Thursday 06, July 2017 by Nabilah Annuar

Moody's affirms ratings of 10 Qatari banks, changes outlook on nine

Changes outlook from stable to negative on nine banks it rates.

Moody's Investors Service has affirmed the long-term ratings of all of the 10 banks it rates in Qatar. Moody's also affirmed the banks' baseline credit assessments (BCA), adjusted BCAs and Counterparty Risk Assessments (CRA)s. At the same time, the rating agency changed the outlook to negative from stable for nine banks and maintained the negative outlook on one bank.

According to a statement from agency, the rating actions were driven by: the weakening domestic operating environment, particularly for banking funding, resulting in the rating agency lowering the macro profile it assigns to Qatar to Moderate+ from Strong, and 2) the weakening capacity of the Qatar government to support the country's banks, as indicated by Moody's change in outlook for the Qatari government's Aa3 government bond rating to negative from stable on 4 July.

Moody's decision to affirm the ratings of all 10 banks reflects the resilience in their financial performance underpinned by continued strong asset quality and capital buffers. Despite challenges emerging from the ongoing dispute between Qatar and a group of peer countries, including its fellow Gulf Cooperation Council (GCC) neighbours Bahrain (Ba2 negative), Saudi Arabia (A1 stable) and the United Arab Emirates (UAE, Aa2 stable) the banks' liquidity buffers remain solid.

At the same time, Moody's decision to change the outlook to negative from stable on the long-term ratings of nine banks reflects Moody's expectations that a prolongation of the current dispute could lead to some outflows of external funding, which would reduce the banks' liquidity buffers while domestic funding sources remain tight due to current oil prices. At the same time, Moody's expects funding costs to rise, dampening banks' profitability. Additionally, the negative outlook also captures the weakening capacity of the government of Qatar to provide support in case of need, as implied by the negative outlook on the Aa3 government bond rating.

The affected institutions are Qatar National Bank, Doha Bank, Al Khalij Commercial Bank (al khaliji), Ahli Bank, Barwa Bank, International Bank of Qatar, Masraf Al Rayan, Qatar International Islamic Bank and Qatar Islamic Bank.

Moody's has maintained the negative outlook on the long-term deposit ratings of The Commercial Bank. The existing negative outlook was driven by Moody's expectation of pressures on the bank's solvency, arising from asset quality deterioration and the weakening of profitability owing to higher loan loss charges and a lower contribution from Commercial Bank's Turkish subsidiary and UAE based associate. Additional pressure is now exerted on the bank's ratings due to the challenges in the operating environment and the negative outlook for the Qatar government rating, similarly to the other Qatari banks rated by Moody's.

A key driver of the negative outlook of the Qatari banks' ratings is the downside risk that a prolongation of the current regional dispute could trigger some outflows of external funding (which represents around 36 per cent of total banking system liabilities as of May 2017) and a generalised increase in the cost of funding. As a result, the banks' liquidity buffers would likely reduce, as domestic funding sources remain tight due to current oil prices.

This could negatively impact the supply of credit and weaken economic growth. Consequently, this could increase asset quality pressures and provisioning charges on the banks over the coming quarters. A combination of these factors, could result in lower profits for Qatari banks. Moody's has captured these risks by lowering its macro profile for Qatar to Moderate+ from Strong-.

Although Moody's continues to incorporate a very high probability of government support for the long-term issuer and deposit ratings of the Qatari banks, the change in their outlook is also driven by the change in outlook to negative from stable on the Aa3 Qatar government bond rating. This reflects the potential weakening of the government's capacity to provide support to banks in case of need. Moody's very high probability of support for the banks in Qatar is driven by the government's shareholding in the banks, the importance of the banking system to the country's economy and past track record of pre-emptively supporting banks in 2009-2010.

Qatar National Bank (QNB)

The key drivers for the affirmation of QNB's Aa3 long-term deposit ratings are Moody's (1) affirmation of the bank's baa1 BCA, and (2) view of a continued very high likelihood of Qatari government support, which continues to translate into four notches of uplift from its baa1 BCA. The change in outlook to negative from stable reflects both pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

QNB's standalone profile is expected to come under pressure owing to the challenges in the operating environment, which are likely to reduce its liquidity buffers. Amongst the domestic banks, QNB has the highest level of external funding (around 49 per cent of its total liabilities on a consolidated basis), which in the event the dispute becomes prolonged could lead to some outflows of external funding, while domestic liquidity conditions remain tight. This would also dampen the bank's strong profitability due to higher funding costs. The BCA also captures the bank's dominant domestic franchise with strong linkages to the government, which underpins its solid solvency position and is a key driver for the BCA affirmation.

Qatar Islamic Bank (QIB)

The key drivers for the affirmation of QIB's A1 deposit ratings are Moody's (1) affirmation of the bank's baa2 BCA and (2) view of a continued very high likelihood of Qatari government support, which continues to translate into four notches of uplift from its baa2 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

The rating agency expects QIB's standalone profile to come under pressure owing to its reliance on external funding, at 27 per cent of its total assets as of December 2016, including sizable funding from the GCC countries (20 per cent of its total assets). Should the dispute become prolonged, this could result in some outflows of external funding, while domestic liquidity conditions remain tight. These challenges are expected to lower the profitability of the bank as funding costs rise. Nevertheless, the BCA also captures the bank's well established and expanding retail and corporate Islamic banking franchise, which supports its overall solvency profile and is a key driver for the BCA affirmation.

Doha Bank

The key drivers for the affirmation of DHBK's A2 deposit ratings are Moody's (1) affirmation of the bank's baa3 BCA and (2) view of a continued very high likelihood of Qatari government support, which continues to translate into four notches of uplift from its baa3 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

Moody's expects DHBK's BCA to come under pressure due to the challenges in the operating environment, which are expected to reduce its liquidity buffers. The bank's market funding - which stands at 24 per cent of total assets as of March 2017 (up from 21 per cent as of December 2016) -could see some outflows in the event the dispute becomes prolonged, while domestic liquidity conditions remain tight. At the same time, the bank's profitability (as measured by net income to total assets), which recovered in 2017 after declining to 0.9 per cent for 2016, due to higher provisioning costs, will likely face renewed pressure from a rise in funding costs.

Nevertheless, the bank's solvency profile remains solid, underpinned by the recent capital increase from a QAR1.3 billion rights issue.

Masraf Al Rayan

The key drivers for the affirmation of Masraf's A1 issuer ratings are Moody's (1) affirmation of the bank's baa2 BCA and (2) view of a continued very high likelihood of Qatari government support which continues to translate into four notches of uplift from its baa2 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

Masraf's standalone profile remains underpinned by its solid solvency profile. However, this is expected to come under pressure owing to the challenges in the operating environment, which could reduce its liquidity buffers. The bank's reliance on external funding was around 14 per cent of total assets as of December 2016.

Although lower than some of its Qatari peers, the level has increased since then, and in the event the dispute prolongs there could be some outflows, while domestic liquidity conditions remain tight. In line with other Qatari banks, Moody's expects that MASRAF's profitability will soften as a result of a rise in funding costs.

Qatar International Islamic Bank

The key drivers for the affirmation of QIIB's A2 issuer ratings are Moody's (1) affirmation of the bank's baa3 BCA and (2) view of a continued very high likelihood of Qatari government support, which continues to translate into four notches of uplift from its baa3 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

QIIB is exposed to the same challenges in the operating environment as other Qatari banks, which could lead to some reduction in its liquidity buffers, however, Moody's expects the bank's performance to be relatively resilient. The rating agency will monitor the evolution of the bank's solid retail-focused franchise which underpins its funding profile (around 70 per cent of total deposits) and its stock of liquid assets which, despite some pressure, are expected to remain higher than its domestic peers (28 per cent as of December 2016 vs 24 per cent system average as of December 2016). In addition, the bank has maintained high capital buffers, which also support its current BCA.

Barwa Bank

The key drivers for the affirmation of Barwa Bank's A2 deposit ratings are Moody's (1) affirmation of the bank's baa3 BCA and (2) view of a continued very high likelihood of Qatari government support which continues to translate into four notches of uplift from its baa3 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

Barwa Bank's BCA is expected to come under pressure due to the challenges in the operating environment, which are expected to reduce its liquidity buffers. The bank's market funding - which currently stands at 18 per cent of total assets—has risen recently, and in the event the dispute becomes prolonged, there could be some outflows, while domestic liquidity conditions remain tight. The bank has a highly concentrated deposit base, more so than its peers, which may also create challenges in a tight liquidity environment. At the same time, the bank's profitability will continue to be pressured due to the rise in funding costs over the outlook period.

Nevertheless, the BCA also captures Barwa Bank's solid asset quality and capital buffers, which underpin its overall solvency position and are key drivers of the BCA affirmation.

Ahli Bank

The key drivers for the affirmation of Ahli Bank's A2 deposit ratings are Moody's (1) affirmation of the bank's baa3 BCA and (2) view of a continued very high likelihood of Qatari government support which continues to translate into four notches of uplift from its baa3 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

Moody's says that Ahli Bank's standalone profile is expected to come under pressure owing to the challenges in the operating environment which are expected to reduce its liquidity buffers. The rating agency says that the bank's market funding has increased - at around 26 per cent of total assets as of March 2017 up from 19 per cent as of December 2016 - which in the event the dispute becomes prolonged could lead to some outflows, while domestic liquidity conditions remain tight. Moody's also expects the bank's profitability to decline over the outlook period due to higher funding costs. Nevertheless, the BCA also captures Ahli Bank's solid asset quality and capital buffers which underpin its overall solvency position and is a key driver for the BCA affirmation.

International Bank of Qatar (IBQ)

The key drivers for the affirmation of IBQ's A2 deposit ratings are Moody's (1) affirmation of the bank's baa3 BCA and (2) view of a continued very high likelihood of Qatari government support which continues to translate into four notches of uplift from its baa3 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

Moody's expects IBQ's BCA to come under pressure due to the challenges in the operating environment, which are expected to reduce its liquidity buffers. The bank's market funding has increased - at 24 per cent of total assets as of December 2016 up from 21 per cent as of December 2015) -- which in the event the dispute becomes prolonged could lead to some outflows, while domestic liquidity conditions remain tight. At the same time, the bank's profitability will continue to be pressured due to the rise in funding costs over the outlook period.

Nevertheless, the BCA also captures IBQ's solid asset quality and capital buffers, which underpin its overall solvency position and are key drivers of the BCA affirmation.

Al Khalij Commercial Bank (al khaliji)

The key drivers for the affirmation of al khaliji's A3 deposit ratings are Moody's (1) affirmation of the bank's ba1 BCA and (2) view of a continued very high likelihood of Qatari government support which continues to translate into four notches of uplift from its ba1 BCA. The change in outlook to negative from stable reflects both the pressure on the bank's standalone credit profile and the change in outlook on the sovereign rating.

The bank's standalone profile is expected to come under pressure owing to the challenges in the operating environment, which are expected to reduce its liquidity buffers. The bank's market funding, although reduced, remains high - 27 per cent as of March 2017 down from 32 per cent of total assets as of December 2016 - which in the event the dispute becomes prolonged could be subject to some outflows, while domestic liquidity conditions remain tight. At the same time, the bank's profitability (as measured by net income to total assets), which recovered during 2017 after declining to 0.6 per cent for 2016 due to higher provisioning and funding costs, would likely face renewed pressure from a further rise in funding costs. Nevertheless, the BCA also captures al khaliji's solid asset quality and capital buffers, which underpin its overall solvency position and are key drivers of the BCA affirmation.

Given the negative outlooks on the long-term deposit and issuer ratings of Qatari banks, upgrades are unlikely in the near future. There is also limited upside potential for the standalone BCAs of the banks given the rating action. However, the outlook could be stabilised if there was swift resolution of the ongoing dispute.

The standalone ratings of the banks could be downgraded if the deterioration in the operating environment leads to a weakening in funding and liquidity of the banks. Likewise, long-term deposit or issuer ratings also benefit from government support uplift and could be affected negatively by a reduction in the government's capacity to provide support as indicated by change in the sovereign rating.

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