Fitch places Al Khalij Commercial Bank on rating watch negative

A full list of rating actions is at the end of this rating action commentary


Fitch Ratings - Dubai:  Fitch Ratings has placed Al Khalij Commercial Bank (al khaliji) P.Q.S.C.'s (AKB) 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. AKB's Viability Rating (VR) has been affirmed at 'bb'. A full list of rating actions is at the end of this rating action commentary.

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


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.

AKB's Long-Term IDR and SRF of 'A' are in line with the SRF for Qatari domestic systemically important banks (D-SIBs). The 'A' D-SIB SRF is in turn 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, AKB's Long-Term IDR and SRF are expected to remain in the 'A' category.


AKB'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 AKB, 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.

AKB'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 AKB is likely to come at a time when the sovereign itself is experiencing some form of stress.


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% in 1H21 (2020: 8.5%), despite capex cutbacks by the government.

The merger between AKB and Masraf Al Rayan (Masraf) is expected to be completed by end-2021, subject to final regulatory approvals. AKB and Masraf will continue to exist independently until the effective date of the merger. Upon the completion of the merger, AKB will be dissolved and its ratings withdrawn.

We believe the near-term risks to the sector's asset quality (end-1H21: average Stage 3 (S3) 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). Qatari banks have adequate excess capital buffers (end-1H21: average common equity Tier 1 (CET1) of 14% against 8.5% regulatory minimum requirements) and healthy pre-impairment operating profitability offsetting a potential moderate increase in problem loans.

AKB's VR is constrained by a narrow franchise in Qatar and an undiversified business model with significant concentrations on both sides of the bank's balance sheet. This results in a weak funding structure with high reliance on wholesale funding and non-domestic deposits, which is common with peers. The VR also reflects adequate core capital ratios and improving profitability.

AKB's asset-quality metrics remained stable in 2020 and 1H21. The S3 loans ratio dropped slightly to 2.4% (including interest in suspense) at end-2020 (2.6% at end-2019), supported by loan growth and QAR549 million write-offs, and was maintained at end-1H21, comparing well with peers'. We do not expect a spike in S3 loans after the expiry of the QCB deferral but we expect more loan restructuring and migration from Stage 1 to S2 loans. The Stage 2 (S2) loan ratio was 16% at end-1H21 and S2 loans were adequately provided for by specific provision (17%). Total reserve coverage was 200% at end-1H21, the highest among peers'.

AKB's profitability metrics are improving but operating return to risk weighted assets ratio remains lower than larger peers'. The ratio was resilient at 1.8% in 2020, and improved to 2% in 1H21, on the back of lower cost of funding and a well- managed cost base despite higher loan impairment charges (LICs). LICs absorbed 34% of pre-impairment profit in 2020 and 1H21 (21% in 2019) as AKB frontloaded its provisions.Net interest margin (NIM) improved to 2.5% in 1H21 (2% in 2019), due to reduced cost of funding in a lower interest-rate environment and the bank's higher reliance on wholesale funding compared to peers. Cost of funding could come under pressure if the bank replaces its wholesale funding with domestic deposits. Revenue diversification is weaker than peers', with non-interest income representing only 8% of gross revenues in 1H21 (11% in 2020).

Capital buffers are adequate, with a total capital adequacy ratio of 20.3% and a Tier 1 ratio of 19% at end-1H21, respectively, well above the 14% (Including ICAAP buffer) and 10.5% regulatory minimum requirements. The common equity Tier 1 (CET1) ratio of 15.4% at end-1H21 was one of the highest among peers'. The difference between the CET1 ratio and the Tier 1 ratio is largely its QAR1 billion additional Tier 1 (AT1) capital notes. AKB has adequate capital buffers to absorb an increase in problem loans if our assumptions around asset-quality deterioration materialise. The bank also has healthy reserve coverage with total reserves covering 5% of gross loan at end-1H21.

Funding is a rating weakness. AKB has a structurally weak funding profile due to high concentration, high reliance on wholesale funding and foreign deposits. Wholesale funding represented 35% of total funding at end-1H21, among the higher peers. Retaining non-resident deposits could also put pressure on the bank's cost of funding if interest rates start to increase. Total non-resident funding represented 31% of the bank's total liabilities at end-1H21. Due to the bank's weak franchise and low reliance on retail deposits (only 9% of total deposits), the deposit base is significantly concentrated by single depositor, the highest among peers'.

Net liquid assets (including cash balances less mandatory reserves, net interbank placements and government investment securities) covered a moderate 20% of customer deposits at end-1H21. The liquidity coverage ratio is comfortable, at 120% at end-1H21. ABK is not NSFR (net stable funding ratio )-compliant, due to the short-term nature of its funding and lack of retail deposits.


Link to Rating Actions: Rating Actions

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