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Moody"s: Qatar"s Acquisition of Additional 10% Stake in Listed Banks" Capital Is Credit Positive

17 January 2011: Last Monday, the Qatari government announced that it will acquire 10% stakes in listed Qatari banks (with the exception of Qatar National Bank ( QNB , Aa3 stable, C-/Baa1), which is already 50% government-owned), bringing its investment in these banks to 20%. The 10% stake will be acquired through the issue of new shares and is credit positive for the local banks.

The fresh equity injected by the government"s investment arm, the Qatar Investment Authority ( QIA ), will (1) strengthen bank capitalisation and (2) enable banks to fund higher loan growth in anticipation of the 2022 World Cup.

The transaction, which is to be completed in first-quarter 2011, follows the initial capital investment of QIA in six locally listed banks. The initial investment was QAR2.6 billion ($714 million) for 5% stakes in the banks in January 2009 and another QAR2.7 billion ($741 million) for an additional 5% in January 2010.

The two rated banks, Commercial Bank of Qatar (CBQ , A1 stable, C-/Baa1 stable) and Doha Bank (A2 stable, D+/Baa3 stable)1 which respectively are the second- and third-largest banks in the system, will benefit from the new capital increase.

Overall, Qatari banks have comfortable capital positions, which is one of the main factors supporting their ratings. Official systemic data shows that at end-November 2010, the total capital adequacy ratio of the Qatari commercial banks stood at a strong 16.32%. We estimate that following the new capital injection by the QIA , the growth in total regulatory capital of the system will range between 50 and 150 basis points, depending on the issue price and the actual amount of shares issued and subscribed to by the government.

Since the beginning of the global financial crisis in 2008, the Qatari government has been highly supportive of the banking system and took a number of measures to maintain its financial stability. These measures included (1) the direct capital injection in the banks (with the Qatari government buying a 10% share of listed banks" capital); (2) the purchase of the banks" listed equity shares in the Qatari Stock Exchange; and (3) the acquisition of part of the banks" real estate investment portfolio. We estimate that altogether, these measures cost around 7% of the country"s GDP.

The government"s announcement of an additional 10% stake in the banks is an additional measure to support the sector and promote credit growth, which is expected to gradually resume the pre-crisis levels of 25%-30% in the medium term. As the country prepares for the 2022 World Cup, we expect government spending for infrastructure development to remain high, and project financing activity on behalf of the banks to grow further. Hence securing capital and longer-term funding is key in order to finance these longer-term projects and address any maturity mismatches on banks" balance sheets.

-Ends-

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© Press Release 2011