Fitch Ratings - Dubai : Fitch Ratings has placed Ahli Bank Q.P.S.C.'s (ABQ) Long-Term Issuer Default Rating (IDR) of 'A' on Rating Watch Negative (RWN). The Short-term IDR and Support Rating Floor (SRF) were also placed on RWN. ABQ's Viability Rating (VR) was affirmed at bbb-'. A full list of rating actions is provided below.

The RWN reflects the Qatari banking sector's increasing reliance on external funding and recent rapid asset growth, which may have moderately weakened the sovereign's ability to provide support to the system, in case of need.

KEY RATING DRIVERS

Non-resident funding reached USD193 billion or 48% of the Qatari banking sector's liabilities at end-August 2021 (up from USD121 billion or 38% at end-2018), while banks' foreign assets remained broadly stable (USD60 billion at end-August). As a result, the banking sector's net external debt at end-August 2021 increased to a substantial USD133 billion or 82% of forecast 2021 GDP (USD57 billion or 31% at end-2018). This high level of external funding, coupled with the large size of the banking system (total assets increased to 302% of forecast 2021 GDP at end-August 2021 from 212% at end-2018), could have moderately weakened the authorities' ability to support the banking sector, if needed, notwithstanding the substantial resources at the sovereign's disposal.

The 'A' domestic systemically important bank (D-SIB) SRF for Qatari banks is at the higher end of the typical range for D-SIB SRFs in jurisdictions where the sovereign is rated 'AA-' and, in Fitch's view, reflects a high propensity to support the banking system.

Fitch will resolve the RWN following further analysis of the current composition and stability of Qatari banks' non-resident funding, the evolution of this funding in volumes and sources, banks' liquidity- management plans and the sovereign's ability to provide liquidity support to banks in case of need. In case of a downgrade, ABQ's Long-Term IDR and SRF are expected to remain in the 'A' category.

IDRS, SR and SRF

ABQ's IDRs, Support Rating (SR) and SRF continue to reflect an extremely high probability of support from the Qatari authorities for domestic banks, if needed. This considers Qatar's still strong ability to support domestic banks, as reflected in the sovereign's 'AA-'/Stable rating and substantial net foreign assets (end-2020: equivalent to 187% of GDP) and revenues. It also reflects Fitch's view of a strong propensity to support the banking sector, including ABQ, based on past episodes of support. These include in 2H17, when the authorities placed significant deposits with banks to support sector liquidity, following the start of the blockade between Qatar and some of its neighbours, and between 2009 and 2011, when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks. The government owns stakes in all Qatari banks.

ABQ's Short-Term IDR of 'F1' is the lower of two options mapping to an 'A' Long-Term IDR, reflecting that a significant proportion of the banking sector's funding is government-related and a stress on ABQ is likely to come at a time when the sovereign itself is experiencing some form of stress.

SENIOR DEBT

The bank's senior debt ratings are driven by the same factors that drive the IDRs.

VIABILITIY RATING (VR)

Fitch has revised the outlook on Qatari banks' operating environment to stable from negative as short-term downside risks from the pandemic fallout on banks' credit profiles have subsided. Fitch forecasts Qatar's real GDP growth to rebound to 1.6% in 2021 (2022: 2.5%), following a 3.6% contraction in 2020, supported by higher hydrocarbon prices and the North Field LNG expansion. The sector's credit growth was a healthy 6.7% (annualised) in 1H21 (2020: 8.5%), despite capex cutbacks by the government.

We believe near-term risks to the sector's asset quality (end-1H21: average Stage 3 (S3) loans ratio of about 2%) are largely contained - even after the expiry of the Qatar Central Bank's (QCB) credit deferrals - and offset by the recovering operating environment and banks' strong provisioning levels (end-1H21: 140% average total reserve coverage of impaired loans). Qatari banks have adequate excess capital buffers (end-1H21: average common equity Tier 1 (CET1) ratio of 14% against 8.5% regulatory minimum requirements) and healthy pre-impairment operating profitability offsetting a potential moderate increase in problem loans.

ABQ's 'bbb-' VR reflects the bank's adequate asset-quality metrics, sound profitability and capital ratios, and sufficient liquid assets. The VR also considers high balance-sheet concentrations, a weak funding structure and a small domestic franchise.

ABQ's asset quality was resilient in 2020 and 1H21, supported by low impaired loans origination. The S3 loans ratio dropped slightly to 2.3% at end-1H21 (2.5% at end-2020), due to some recoveries and loan growth. The Stage 2 (S2) loans ratio dropped to 8% at end-1H21 (11% at end-2020), due to the migration of around QAR900 million of loans from S2 to S1, comparing well with peers'. Fitch expects some deterioration in 2021, as QCB's loan deferral programme expires, with some loan restructuring and an increase in S2 loans. However, we do not anticipate a sharp increase in the bank's problem loans ratio, due to its healthy underlying asset quality. Total reserve coverage of impaired loans increased to 158% at end-1H21 (118% at end-2019) and S3 loans were 88% covered by specific provisions.

ABQ's core profitability remains resilient and operating return/average risk-weighted assets (RWAs) of 1.7% in 1H21 was down by only 40bp from 2019's, despite higher loan impairment charges (LICs) and front-loading of provisions. LICs absorbed 27% of pre-impairment operating profit in 2020 (16% in 2019) and are expected to stay around the same levels in 2021. Net interest margin (NIM) improved to 2.5% in 1H21 (2.1% in 2019), owing to zero cost of funding from the QCB and ABQ reducing some of its price-sensitive deposits. However, ABQ's NIM remains lower than larger peers'.

ABQ is well-capitalised and has one of the lowest dividend pay-out ratios (66% of earnings have been retained over the past eight years) in the sector. Its 16.3% CET1 ratio at end-1H21 was comfortably above the QCB's minimum requirement of 8.5% and compared well against peers'. The total capital adequacy ratio (CAR) increased to 20.5% at end-1H21 from 17.7% at end-2020, owing to the issuance of QAR1.1 billion additional Tier 1 (AT1) notes and is well above the 13.5% QCB requirement. However, an increase in problem loan origination could put pressure on these buffers.

ABQ's funding is structurally weak, due to high dependence on wholesale funding (around 30% of total funding) and high single-name concentrations (20-largest depositors at 57% of the total at end-1H21), due to a limited pool of granular retail deposits. Non-resident deposits formed 10% of the deposit base and total non-resident funding accounted for 38% of the bank's total liabilities at end-1H21.

ABQ's gross loans-to-deposits ratio was 128% at end-1H21, higher than the peer median average. While the bank is focused on preserving margins, it has shed expensive deposits that would renew only at much higher interest rates. The bank is net stable funding requirement (SFR)-compliant (116% at end-1H21) as its term loans and senior unsecured debt help diversify its maturity profile. The liquidity coverage ratio (LCR) was healthy at 895% at end-1H21. Unpledged investment-grade securities, cash balances less mandatory reserves and interbank placements covered 26% of total deposits at end-1H21.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IDRs, SR, SRF

The IDRs and SRF could be downgraded and revised lower, respectively, if Fitch concludes that the Qatari authorities' ability to support the banking sector or the bank has moderately reduced as a result of the increase in external funding and the growth in system assets. In case of a downgrade, ABQ's Long-Term IDR and SRF are likely to remain in the 'A' category.

A downgrade of the sovereign or a negative change in Fitch's assessment of the government's propensity to provide support could also result in a downgrade of ABQ's IDRs and downward revision of the SRF.

VR

The VR is sensitive to significant deterioration in the bank's asset quality and liquidity ratios. A rise in S2 and S3 loans and a sharp decrease in profitability would likely trigger a rating downgrade. Material outflow of deposits and a sharp decline in the liquidity of the bank could also trigger a downgrade.

Senior Debt

The ratings of debt issued by the SPV are sensitive to adverse changes in the bank's IDRs.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

IDRs, SR and SRF

ABQ's IDRs and SRF could be affirmed at their current levels if Fitch concludes that the sovereign's ability to support the sector, has not materially reduced, notwithstanding the increase in external funding and system assets.

Rating upgrades are highly unlikely given the RWN on the ratings, their already high level relative to the sovereign's, and the Stable Outlook on the sovereign's ratings.

VR

Upside could result from the bank strengthening its funding base and earnings, while maintaining sound capitalisation and asset quality.

Senior Debt

The ratings of debt issued by the SPV are sensitive to positive changes in the bank's IDRs.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

ABQ's IDRs are driven by sovereign support.

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 the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

-Ends-

Link to Rating Actions: Rating Actions

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com 

Additional information is available on www.fitchratings.com 

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