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Fitch Affirms 9 Qatari Banks' LT IDRs; Downgrades 6 VRs
April 13, 2017 / 2:48 PM / 8 months ago

Fitch Affirms 9 Qatari Banks' LT IDRs; Downgrades 6 VRs

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Qatari Banks - Rating Action Report here DUBAI/LONDON, April 13 (Fitch) Fitch Ratings has affirmed Qatar National Bank's (QNB) Long-Term Issuer Default Rating (IDR) at 'AA-'. The agency has also affirmed the IDRs of 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) at 'A+'. The Outlooks are Stable. Fitch has downgraded the Viability Ratings (VR) of six banks reflecting the tougher operating environment in Qatar. This primarily reflects Fitch's 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 slow-down of both private and public sector growth. Heightened weakness in the operating environment is already having a negative impact on banks' performance metrics, largely reflecting rising funding costs, driven by high reliance on corporate and government-related interest-bearing time deposits, a significant drop in government and government-related deposits and the consequent large inflow in the sector of non-domestic deposits. Operating environment weakness is also adding pressure on asset quality, particularly in the contracting and real estate development loan portfolios where restructurings are rising, and some banks are seeing higher loan impairment charges. We have affirmed CBQ's VR at 'bbb-' having downgraded it in November 2016 due to deterioration in CBQ's asset quality metrics, mainly in its home market of Qatar. We have affirmed ABQ's VR at 'bbb-' as the bank maintains a sound financial profile despite the deterioration in the operating environment. This is supported by its conservative risk appetite, lower exposure to the real estate and contracting sectors relative to some peers, moderate growth levels and healthy internal capital generation. Fitch has also affirmed QIIB's VR at 'bb+' as we consider this is commensurate with the deteriorated operating environment. A full list of rating actions is available at or by clicking the link above. KEY RATING DRIVERS IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS The IDRs, Support Ratings (SR) and Support Rating Floors (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/Stable), combined with Fitch's belief that there would be 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 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, and we do not expect low oil prices to impact the sovereign's ability to support its public sector companies and banks in the medium term. The sovereign's capacity to support the banking system is sustained by its sovereign reserves and revenues, mostly from hydrocarbon production. Qatari banks' SRFs are not differentiated due to franchise or level of government ownership because we believe there is an extremely high probability that all rated Qatari banks would receive support should they require it. 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 Stable Outlooks on all banks mirrors the Outlook on the Qatari sovereign. VRs Funding costs continued to rise in 2016, putting significant pressure on all banks' operating profitability metrics. The average operating profit/average assets ratio across rated banks fell in 2016. Qatari banks' high reliance on corporate and government-related interest-bearing time deposits and deteriorated liquidity in the system due to low oil prices are the main reasons behind the increase. The banks have made efforts to rein in operating expenses, but the sector average cost to income ratio increased due to higher funding costs pressuring operating income. Fitch expects continued pressure on banks' performance metrics given tighter liquidity conditions. Liquidity and funding pressures have stabilised in the banking sector since 2Q16 when the Qatari sovereign issued USD9 billion of debt and some of this has been redeposited with the banks. The banks have been actively managing their loans to deposits ratios in order to be close to the 100% Qatari Central Bank (QCB) recommended level, despite the higher cost of deposits. The funding profile of Qatari banks is undergoing a substantial change. Non-resident, largely Asian, deposits, which are highly remunerated, are rising rapidly and now feature among the 20 largest depositors at many rated banks. Non-domestic deposits represented 26% of sector deposits at end-February 2017 (end-February 2016: 15%). In our view, these deposits are likely to be less stable than domestic deposits, weakening the overall funding profile of the Qatari banks. There are significant asset and liability maturity mismatches, despite the fact that market funding is becoming a bigger source of funding.. Short term corporate customer deposits remain the main source of funding for Qatari banks, which will make compliance by the outset of 2018 with the fully loaded Net Stable Funding Ratio difficult for Qatari banks to achieve. Liquidity remains adequate to anticipate funding maturities. Asset quality metrics have remained strong but there are pressures in the contracting and real estate sectors (totaling about 25% of total banking system loans) and loan impairment charges/loans ratios have been rising at some banks. Impaired loans ratios are low (sector average impaired loans ratio was approximately 2% at end-2016) compared with other GCC markets (averaging 3% to 5%). However, restructured loans are increasing at some banks, reflecting the more challenging operating environment. Asset quality metrics will remain under pressure, in Fitch's view. Loan loss reserve coverage is adequate at nearly 100%, but reserves are low compared with gross loans. Qatari banks maintain adequate capital ratios relative to their risk profiles despite strong loan growth in recent years. The issuance of additional Tier 1 (AT1) instruments (not included as part of Fitch Core Capital) is supporting regulatory capital ratios. We do not expect net interest margins to rise in the near term. Fitch expects a mild increase in impairment provisioning in anticipation of the implementation of IFRS 9 on 1 January 2018. This should be manageable for Qatari banks because profitability is sufficiently robust to enable them to write additional impairment provisions'. Nevertheless, QCB rules have only recently been published and the true impact is not fully known. Loan growth is expected to slow slightly to high single digits in 2017 (2016: 12%) due to continued pressure on the operating environment. However, government spending on strategic projects is expected to remain strong. Debt issuance in 2017 is expected to be stronger than in the past two years as banks look to extend their funding maturity profiles at favourable rates, anticipating further US interest rate rises. Pressure on asset quality and profitability could be detrimental to current adequate, but shrinking, core capital levels. The VRs for Qatari banks range from 'bbb+' for QNB, 'bbb-' for CBQ, DB, QIB and ABQ, with the remaining four banks at 'bb+'. Size and market share are a key differentiating consideration. QNB's VR of 'bbb+' reflects its dominant franchise in Qatar, close links to the Qatari government and solid management quality. 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 considers the bank's higher risk appetite (as indicated by its recent acquisitions and by its strong expansion plans outside Qatar) and quickly deteriorating core capital and leverage ratios, 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. CBQ's VR of 'bbb-' reflects its strong and established franchise in Qatar, and its 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 its Turkish subsidiary (Alternatifbank; BBB-/Stable), which accounts for about 14% of CBQ's balance sheet and 16% of its impaired loans). 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 consider CBQ's capitalisation to be only adequate and this is reflected in the VR. The VR also considers 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 its well-established franchise in Qatar, sound management quality, a relatively diversified funding franchise, albeit with increasing reliance on foreign deposits, and its 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 segments (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 those of 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, the 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 its small domestic franchise. The VR also reflects high concentrations on both sides of the balance sheet and its increasing proportion of non-domestic deposits. It also reflects the bank's solid management quality, adequate liquidity, healthy internal capital generation capacity, profitability ratios comparing well with peers and its sound asset quality. The bank has also been lengthening its funding profile. Capital ratios are solid, but Fitch considers a high level of capital to be necessary in view of its loan book concentration. AKB's VR of 'bb+' reflects the bank's small franchise and undiversified business model, sound management quality, as well as its conservative risk management and sound 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 its limited franchise and high sector and single name financing concentrations, which increases the bank's risk profile and the risk of fluctuation in its 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, and its strong liquidity, also support its VR. IBQ's VR of 'bb+' reflects its relatively narrow, niche private banking franchise. It also reflects the concentrated funding base, primarily sourced from high-net-worth individual deposits and high single name lending concentrations. We consider 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 the rising share of non-resident deposits, albeit 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 fact that the largest exposures are 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 improve modestly as it implements its growth plans. Barwa's VR of 'bb+' predominantly reflects its limited franchise and small size, but also the benefits of its solid ties to the Qatari government, as a result of its 54% ownership by the state, which helps 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, albeit a funding base that is also highly concentrated, and more so than that of 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. RATING SENSITIVITIES IDRs, SRs AND SRFs The IDRs, SRs and SRFs are sensitive to a change in Fitch's assumptions around the Qatari authorities' propensity or ability to provide timely support to the banking sector. Fitch considers the likelihood of any change to be small in the foreseeable future. VR Fitch does not see any upside potential for the VRs in the short term given the more challenging operating environment. Many factors enabling Qatari banks' VRs to be above many GCC peers have now disappeared, most notably the sector's previously ample liquidity. Nevertheless, a reduction in balance sheet concentrations, which we consider unlikely in the near term, could support VR upgrades. QNB's VR is sensitive to further expansion into weaker operating environments. This would further weaken the bank's risk profile and capital/leverage ratios, which could put pressure on the VR in the medium term. Significant asset quality deterioration in the banks' domestic market could also pressure the VR, but we view this as less likely. CBQ's VR is sensitive to further deterioration in domestic asset quality and increased risks from its Turkish subsidiary. The VR is also sensitive to weakening capitalisation or liquidity. DB's VR is sensitive to any significant weakening of capitalisation, liquidity or asset quality. Further aggressive financing growth that would weaken QIB's risk profile and affect the bank's asset quality metrics and capital position would put the VR under pressure. AKB's VR is sensitive to a significant deterioration in liquidity or asset quality sufficient to affect the bank's capital. A material weakening in QIIB's asset quality, severely affecting profitability and capital, which Fitch considers unlikely, would put downward pressure on the VR. ABQ's VR could come under pressure if the bank's liquidity position tightens and it is not able to reduce its funding concentrations. A material weakening of asset quality, severely affecting profitability and capital, would also put downward pressure on the VR. IBQ's VR could be pressured by a failure to maintain adequate capital and liquidity levels, or a significant increase in the bank's risk appetite, which could be a change in strategy or in its underwriting standards. Downside to Barwa's VR could arise from a material deterioration of asset quality. Downward pressure could also arise from capital levels not being sufficient to support stated growth plans and adequately mitigating concentration and other risks. KEY RATING DRIVERS AND SENSITIVITIES SPVS AND SENIOR DEBT The ratings of debt issued by the special purpose vehicles (SPV) listed below are in line with the parents' Long-Term and/or Short-Term IDRs, because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPVs as the same as the likelihood of the default of the bank, and are sensitive to any change in the parents' IDRs. 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. Contact: Primary Analysts Redmond Ramsdale (all banks except ABQ) Senior Director +971 4 424 1202 Fitch Ratings Limited Al Thuraya Tower 1, Office 1805 and 1806 Media City PO Box 502030, Dubai Eric Dupont (ABQ) +33 1 44 29 91 31 Fitch France S.A.S. 60 Rue de Monceau 75008 Paris 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 Janine Dow Senior Director +44 20 3530 1464 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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