Fitch Ratings has affirmed Qatar National Bank’s (QNB) Long-term Issuer Default Rating (IDR) at ‘A+’ with a Stable Outlook, and Viability Rating (VR) at ‘a’. A full list of rating actions is at the end of this rating action commentary.
Rating Drivers – IDRs and VR
QNB’s IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support available to the bank from the Qatari authorities if needed. Fitch’s opinion of support is based on the ability and willingness of Qatar to support QNB given its dominant franchise, key role in the economy and the government’s 50% strategic stake in the bank. Fitch has also considered the authorities’ strong track record of support for the domestic banking system.
The VR reflects QNB‘s strong financial metrics, specifically its revenue generation capability, robust profitability, low non-performing loans (NPL) ratio and solid liquidity and capital position. High loan and deposit concentrations, which would otherwise constrain the rating, are mitigated by QNB’s borrowers and depositors being primarily lower risk Qatari government agencies. Fitch’s stress tests show that the bank has strong capital and liquidity buffers which can comfortably offset downward scenarios.
QNB continues to expand rapidly owing to increasing exposure to the government sector on the back of Qatar’s substantial infrastructure spending. Given QNB’s size and franchise, as well as close links to the government, large volumes of public business flow through to the bank, ensuring solid earnings and profitability. Fitch believes these trends will continue as long as the operating environment remains healthy and the government remains supportive of infrastructure development. The bank’s high reliance on the government sector and overall lack of diversification presents a binary risk for the business model. QNB bank is addressing concentration risk through a focus on international expansion.
Asset quality remains sound, although NPLs rose by 69% at end-2011 due to several bad loans in the corporate segment. Nevertheless, QNB’s NPL ratio (end-June 2012: 1.1%, with reserve coverage of 123%) is one of the lowest in the region and this is likely to continue despite its growth strategy. The bank’s capacity to absorb higher losses through recurring earnings, reserves and capital are strong rating factors.
QNB benefits from a large and stable deposit base (88% of non-equity funding at end-H112), with large and continuing funding support from government deposits. Its liquidity position remains comfortable with a Fitch calculated loans/deposits ratio of 97% at end-H112 and a large balance of liquid assets including substantial holdings of Qatari government debt securities.
With a core capital ratio of 26% at end-H112, Fitch considers the bank to be well capitalised. QNB raised QAR12.7bn through a rights issue in 2011 which boosted capital. This level of capital is prudent given its sensitivity to loan concentrations and focus on growth.
The bank’s IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch’s assumptions around the propensity or ability of the Qatari authorities to provide timely support to QNB. Given Qatar’s robust economy and the authorities’ strong track record of support for local banks downside pressure is considered low.
Downside pressure on the VR could result from a sharp deterioration in the domestic operating environment as it will directly impact QNB’s financial metrics and prospects. Fitch does not expect any such deterioration given the government’s on-going, highly supportive investment and influence in infrastructure development. The VR could also be sensitive to any emergence of aggressive or weak underwriting standards as the bank continues to focus on rapid growth as well as uncontrolled overseas expansion. The concern on the latter is if QNB overpays for an acquisition or if it leads to a weakening of asset quality.
There is limited upside potential given its already high level.
QNB is the largest bank in Qatar, holding around 45% of system assets. The bank is 50% owned by the government through the Qatar Investment Authority. The domestic franchise is complemented by an expanding network of regional and international associates and subsidiaries. QNB continues to focus on international expansion to diversify the franchise; at end-June 2012, international operations contributed to a healthy 16% of consolidated net income.
The rating actions are as follows:
Long-term IDR affirmed at ‘A+’; Outlook Stable
Short-term IDR affirmed at ‘F1′
VR affirmed at ‘a’
Support Rating affirmed at ’1′
Support Rating Floor affirmed at ‘A+’
Senior unsecured debt affirmed at ‘A+’
QNB Finance Limited
Senior Unsecured Notes (guaranteed by QNB) affirmed at ‘A+’
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