Tuesday 27, December 2016 by Robin AmlĂ´t

Ahli Bank Qatar's ratings affirmed by Capital Intelligence

Capital Intelligence Ratings (CI) has affirmed Ahli Bank QSC’s (ABQ) Long- and Short-Term Foreign Currency Ratings at ‘A’ and ‘A2’, respectively, with a ‘Stable’ Outlook. CI Ratings also maintained the Support Rating of ‘1’ in view of the extremely high likelihood of support from the bank’s strong governmental shareholders, as well as from official sources in case of need.

The Financial Strength Rating (FSR) is also affirmed at ‘A-’, with a ‘Stable’ Outlook, on the grounds of very sound loan asset quality, ongoing strong profitability (despite the decline), and good capital adequacy. Also supporting the FSR are the diversified sources of funding and effective access to financial markets. The factors constraining the FSR are the tight net loans to customer deposits ratio and steady decline in liquid asset holdings, and ongoing concentration risks in both loans and customer deposits (mainly related to government and semi government entities), as is the case with peer banks. The bank’s moderate market shares of loans and deposits and the challenging operating environment − due to the fall in hydrocarbon prices − are also constraining factors.

Although ABQ ranks among the smaller banks in the local market, it has nonetheless built and developed a successful business franchise. Being the beneficiary of a diversified business model focused on commercial banking, trade finance and retail, the bank is well placed to benefit from ongoing sound (though lower) economic growth in Qatar due to expanding non-hydrocarbon activity, as well as continuing hydrocarbon production.

The quality of the loan portfolio remains strong as demonstrated by a very low – and improved − non-performing loans (NPLs) to gross loans ratio. The bank’s excellent NPL ratio remained the best among the conventional banks in Qatar. Moreover, loan-loss reserves (LLRs) have continued to provide more than full cover for NPLs. ABQ has a conservative provisioning policy in place that seeks to maintain LLR cover in excess of 125 per cent. In this regard, the bank’s high level of LLRs together with a solid capital base provide an effective buffer against potential credit losses. However, as is the case with most other Qatari banks, there remain exposure concentrations in respect to borrowers, including to government and semi-government entities, and these, in turn, elevate credit risk.

Although liquidity tightened further in recent years as measured by the net loans to total customer deposits ratio due to faster credit expansion than growth in customer deposits, the bank’s ratio of net loans to stable funds improved to an acceptable level at end Q3 2016, benefiting from the successful arrangement of new term loans as well as slower credit expansion. The increased contribution of term borrowings to total funding has helped to limit the utilization of short term wholesale funding, notably interbank deposits and CDs. Term debt has also diversified ABQ’s sources of funds and reduced maturity mismatches, although the maturity gap remained high up to the three months category. Mitigating factors in this regard are ABQ’s pool of liquid assets, supported by the fact that short-term customer deposits are typically rolled over at maturity. The repo facility with QCB is also a liquidity risk mitigant. Although the net liquid asset ratio declined further to a low level at end Q3 2016, reflecting reduced holdings of liquid assets, the bank’s quasi-liquid asset ratio improved due to an expanded marketable securities portfolio.

ABQ’s expanding customer deposit base, however, continues to be characterized by high concentrations, a phenomenon common in the Qatar banking system. These funds relate mainly to government and semi-government entities, and continue to provide more than one-fourth to total customer deposits. That said, given the tighter liquidity conditions in Qatar and the broader GCC market due to a decline in government revenue following the sharp fall in hydrocarbon prices, these entities may possibly draw down on their deposits in the near to medium-term. Although currently there is no sign of this happening, this may increase funding and liquidity risks for Qatari banks as a group.

Despite the further decline in capital adequacy, the latter remains sound and the rate of internal capital generation has improved − thanks to a lower dividend payout to shareholders. The capital base currently provides a sound basis for ABQ to further grow risk weighted assets (RWAs) and market share. The Common Equity Tier 1 remained at a strong level. As such, ABQ has the ability to raise Tier 2 or AT1 capital if the need arises. RWAs have grown faster than regulatory capital in recent years and this, in turn, has reduced capital adequacy.

ABQ’s profitability, as measured by the return on average assets (ROAA), remains strong and better than the Qatari sector average, supported by good gross income generation and effective cost control. Although the bank’s ROAA and operating profitability have slipped over the last few years, in line with most other Qatari banks, this is principally due to a narrower net interest margin. Non-interest income (NII) continues to benefit from high levels of fee and commission income generated by credit and contingent account (LCs and LGs) activity, as well as a significant level of investment income. The contribution of NII to gross income improved in recent periods, although this was largely due to securities gains.

ABQ is the name adopted for the erstwhile ‘Al-Ahli Bank of Qatar’ after Bahrain-based Ahli United Bank acquired a major stake in 2004. The bank was re-branded as ‘Ahli Bank QSC’ with a new corporate identity and new management team. Under that management the bank underwent a successful restructuring programme. ABQ’s business is segmented into retail banking, grouped together with private banking and wealth management, corporate banking, and treasury and investments. Currently, Qatar Foundation is the largest single shareholder with 29.41 per cent of ABQ’s shares, and QIA (through its subsidiary Qatar Holding Company) has a 17.65 per cent shareholding, bringing the total shareholding by state-owned entities to 47.06 per cent; other smaller investors in aggregate own 52.94 per cent of the bank’s equity. At end-September 2016, the bank’s total assets were QAR 35.3 billion ($9.7 billion) and total capital was QAR 4.76 billion ($1.3 billion).

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