Fitch Ratings has affirmed Arab Bank Plc's (AB) Long-Term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook.

A full list of rating actions is below.

Key Rating Drivers

VR Drives IDRs: AB's IDRs are driven by its standalone strength, as indicated by its 'bb' Viability Rating (VR). The VR reflects the bank's geographical diversification, leading domestic franchise, stable asset quality, recovering profitability, adequate capitalisation and strong funding and liquidity. The VR also considers AB's high exposure to the Jordanian sovereign relative to its equity and to challenging operating conditions in some MENA countries. The Short-Term IDR of 'B' is the only option mapping to a 'BB' Long-Term IDR.

IDR Above Sovereign's: AB's Long-Term IDR is above Jordan's sovereign rating as Fitch believes that the bank's capital and liquidity positions would allow it to weather a sovereign default and Fitch believes that the Jordanian government would not prevent AB from servicing its debt obligations in case of a sovereign default by imposing capital controls.

Fitch caps AB's VR at one notch above Jordan's sovereign rating because of its high exposure to the Jordanian sovereign relative to the bank's equity via holdings of (mostly local-currency) government securities.

Recovering Operating Environment: Fitch forecasts real GDP growth of 2.3% in 2022 and 2.5% in 2023 for Jordan due to recoveries in manufacturing, tourism and IT services, as well as stronger domestic demand. However, the domestic operating environment remains challenging due to below-potential and structurally weak GDP growth, monetary tightening, high unemployment and geopolitical risks. Fitch expects moderate domestic bank credit growth of 4%-5% in 2022-2023. GCC markets are recovering but other MENA countries remain under pressure.

Geographical Diversification: AB's leading domestic market shares (20% by total assets and 15% by loans at end-2021) is complemented by the bank's diversified business model, with regional and international presence, all of which support business and earning generation and deposit collection. However, this exposes the bank to regional volatile markets.

Conservative Risk Appetite: AB's loan book is diversified by economic sector, single-obligor and geography. Risk controls are appropriate for the business risks and complexity. Loan growth is low-to-moderate. However, the bank is exposed to foreign-currency risk from its foreign branches and subsidiaries and sensitive to interest-rate changes from repricing gaps.

Moderate Asset Quality: AB's Stage 2 and 3 loans ratio decreased to 14.2% and 8.1% at end-1H22, respectively (end-2021: 14.9% and 8.3%) as operating conditions recover progressively. Foreclosed assets are minimal. AB's generation of potential problem loans was minimal in 1H22 and Fitch expects minor pressure on loan quality from higher interest rates in 2023. AB's large stock of liquid assets (end-1H22: 41% of total assets; investment-grade: 17%) support asset quality. Total reserve coverage of Stage 3 loans (end-3Q22: 128%) will remain high.

Recovering Profitability: AB's net income increased 61% in 2021 and 49% in 9M22, due to lower loan-impairment charges (LICs), larger business volumes and stronger profits from associates but remains below pre-pandemic levels. Its focus on liquidity and operations in lower-risk countries puts pressure on margins. A high cost/income ratio from group integration, compliance and IT investments adds pressure. Fitch expects AB's profitability to improve in 2023 on higher interest rates, larger business volumes and fairly stable LICs.

Adequate Capitalisation: AB's common equity Tier 1 ratio is stable and adequate (end-3Q22: 15%) given the bank's stable asset quality, high specific reserve coverage of Stage 3 loans, acceptable pre-impairment operating profit and below-average loan book concentration. AB benefits from a low risk-weighted assets density (less than 70%). Recovering profitability and moderate loan growth will support AB's capitalisation in 2023. AB can issue capital if needed.

Strong Funding and Liquidity: AB's geographical diversification and leading domestic franchise support its strong funding profile. Customer deposits accounted for 91% of non-equity funding at end-3Q22, and 56% were retail deposits, supporting low deposit concentration. High levels of current and saving accounts (53%) support low funding costs, below most peers'. AB channels its excess liquidity into investment securities and interbank placements, including in highly rated markets. Basel 3 high quality liquid assets covered 28% of customer deposits at end-1H22 on a consolidated basis.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

AB's VR and Long-Term IDR are sensitive to deterioration in its operating environments, as well as material weakening in asset quality, profitability and capital

A Stage 3 loans ratio exceeding 12% could lead to a VR downgrade

A weakening in AB's profitability, with the operating profit/RWAs remaining below 1.25% on a sustained basis could also lead to a VR downgrade, especially if pre-impairment operating profit is not sufficient to shield capital buffers from asset-quality deterioration

A material deterioration in AB's common equity Tier 1 (CET1) ratio to below 12% could also lead to a downgrade of the VR

AB's ratings are sensitive to a downgrade of the Jordanian sovereign, given Fitch's assessment that AB's VR should not be more than one notch above Jordan's sovereign rating. AB's ratings could also be downgraded if Fitch estimates that the bank's ability to weather a sovereign downgrade weakens, or in case of sovereign intervention impeding AB's ability to service the bank's obligations.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the bank's VR would require an upgrade of the Jordanian sovereign

AB's Government Support Rating (GSR) of 'b' reflects a limited probability of support from the Jordanian authorities. This considers the authorities' strong willingness to support domestic banks and AB's systemic importance based on its 20% market share of system assets, but also the sovereign's weak financial flexibility.

A downgrade of the sovereign rating would result in a downgrade of the GSR. The GSR is also sensitive to changes in Fitch's view of the Jordanian sovereign's willingness to support the bank. An upgrade of AB's GSR would require an upgrade of the sovereign rating.

VR ADJUSTMENTS

The operating environment score of 'bb' is above the 'b' category implied score for Jordan due to the following adjustment reasons: macroeconomic stability (positive) and international operations (positive).

The asset quality score of 'bb-' is above the 'b' category implied score for AB due to the following adjustment reason: non-loan exposures (positive).

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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

AB's GSR is driven by Jordan's sovereign Long-Term IDR.

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 the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg

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