Fitch Ratings-London/Dubai-March 14: Fitch Ratings has affirmed Ahli Bank's QSC (ABQ) Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook. It has also affirmed the Viability Rating (VR) at 'bbb-'. A full list of rating actions is at the end of this Rating Action Commentary.
KEY RATING DRIVERS
IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT
ABQ'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 strong 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 revenue, mostly from hydrocarbon production, despite lower oil prices.
ABQ's SRF is at the Qatari banks' domestic systemically important bank (D-SIB) SRF of 'A', and is not differentiated by franchise or level of government ownership because we see an extremely high probability that all rated Qatari banks would receive support should they require it. This belief 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.
The bank's senior debt ratings are driven by the same factors that drive the IDRs.
The Stable Outlook on ABQ's Long-Term IDR mirrors that on the Qatari sovereign.
VR
The VR of ABQ reflects the bank's adequate profitability, sound asset-quality metrics, sound capital ratios and sufficient liquid assets. It further takes into account high balance-sheet concentrations, a weak funding structure and the bank's small domestic franchise.
ABQ's asset-quality metrics deteriorated in 2018 but remained sound. The impaired loans ratio increased to 1.7% from 1% but reserve coverage remains healthy at 135%. The bank has been reporting Stage 2 loans of 6.1% of gross loans, which is lower than peers. This makes for a total of 7.8% of total problem loans (Stage 2+3) for ABQ, which is significant albeit better than peers. This reflects the bank historically low amount of watch-list loans and no restructured loans. The bank's concentration is high, similar to other local and regional peers, with the 20 largest exposures representing 2.1x equity at end-2018.
ABQ's profitability has been resilient to the lower business volumes in 2018. ABQ's net interest margin (NIM) was maintained at 2.3% in 2018 supported by the loan book re-pricing, despite the cost of funding rising by 40bp. NIM could come under pressure as the bank tries to increase its customer deposits to reduce its loans to deposits ratio. Non-interest income compensated for the more tamed net interest income. The cost-to-income ratio improved to 28% from 31% as the bank rationalised its branch network. Loan and securities impairment charges absorbed 16% of the bank's pre-impairment operating profit in 2018 due to provisions taken in the corporate book against new Stage 3 exposures.
ABQ has sound capital. Flat risk-weighted assets (RWAs) and retained earnings led to a small rise in capital ratios. The FCC ratio grew to 17.9% at end-2018 from 17.3% at end-2017 above the 15.2% peers' average. The capital adequacy ratio was 18.2% at end-2018, well above the 13.5% QCB limit including the capital conversion buffer of 2.5% and a 1% ICAAP charge, and above the 16% internal limit. ABQ is not recognised as a D-SIB, therefore no additional buffer is required. The impact of implementing IFRS 9 was negligible. The ECL charge was QAR234 million (0.75% of RWAs) at the beginning of January 2019 and was taken from retained earnings. ABQ did not need to cover the impact of IFRS 9 by using its risk reserves, unlike several other banks.
ABQ's funding is structurally weak due to its lack of stable and long-term funding. ABQ is mainly funded by customer deposits. Foreign deposits remained well below the pre-blockade period, at 6.5% of total deposits, mainly from Asia. These are yield sensitive and unlikely to stay with the bank in case of extreme shock. ABQ is highly reliant on non-deposit funding, which increased to 36% of total funding from 30% at end-2017. ABQ's loans-to-deposits ratio has increased to 129% due to the decrease in deposits and was high compared with the peer median average of 110%. The stock of liquid assets was sufficient at end-2018. The liquidity coverage ratio was 156% at end-2018, compliant with 100% QCB limit. The bank's interbank assets/liabilities ratio fell in 2017 due to the increase in interbank liabilities, but slightly recovered in 2018 with higher interbank assets. ABQ is not compliant with NSFR but it is close to the required minimum of 100%.
The VR also reflects the bank's small domestic franchise (only 3% of banking system loans and deposits).
RATING SENSITIVITIES
IDRS, SUPPORT RATINGS 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 or ABQ.
SPV AND SENIOR DEBT
The senior debt ratings are sensitive to the same factors that affect the IDRs.
VR
ABQ's VR is sensitive to major deterioration in the operating environment that would weaken the bank's risk profile and affect the bank's asset-quality metrics, capital position and funding.
The rating actions are as follows:
ABQ
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'
Euro commercial paper and certificate of deposits programme: affirmed at 'A/F1'
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Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)
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