Fitch Ratings-London-November 18:
Fitch Ratings has affirmed Doha Bank Q.P.S.C.'s (DB) Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook. At the same time, the agency has affirmed DB's Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
DB'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, including DB.
Our view of the propensity to support is based on a strong 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 is sustained by sovereign reserves and revenues, mostly from hydrocarbon production, despite lower oil prices.
DB's SRF of 'A' is at the same level as the Qatari bank's domestic systemically important bank (D-SIB) SRF. The latter is not differentiated by franchise or level of government ownership because we believe there is an extremely high probability that all rated Qatari banks would receive support should they require it. This view also partly reflects the risk of contagion (small number of banks and high concentration of banks in the system), and the importance of the banking system in building the local economy.
We assign Short-Term IDRs according to the mapping correspondence described in our bank rating criteria. An 'A' Long-Term IDR can correspond to a Short-Term IDR of either 'F1' or 'F1+'. In the case of DB, we opted for 'F1', the lower of the two Short-Term IDR options. This is because a significant proportion of the Qatari banking sector funding is related to the government and a stress scenario for the banks is likely to come at a time when the sovereign itself is experiencing some form of stress.
The Stable Outlook on DB's Long-Term IDR mirrors that on the Qatari sovereign.
SPVs AND SENIOR DEBT
The ratings of debt issued by DB's special purpose vehicle (SPV) 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 SPV the same as the likelihood of the default of the bank.
VR
The 'bb+' VR of DB reflects its weak asset quality metrics that underperform peers', weak profitability, high concentrations on both sides of the balance sheet, only adequate core capital ratios and a high reliance on foreign funding. The bank's focus on private-sector borrowers, including the higher-risk contracting segment in Qatar and international assets in the Gulf Cooperation Council (GCC) also result in greater reliance on volatile business. Nevertheless, our assessment of DB's standalone creditworthiness is underpinned by the well-established domestic franchise in Qatar of the fifth-largest bank, with market shares of about 6%-7% in loans and deposits at end-1H19.
DB's non-performing loans (NPL) ratio was a high 5.6% at end-3Q19 (end-2017: 3.6%), primarily reflecting seasoning in the contracting financing book (12% impaired) and problems in the bank's GCC operations (13% of loans at end-2018; 29% impaired at end-3Q19) - the latter including some lumpy exposures impacted by Qatar's political dispute with neighbouring countries. Exposure to lower-risk government lending (end-3Q19: 8% of loans) is low compared with that of peers.
DB's NPL ratio improved slightly in 9M19, due mainly to QAR537 million of write-offs, while loan growth (about 9%) was at the higher end of peers'. NPL origination (net new NPLs/average performing loans) also remains high (9M19: 1.7% annualised), although it has decreased from its peak (2018: 2.3%).
Credit risk is heightened by significant exposure to the troubled contracting and real-estate sectors (a combined 41% of loans at end-3Q19), as reflected in high Stage 2 loans, including some restructured. Stage 2 loans were equal to 28% of gross loans and mainly related to real estate and contracting. Single-name risk is also high. Total reserve coverage of impaired loans was 141% at end-3Q19. However, specific coverage of Stage 2 loans was just 8%. Real-estate exposures are typically well covered with collateral, although collateral realisation could be a lengthy process.
Asset-quality problems have impacted profitability, with loan impairment charges absorbing a high 46% of pre-impairment operating profit in 9M19. As a result, operating profit to risk-weighted assets (RWAs) was just 1.3%, the weakest among the peer group. Furthermore, profitability was inflated by non-recurring gains on securities sale in 9M19, equal to 24% of operating profit. DB's net interest margin also continued to tighten due to the sourcing of more expensive foreign funding, an increase in lower-yielding government securities (20% of total assets) and the presence of some long term fixed-rate deposits, despite loan repricing efforts and a lower US dollar interest rate environment. DB's cost efficiency has improved (9M19: cost/income of 29%), reflecting good cost control and is broadly in line with peers'.
We expect loan impairment charges/gross loans to remain high given asset-quality pressures. Profitability could deteriorate significantly from marked further weakening of asset quality.
DB's FCC ratio of 12% at end-3Q19 was lower than most peers'. It is only adequate given the bank's high concentration risk and weak asset quality and profitability. It fell materially in 2018, due primarily to the impact of IFRS9 implementation but has since improved slightly. The improvement reflected the optimisation of RWAs - including growth in lower-risk weighted Qatari sovereign securities - and a lower dividend pay-out in 9M19. DB's Tier 1 and total capital adequacy ratio (CAR) of 15.7% and 16.8% are supported by QAR4 billion additional Tier 1 (AT1) notes and QAR923 million of Tier 2 capital, respectively. DB's high coverage of NPLs mitigates risks to capital from existing impaired loans.
Deposits represented 64% of total funding (including AT1 notes) at end-3Q19. The deposit base is concentrated and contractually largely short-term. Domestic deposits - which are dominated by government deposits (41% of total customer deposits, down from 52% at end-2018) - are considered stable. However, liquidity risk is greater for more lumpy non-domestic deposits (end-3Q19: a high 35%).
DB's gross loans/deposits ratio of 119% at end-3Q19 is higher than most peers', reflecting high wholesale funding reliance (36% of total funding), mainly comprising short-term interbank deposits (12%), repos (11%), bank borrowings (8%), and AT1 (4%) notes. Consequently, a potential change in investor sentiment could put pressure on DB's funding and liquidity profile. Liquid assets (including interbank placements, unencumbered government securities and cash balances less mandatory reserves) represented a moderate 21% of assets and 37% of customer deposits at end-3Q19 and fully covered wholesale funding repayments (excluding repos) due within one year.
RATING SENSITIVITIES
IDRs, SUPPORT RATINGS AND SUPPORT RATING FLOOR
DB's 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 or to DB.
SPV AND SENIOR DEBT
The ratings of debt issued by the SPV are sensitive to changes in the parent's IDRs.
VR
Further significant weakening in DB's asset quality, which put pressure on profitability and capital, would weigh on the VR. In addition, significant expansion of operations into lower-rated operating environments could also be negative for the VR.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit
Doha Bank Q.P.S.C.; Long Term Issuer Default Rating; Affirmed; A; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F1
; Viability Rating; Affirmed; bb+
; Support Rating; Affirmed; 1
; Support Rating Floor; Affirmed; A
Doha Finance Limited
----senior unsecured; Long Term Rating; Affirmed; A
----senior unsecured; Short Term Rating; Affirmed; F1
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Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)
Short-Term Ratings Criteria (pub. 02 May 2019)
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