Fitch Ratings-London-March 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 Qatar's strong ability to support its banks, as indicated by its rating (AA-/Stable), combined with Fitch's belief that there is a strong willingness to support the banking sector and the bank. The latter 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 significant sovereign reserves and revenues, mostly from hydrocarbon production, despite lower oil prices.
DB's SRF is at the Qatari bank's domestic systemically important bank (D-SIB) SRF of 'A', and 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 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 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
DB's 'bb+' VR reflects weak asset quality metrics in relation to peers and high concentrations, the ensuing weak profitability, only adequate core capital ratios and tight liquidity and its reliance on foreign funding.
Nevertheless, DB's VR is underpinned by its well-established domestic franchise in Qatar, where it is the fifth-largest bank, with market shares of about 6%-7% in loans and deposits at end-2018. However, the bank's business model is being challenged, due to its aggressive risk appetite in largely targeting the private sector, including the riskier contracting segment.
DB's asset quality metrics continued to deteriorate in 2018 and remain weaker than most peers. The impaired loans ratio increased to a high 5.9% at end-2018 (end-2017: 3.6%), primarily reflecting loan book seasoning in the bank's contracting financing (16% impaired loans ratio in this segment) and problems in its Gulf Cooperation Council (GCC) operations (a high 35% of which is impaired, including lumpy exposures impacted by the political dispute). Non-performing loan (NPL) origination (net new NPLs/average loans) increased to a high 2.4% in 2018.
Asset quality risks remain high at DB, given its high exposure to the higher-risk contracting and real estate sectors, which accounted for about 45% of the loan book at end-2018 and lower than peers exposure to less-risky government lending (only 6% of loans). Stage 2 loans are also significant at 31% of total loans suggesting the potential for further NPL growth, although the high level was partly due to the transition to IFRS 9 in 1Q18. Reserve coverage of impaired loans is high (138% at end-2018) albeit more moderate compared with total NPLs and Stage 2 loans (22% coverage). Real estate exposures are typically well covered with collateral.
Weakening asset quality is impacting profitability, with loan impairment charges absorbing a high 53% of pre-impairment operating profit in 2018. As a result, operating profit to risk-weighted assets (RWAs) fell considerably to 1.1% and return on equity was a weak 9.1%. DB's net interest margin shrunk 20bp (to 2.5% in 2018) reflecting materially increased funding costs and despite the bank's active repricing efforts. However, DB's cost/income fell to 32% (from 38% in 2017) through good cost control and is now more in line with peers. We expect loan impairment charges/gross loans to remain high at DB given asset quality pressures. Profitability could deteriorate significantly in case of a marked further weakening of asset quality.
DB's Fitch Core Capital (FCC) ratio is only adequate and fell to 11.1% at end-2018 from 13.5% at end-2017, primarily due to the large impact from IFRS9 implementation equivalent to QAR1.8 billion. The FCC ratio is lower than most peers. DB's Tier 1 and total capital adequacy ratio (CAR) of 15.8% and 17.0% are supported by QAR4 billion additional Tier 1 notes and about QAR900 million of Tier 2 capital, respectively. We consider DB's core capital ratios low in light of bank's high loan concentration and weakening asset quality and profitability. However, this is somewhat mitigated by DB's high coverage of total loan loss allowances.
Deposits represented about 66% of non-equity funding at end-2018, as wholesale funding has increased. DB's deposit base remains concentrated and is dominated by government deposits (52% of customer deposits at end-2018), which have increased since the blockade began. Nevertheless, a high 28% of customer deposits are from foreign depositors, increasing risks for deposit outflows. Interbank deposits (12% of funding) and repos (11%) increased in 2018 as customer deposits fell. A change in investor sentiment could therefore put pressure on DB's funding and liquidity given the bank's high reliance on wholesale funding. In addition, liquid assets (including interbank placements, unencumbered securities and cash balances less mandatory reserves) represented a modest 20% of assets and 35% of customer deposits at end-2018, with the gross loans-to-deposits ratio having increased to 117% at end-2018, which is higher than most peers.
RATING SENSITIVITIES
[IDRs, SR AND SRF
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. A downgrade of the sovereign would result in a downgrade of DB's IDRs.
SPV AND SENIOR DEBT
The ratings of debt issued by the SPV are sensitive to changes in their parent's IDRs.]
VR
A marked weakening in the operating environment could weaken DB's risk profile, as for all Qatari banks. A significant further weakening in DB's asset quality, which put pressure on profitability and capital, would put downward pressure on the VR. In addition, a significant expansion of operations into lower-rated operating environments could also be negative for the VR.
Upside is unlikely in the current challenging operating environment and given pressures on the bank's asset quality, profitability and core capital.
The rating actions are as follows:
Doha Bank Q.P.S.C.
Long-Term IDR: affirmed at 'A'; Stable Outlook
Short-Term IDR: affirmed at 'F1'
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A'
Doha Finance Ltd
EMTN programme senior unsecured notes programme at 'A'/'F1'
Contact:
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Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)
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