Fitch Ratings-London-20 July 2016

Fitch Ratings has affirmed Qatar National Bank's (QNB) Long-Term Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook. At the same time the agency has downgraded QNB's Viability Rating (VR) to 'a-' from 'a' and removed it from Rating Watch Negative (RWN) following the completion of QNB's acquisition of Finansbank (BBB/Stable/bbb-). A full list of rating actions is at the end of this rating action commentary.

The VR downgrade primarily reflects Fitch's view that the acquisition will increase QNB's risk profile, weaken capitalisation and introduce some volatility to its earnings and profitability. Finansbank is a fairly well-capitalised and profitable bank, but the Turkish operating environment is significantly weaker and more volatile than that of QNB's home market in Qatar. However, QNB has a good record of integrating and managing subsidiaries in weaker operating environments. In addition, the agency considers that Turkey could be an opportunity for diversifying QNB's franchise in the longer term, an opportunity that is not available in QNB's fairly small undiversified domestic economy.

KEY RATING DRIVERS

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

QNB's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation 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 history of sovereign support.

The government has demonstrated a strong commitment to its banks and key public-sector companies, and we expect this to continue despite the effects of lower oil prices. The sovereign's capacity to support the banking system is sustained by its sovereign wealth funds and revenues, mostly from its hydrocarbon production.

Fitch does not believe that franchise or level of government ownership should necessarily lead to a difference in banks' SRFs in the case of Qatar. We believe that there is an extremely high probability that all rated Qatari banks would receive support should they require it, irrespective of franchise and ownership. However, Fitch makes a distinction between QNB's SRF of 'AA-' and that of the other banks in Qatar (A+), as a result of its status as the flagship bank in the sector, its role in the Qatari banking sector and close business links with the state.

The Stable Outlook reflects the Outlook on the Qatari sovereign.

VR

QNB's VR reflects its dominant franchise in Qatar, close links to the Qatari government, strong funding profile with sound liquidity and track record of strong and stable earnings. Capitalisation has weakened, although QNB raised QAR10bn of additional Tier 1 capital in 2Q16 to maintain its capital ratio above 14% following the Finansbank acquisition. The bank's Tier 1 ratio was 14.2% at end-June 2016. We consider the bank's efficiency in bolstering capital prior to completion of the acquisition and the amount of Tier 1 capital raised to be a good indicator of management's ability to mitigate some of the risks of this acquisition. Liquidity remains sound despite tightening liquidity in the Qatari market generally.

QNB's profitability is stronger than that of most of its peers. However, Fitch considers that Finansbank will add volatility to QNB's profitability. The bank's risk appetite is fairly conservative although rapid growth in Turkey and/or further expansion into higher-risk markets would indicate a higher risk appetite and could pressure the VR. 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.

RATING SENSITIVITIES

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

The IDRs, SR and SRF are sensitive to a change in Fitch's assumptions around the Qatari authorities' propensity or ability to provide timely support to the banking sector. At present, Fitch considers the likelihood of any change to be small.

VR

QNB's VR is sensitive to its growth strategy in Turkey and other weaker operating environments. Rapid growth in lower-rated markets that would weaken the bank's risk profile could put pressure on the VR in the longer term. Capital weakening or significant asset quality deterioration in the bank's domestic market could also pressure the VR, but we view this as less likely.

The rating actions are as follows:

Long-Term IDR affirmed at 'AA-', Outlook Stable

Short-Term IDR affirmed at 'F1+'

Viability Rating downgraded to 'a-' from 'a'; RWN removed

Support Rating affirmed at '1'

Support Rating Floor affirmed at 'AA-'

-Ends-

Contact:
Primary Analyst
Laila Sadek
Director
+44 20 3530 1308
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Secondary Analyst
Eric Dupont
Senior Director
+33 1 4429 9131

Committee Chairperson
Redmond Ramsdale
Senior Director
+971 4 424 1202

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© Press Release 2016