Arab National Bank: Stable risk metrics owing to quality assets

Arab National Bank reported encouraging Q1 25 results, supported by an expanding non-oil Saudi economy. Loans and advances rose 13.4% y/y to SAR179.1bn, driven by strong growth in the corporate lending segment. Customers’ deposits grew in sync at 12.1% to SAR195.6bn. Cost of risk remained steady with only 2bp increase to 40bp, underpinning stable quality of loan book.

NIM remained resilient at 3.63%, reflecting a decrease of 13bp on the back of interest rate cuts, although this was supported by asset growth and improved cost of funds. As a result, operating income rose 9.6% to SAR2.5bn.

Arab National Bank, established in 1979 by Royal Decree M/38, succeeding the local operations of Arab Bank in Saudi Arabia. Based in Riyadh, the bank operates regional offices in Jeddah and Khobar, as well as an international branch in London. The group provides a diverse range of banking solutions, including business and retail banking, investment products, and various financial services to meet the needs of customers throughout the Kingdom.

The bank serves over 2m customers through a robust network of 122 branches and 1,077 ATMs. The company conducts business through four segments – Corporate, which constitutes 42% of Q1 25 operating income; Retail, 39%; Treasury, 14%; Investment & Brokerage and Other, 5%.

Optimal business mix

Arab National Bank has well diversified asset mix of total SAR264.7bn as of end-Q1 25, of which Corporate accounted for 42.8%; Retail, 27.7%; Treasury, 28.1%; Investment & Brokerage and Other, 1.4%. In addition, the loan book is skewed towards Corporate with 75% weightage, while Retail loans accounted for 25%. Regarding Deposits, Retail accounted for 48% of the mix, whereas Non-retail accounted for 52%.

Positive tailwinds for banking sector

The Saudi economy has remained robust over the years, with IMF data showing GDP rising over 300% since 2004 to USD1,037bn in 2025e, thereby outperforming world’s average growth rate over the same period. The positive performance trajectory has been driven by stable growth rates in the non-oil sector, with oil sector subjected to high volatility owing to commodities price fluctuations. In addition, KSA’s macro-economic environment gains further stability from the Saudi Central Bank aligning its repo rate with the US Federal funds rate.

These drivers pushed the banking sector forward, with KSA banks’ total deposits reaching SAR2.7tn in 2024, reflecting a 8.4% y/y increase. This fuelled increased lending, which reached SAR2.9tn. In addition, the net interest margin (NIM) remains robust at over 3% over the past five years.

On track to achieve 2025 targets

The management has exuded confidence to deliver on its 2025 targets. The bank anticipates registering mid-teens growth in loans and advances in FY 25, and NIM change of negative 5 to 5bp. In addition, cost to income ratio is expected below 32%, with cost increase of single digit. Return on average equity is anticipated at over 13%, and asset quality broadly stable with cost of risk at 40-50bp.

Arab National Bank has prioritized shareholder returns with a dividend payout ratio of 52.3% in FY 24 and paid an annual dividend of SAR1.3 per share in FY 24, resulting in an attractive dividend yield of 6.2%. Moreover, analysts expect an average dividend yield of 6.2% over the next three years.

Decrease in long-term provisions

The bank posted a decent Net Interest Income (NII) CAGR of 7.6% over FY 19-24, reaching SAR8.1bn. Non-interest income increased at a CAGR of 4.9% over the same period to SAR1.4bn in FY 24. In addition, provision for loan losses declined at a CAGR of 7.9% over the same time, reflecting improvement in asset quality. Net profit therefore surged at a CAGR of 10.4% to SAR5bn in FY 24.

The company strengthened its cash position to SAR5.1bn as of end-FY 24 from SAR3.8bn as of end-FY 19. Gross loans rose to SAR173bn as of end-FY 24 from SAR122bn as of end-FY 19. Total debt remained almost flat at SAR5.4bn as end-FY 24, compared to SAR5.1bn as end-FY 19.

In comparison, Al Rajhi Banking, a local peer, reported a higher NII CAGR of 8.6% over the past five years, reaching SAR24.8bn in FY 24. Net profit surged at a CAGR of 14.2% to SAR19.7bn in FY 24.

Compelling valuation levels

Over the past one year, the company's stock has delivered returns of approximately 6.4%, reflecting a positive fundamental trajectory. In comparison, Al Rajhi Banking’s stock delivered higher returns of 20%.

The company is trading lower compared to its historical average and Al Rajhi Banking. Arab National Bank is currently trading at a P/B multiple of 1x, which is lower than its 3-year historical average of 1.2x and that of Al Rajhi Banking (3.3x).

Arab National Bank is monitored by 10 analysts, liked by pretty much all - nine of whom have ‘Buy’ ratings for an average target price of SAR26.1, implying 21.3% upside potential from the current price. Analysts estimate a net profit CAGR of 4.3% over FY 24-27, reaching SAR5.6bn with margins of 48.4% in FY 27, with EPS expected to increase to SAR2.8 in FY 27 from SAR2.5 in FY 24. Likewise, analysts estimate net profit CAGR of 14.5% for Al Rajhi Banking.

Overall, the bank appears to be set to post growth over the long term, supported by macro tailwinds from the Saudi economy, good quality assets, and strong balance sheet. However, there are few risks which might impact operations, including liquidity risk, credit risk, and cybersecurity risk.