitch's methodology, a bank's Long-Term IDR is the higher of the entity's VR and SRF.

SUPPORT RATING AND SUPPORT RATING FLOOR

ANB's SR and SRF are sensitive to a change in the Saudi Arabian sovereign rating (A+). As this is currently on a Stable Outlook, a change is unlikely in the short-term. A change in propensity from the authorities to support the bank could also lead to a rating action, but this is not Fitch's base case.

VR

ANB's VR is sensitive to sharper-than-expected deterioration in its financial metrics, which could include higher loan impairment charges, as well as weaker asset quality and capitalisation. A tightening of liquidity could also put pressure on the rating given the bank's limited headroom below the regulatory loans/deposits ratio of 90%.

The rating actions are as follows:

Arab National Bank

Long-Term IDR affirmed at 'BBB+'; Outlook Stable

Short-Term IDR affirmed at 'F2'

Support Rating affirmed at '2'

Support Rating Floor affirmed at 'BBB+'

Viability Rating affirmed at 'bbb+'

Contact:

Primary Analyst

Amin Sakhri

Director

+971 4 424 1202

Fitch Ratings Limited

Al Thuraya Tower 1, Office 1805 and 1806

Media City

PO Box 502030, Dubai

Secondary Analyst

Nicolas Charreyron

Analyst

+971 4 4424 1208

Committee Chairperson

Alexander Danilov

Senior Director

+7 495 956 2408

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

Bank Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034713

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/site/dodd-frank-disclosure/10041548

Solicitation Status

https://www.fitchratings.com/site/pr/10041548#solicitation

Endorsement Policy

https://www.fitchratings.com/regulatory

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