June 21, 2017 / 2:33 PM / a month ago

Fitch Places 9 Qatari Banks on Rating Watch Negative

22 Min Read

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Fitch Places 9 Qatari Banks on Rating Watch Negative - Rating Action Report here LONDON/DUBAI, June 21 (Fitch) Fitch Ratings has placed all ratings on Qatar National Bank (QNB), The Commercial Bank (Q.S.C.) (CBQ), Doha Bank (DB), Qatar Islamic Bank (S.A.Q) (QIB), Al Khalij Commercial Bank P.Q.S.C. (AKB), Qatar International Islamic Bank (QIIB), Ahli Bank QSC (ABQ), International Bank of Qatar (Q.S.C) (IBQ) and Barwa Bank Q.S.C. (Barwa) on Rating Watch Negative (RWN). A full list of rating actions is available at www.fitchratings.com or by clicking the link above. This action follows the placement of the Qatari sovereign on RWN (see Fitch Places Qatar's 'AA' IDR on Rating Watch, dated 12-Jun-2017 on www.fitchratings.com.) and reflects significant uncertainty around the Qatari banking system resulting from the decision of Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt and some other Arab countries to sever diplomatic and logistical ties with Qatar. While some discussions have taken place to resolve the crisis, it is becoming more likely that the crisis will be sustained and will negatively impact Qatar's economy. Ultimately, the sovereign ability to support the banking system could weaken and all nine banks' Issuer Default Ratings (IDRs), which are driven by potential sovereign support, could be downgraded. The RWN on the Viability Ratings (VRs) reflects the heightened risks that this crisis places on the banks' operating environment, funding and liquidity and earnings and profitability, if the imposed isolation lasts for a sustained period. Depending on business model and funding and liquidity profile, the current crisis might affect some banks more than others, although we expect all banks to be affected to a certain extent. This is on top of Fitch's current expectation that economic growth will slow in 2017 and 2018, reflecting a less benign fiscal environment, contraction in current spending and a focus on fiscal efficiency leading to a slowdown of both private and public sector growth. KEY RATING DRIVERS IDRs, Support Ratings (SRs) and Support Rating Floors (SRFs) The IDRs, SRs and SRFs of all Qatari banks reflect Fitch's expectation of an extremely high probability of support from the Qatari authorities for domestic banks in case of need. This reflects Qatar's strong ability to support its banks, as indicated by its rating (AA/RWN), combined with Fitch's belief of a strong willingness to do so. The latter is based on a track record of sovereign support between 2009 and 1Q11 when some banks received capital injections to enhance their capital buffers and the government purchased some problematic assets from the banks following the financial crisis. The government owns stakes in all Qatari banks. The government has demonstrated a strong commitment to its banks and key public sector companies, which has been reaffirmed during this crisis. The sovereign's capacity to support the banking system remains very strong owing to solid sovereign reserves and revenues, mostly from hydrocarbon production, but could weaken if the current crisis is prolonged. Qatari banks' SRFs are not differentiated due to franchise or level of government ownership because we see an extremely high probability that all rated Qatari banks would receive support should they require it. This belief also partly reflects the risk of contagion (small number of banks and high concentration of the banks in the system) and the importance of the banking system in building the local economy. As a result, Fitch equalises all Qatari banks' SRFs and IDRs at 'A+'. QNB is the exception, rated one notch higher at 'AA-' to reflect its flagship status, its role in the Qatari banking sector and its close business links with the state. The RWN on the Long-Term IDRs of all banks mirrors the RWN on the Qatari sovereign. In assigning the current IDRs, Fitch considers that the Qatari authorities will not place a moratorium on deposit withdrawals from or debt repayment to the countries in dispute in retaliation. VR The VRs for Qatari banks range from 'bbb+' for QNB, 'bbb-' for CBQ, DB, QIB and ABQ, to 'bb+' for the remaining four banks. Size and market share are a key differentiating consideration. The RWN on the banks' VRs reflects the heightened uncertainty resulting from the political crisis. A prolonged period of isolation is likely to have negative impact on the operating environment, further impact tightened liquidity and further increase cost of funding, as investors demand higher pricing due to greater uncertainty. Depending on the business model and funding and liquidity profile, the current crisis might affect some banks more than others, although we expect all banks to be affected to a certain extent. Our current assessment assumes that the Qatari Riyal / USD peg remains in place. QNB's VR of 'bbb+' reflects the bank's dominant franchise in Qatar, close links to the Qatari government and experienced senior management. It also reflects the bank's ability to access additional funding if needed. Profitability is stronger than most peers due to its lower-cost domestic funding base and higher margins from international operations. The VR also reflects the bank's higher risk appetite (as indicated by the bank's recent acquisitions and by strong expansion plans outside Qatar) and slightly weaker core capital and leverage ratios than peers, which benefit from 0% risk weighting on higher levels of government lending than other Qatari banks. High loan and deposit concentrations, which would otherwise constrain the rating, are mitigated by QNB's largest borrowers and depositors being primarily lower-risk Qatari government-related entities. QNB has a very large short USD position compared with peers, which could pressure the bank's foreign currency liquidity given the increase in foreign currency shortage in the market. CBQ's VR of 'bbb-' reflects the bank's strong and established franchise in Qatar and solid management quality. It also reflects deterioration in CBQ's asset quality metrics in the real estate and contracting sectors in Qatar and the weak performance of the bank's Turkish subsidiary (Alternatifbank; BBB-/Stable), which accounts for about 14% and 16% of CBQ's balance sheet and impaired loans, respectively). The asset quality deterioration reflects the bank's higher risk appetite than peers, although the bank's new strategy is to aim for lower-risk lending, which should eventually strengthen the balance sheet. Fitch expects asset quality metrics to continue to deteriorate before stabilising in 2018. Loans and deposits are concentrated, although CBQ's concentration levels are better than most domestic banks'. Following a recent rights issue, CBQ's ability to raise additional core capital in the short-to medium-term will likely be limited. We view CBQ's capitalisation as only adequate, which is reflected in the VR. The VR also takes into account the bank's adequate funding and liquidity profile. High impairment charges have significantly weakened profitability, which we expect to remain the case until 2018. DB's VR of 'bbb-' reflects the bank's well-established franchise in Qatar, sound management quality, a relatively more diversified funding franchise than peers, albeit with increasing reliance on foreign deposits, and the bank's adequate capitalisation. Asset quality is reasonable, but DB has historically had a higher impaired loans ratio than most peers. The VR also reflects DB's higher exposure to the real estate and contracting sectors (43% of loans at end-2016), which heightens risks. QIB's VR of 'bbb-' reflects the bank's established franchise in Qatar, solid management quality, sound asset quality, and solid funding and liquidity profile, with a franchise that is more diversified than many peers. Both financing and deposits are concentrated, in common with the sector, although deposits are less concentrated than peers' due to a strong retail component. The VR also takes into account the bank's adequate profitability, and satisfactory capital and leverage ratios compared with peers. In Fitch's view, QIB's aggressive 46% financing growth in 2015 was a sign of a potential rise in the bank's risk appetite, but growth has reduced in line with peers since 2016. ABQ's VR of 'bbb-' reflects the bank's reasonably conservative risk appetite and well-balanced business model, despite a small domestic franchise. The VR also reflects high concentrations on both sides of the balance sheet and an increasing proportion of non-domestic deposits. It also considers the bank's solid management quality, adequate liquidity, healthy internal capital generation capacity, sound asset quality and profitability ratios that compare well with peers. The bank has also been lengthening its funding profile. Capital ratios are solid, but Fitch views a high level of capital as necessary for ABQ's loan book concentration. AKB's VR of 'bb+' reflects the bank's small franchise and undiversified business model, as well as sound management quality, conservative risk management and healthy asset quality. There are high concentrations on both sides of the balance sheet. The VR also factors in the bank's acceptable capital ratios. Funding and liquidity remain adequate, but reflect a rise in large non-domestic deposits and significant asset/liability mismatches. The bank has proven its ability to grow its lending business according to management's plan. AKB's profitability remains weaker than most domestic peers'. QIIB's VR of 'bb+' reflects the bank's limited franchise and high sector and single name financing concentrations, which increase the bank's risk profile and the risk of fluctuation in asset quality. The VR also factors in QIIB's sound funding profile, with a more diversified funding base than most peers. QIIB's sound capital and leverage ratios, together with strong liquidity, also support the VR. IBQ's VR of 'bb+' reflects the bank's narrow, niche private banking franchise. It also reflects a concentrated funding base, primarily sourced from high-net-worth individual deposits and high single name lending concentrations. We view the bank's risk appetite as more aggressive than peers', reflecting the bank's high related-party lending. The VR also reflects significantly increased funding costs and a rising share of non-resident deposits, although these are still below the sector average. However, the VR also factors in the bank's solid management quality, reasonable capitalisation and sound liquidity. Concentration levels are high and above those of most peers, but they are mitigated by the largest exposures being mainly to government-related entities or to large blue-chip corporates. Asset quality metrics are broadly in line with peers' and we expect the bank's concentrations to reduce as IBQ implements its growth plans. Barwa's VR of 'bb+' predominantly reflects the bank's limited franchise and small size, but also the benefits of the bank's solid ties to the Qatari government (54% stake), which help to generate business flows, in both financing and funding. The VR also takes into account the bank's solid management quality, sound asset quality and reasonably strong profitability, as well as high lending concentrations and fairly significant restructuring in 2016. Barwa's capital ratios are solid, but should be viewed against the bank's concentrated balance sheet. The VR takes into account adequate funding and liquidity, although the funding base is more concentrated than peers'. Barwa and IBQ have entered into discussions for a three-bank merger with Qatar's Masraf Al Rayan. However, these discussions are still in early stages and do not have any impact at this stage on Barwa's and IBQ's ratings. SPVs AND SENIOR DEBT The ratings of debt issued by the banks' special purpose vehicles (SPV) are in line with the parents' Long- and/or Short-Term IDRs, because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPVs the same as the likelihood of the default of the bank. In assessing the ratings of QIB, QIIB and Barwa, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications. RATING SENSITIVITIES IDRS, SRs AND SRFs The IDRs, SRs and SRFs are sensitive to a change in Fitch's assumptions around the Qatari authorities' ability to provide timely support to the banking sector, including repayment of all senior deposits and debt, be they domestic or international. The RWN on all banks' IDRs is expected to be resolved at the same time as the RWN on the sovereign. A downgrade of the sovereign would result in a downgrade of all nine banks' IDRs. In the very unlikely event that the Qatari authorities place a moratorium on deposit withdrawals from or debt repayment to the countries in dispute in retaliation, some banks' IDRs would be downgraded to 'Restricted Default' ('RD'). VR Developments in the current crisis could be rapid and could significantly impact the banks. It is likely that the most immediate impact will be on the operating environment, funding and liquidity, cost of funding and performance. Any strong impact on any of these factors will trigger a downgrade of the VRs, although the impact may not be as pronounced or simultaneous for all banks. Banks with lower reliance on non-domestic deposits (such as IBQ, Barwa and QIIB) may be more immune to the above-mentioned pressures. In contrast, a weakening operating environment is expected to exert more pressure on the bank with the strongest company profile in Qatar, such as QNB as the flagship bank. Increased competition for domestic deposits will impact the liquidity profile and funding costs of all banks to varying degrees. We would expect margins to come under strain across the banking system. The current crisis could also affect the ability of all banks to raise foreign term funding and to term out their funding profiles. Fitch would expect the first large impacts to be visible in 2H17. Any large loss stemming from QNB's very large short USD position could also lead to a downgrade of the bank's VR. SPVs AND SENIOR DEBT The ratings of debt issued by the SPVs are sensitive to changes in their parents' IDRs. Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analysts Zeinab Abdalla (QNB, CBQ, AKB, ABQ) Associate Director +971 4 424 1210 Huseyin Sevinc (QIIB, DB, IBQ) Associate Director +44 20 3530 1027 Nicolas Charreyron (QIB, Barwa) Analyst +971 4 424 1208 Committee Chairperson Eric Dupont Senior Director +33 1 44 29 9131 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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