Fitch Ratings-London/Dubai-March 18: Fitch Ratings has affirmed Qatar National Bank's (Q.P.S.C.) (QNB) Long-Term Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. QNB's Viability Rating (VR) has also been affirmed at 'bbb+'. A full list of rating actions is at the end of this Rating Action Commentary.
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOOR
QNB's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation of an extremely high probability of support from the Qatari authorities for domestic banks in case of need. This reflects the strong ability of Qatar to support its banks, as indicated by its rating (AA-/Stable), combined with Fitch's belief of a strong willingness to support the banking sector and the bank. The latter is based on a track record of sovereign support to the banking sector including i) between 2009 and 1Q11 when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks and ii) during 2H17 when the Qatari authorities placed significant deposits across the banks to support sector liquidity following the start of the blockade between Qatar and some of its neighbours. The government owns stakes in all Qatari banks.
The government has demonstrated a strong commitment to its banks and key public sector companies. The sovereign's capacity to support the banking system remains very strong owing to solid sovereign reserves and revenue, mostly from hydrocarbon production, despite lower prices.
The 'A+' SRF of QNB is one notch higher than all other Qatari banks' SRFs to reflect its flagship status, its role in the Qatari banking sector and its close business links with the state.
We assign Short-Term IDRs according to the mapping correspondence described in our rating criteria. An 'A+' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of QNB, whose Long-Term IDR is 'A+', we opted for 'F1', the lower of the two Short-Term IDR options. This is because a significant proportion of the bank's funding is related to the government and a stress scenario for the bank is likely to come at a time when the sovereign itself is experiencing some form of stress.
SPVs AND SENIOR DEBT
The ratings of debt issued by QNB's special purpose vehicles (SPVs) are in line with the parent's Long- or Short-Term IDRs, because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPVs the same as the likelihood of the default of the bank.
VR
QNB's VR of 'bbb+' reflects the bank's 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 factors in the bank's higher risk appetite, as indicated particularly by the bank's acquisitions in Turkey and Egypt, and generally by the bank's strong expansion plans outside Qatar. The rating further reflects QNB's declining core capital and leverage ratios (compared with pre-2016 levels), 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 (GREs).
QNB is Qatar's largest bank, accounting for about 45% of domestic loans and deposits. It is the most geographically diversified bank in Qatar with subsidiaries and associates in more than 30 countries across MENA, Asia and Europe. International operations help the bank diversify its business model and balance sheet given the relatively small domestic economy. However, we believe that the geographical expansion of QNB is adding to its risk profile, with about 20% of its assets in volatile markets (mainly Egypt and Turkey).
QNB is one of the most profitable banks in Qatar, with solid core earnings driven by expanding loan volumes combined with relatively good asset quality and low loan impairment charges. Similar to peers, the bank's net interest margin (NIM) came under further pressure in 2017 (to 2.6% from 3.1%) due to the devaluation of the Egyptian pound in November 2016 affecting interest income and higher funding costs following the political dispute. The NIM was maintained in 2018 and QNB's margins still compare well with peers' due to a dominant funding franchise in Qatar, the bank's ability to source funding relatively easily outside Qatar and better margins from the bank's international operations.
QNB has strong asset-quality metrics, which compare well with peers', supported by the relatively low-risk domestic lending and its high exposure to the government and GREs, forming 43% of its loan book. The impaired loans ratio was stable at 1.9% and total reserve coverage was 133% at end-2018. Stage 2 loans formed only 3% of the loan book at end-2018, strongly below peers, given the bank's relatively low exposure to the real estate and contracting sector and high lending to GREs. The bank's subsidiary, Finansbank, represents about 38% of QNB's total impaired loans. QNB also has healthy profitability, which can absorb additional impairment charges, if needed. Pre-impairment operating profit was 2.9% of gross loans in 2018, comparing well with peers'.
QNB's capital ratios are adequate but should be viewed in light of the bank's high borrower concentration, although we believe the concentration is of good credit quality. Core capital ratios came under pressure in 2016 due to the acquisition of Finansbank. The Fitch Core Capital ratio dropped slightly to 15.3% at end-2018 (15.8% at end-2017) due to QAR4 billion foreign translation losses as a result of the Turkish lira depreciation and additional QAR4 billion IFRS 9 ECL charges. QNB issued QAR10 billion of additional Tier 1 (AT1) notes in 2016 and additional QAR10 billion in 2018 to reduce the pressure on its capital ratios. The Tier 1 capital ratio was 18.1% at end-2018, above the minimum regulatory requirement of 12.38% (including 1.88% D-SIB capital charge).
Tangible common equity-to-assets was only at 7.5% at end-2018 (lower than peers') as the bank's capital ratios benefit from 0% risk weighting on government lending and sovereign securities. In 2018, QNB paid QAR5.5 billion dividends, representing 42% of 2017 net income (25% pay-out ratio in 2017). If QNB considers another acquisition, we expect the bank to issue further AT1 notes or carry out a rights issue. Given QNB's ownership, we do not believe the bank would have difficulty raising capital.
QNB has a solid funding base supported by its strong domestic franchise. QNB attracts large volumes of government and GRE deposits given its close links to the government and these were 31% of total deposits at end-2018. QNB is also very active in debt capital markets. Liquidity remains adequate. Liquid assets including interbank placements, Qatari sovereign debt securities and cash balance less mandatory reserves covered 20% of customer deposits at end-2018. The group's loans-to-deposits ratio was stable at 102% at end-2018, one of the lowest among peers. However, domestically, the loans-to-deposits ratio was much higher at about 123% at end-2018 (excluding deposits in QNB's off shore branches).
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS AND SYPPOR 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 and the bank. A downgrade of the sovereign would result in a similar action on QNB's IDRs.
SPVs and SENIOR DEBT
The ratings of debt issued by the SPV are sensitive to changes in their parent's IDR.
VR
QNB's VR is sensitive to further expansion into weaker operating environments, which would affect the bank's risk profile and capital ratios. Significant asset-quality deterioration in the bank's domestic market could also put pressure on the VR, but this is not our base case.
The rating actions are as follows:
QNB
Long-Term IDR affirmed at 'A+'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb+'
Support Rating Floor affirmed at 'A+'
Support Rating affirmed at '1'
QNB Finance Ltd
EMTN programme senior unsecured notes affirmed at 'A+'/'F1'
Senior unsecured notes affirmed at 'A+'
Contact:
Contact:
Primary Analyst
Redmond Ramsdale
Senior Director
+44 20 3530 1836
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Zeinab Abdalla
Director
+971 4424 1210
Committee Chairperson
Artur Szeski
Senior Director
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@fitchratings.com.
Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)
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