Fitch Ratings-London-22 November 2016
Fitch Ratings has affirmed The Commercial Bank Q.S.C’s (CBQ) Long-Term Issuer Default Rating (IDR) at ‘A+’ with a Stable Outlook. At the same time the agency has downgraded CBQ’s Viability Rating (VR) to ‘bbb-‘ from ‘bbb’. A full list of rating actions is at the end of this rating action commentary.
The downgrade of the VR reflects the deterioration in CBQ’s asset quality metrics, mainly in its home market of Qatar. It also factors in a sharp rise in impairment charges, mainly relating to newly impaired Qatari exposures, but also due to the deteriorating performance of the bank’s Turkish subsidiary, Abank. Fitch expects asset quality metrics to continue to deteriorate before stabilising in 2017/18. Elevated impairment charges will significantly weaken profitability, which we expect to be minimal until 2018. Fitch has taken into account the bank’s plans to boost capital in 4Q16 and 1Q17 and its strategy to aim for lower risk lending, which should strengthen the balance sheet.
KEY RATING DRIVERS
IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
CBQ’s IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch’s expectation 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 would be a strong willingness to do so. The latter is based on a history of sovereign support.
The government has demonstrated a strong commitment to its banks and key public-sector companies, and we expect this to continue, despite the effects of lower oil prices. The sovereign’s capacity to support the banking system is sustained by its sovereign wealth funds and revenues, mostly from its hydrocarbon production.
The Stable Outlook reflects the Outlook on the Qatari sovereign.
CBQ’s VR reflects its strong and established franchise in Qatar, its adequate funding and liquidity but also weakening profitability. The return on assets is well below the average of Qatari peers; largely as a result of high impairment charges.
CBQ’s asset quality metrics have deteriorated, and the impaired loans ratio of 5.3% at end-3Q16 was well above that of peers. The deterioration was largely due to some Qatari real estate exposures. CBQ’s exposure to the real estate and contracting sectors is well above average, representing 31% of the loan book at end-1H16. We expect the impaired loans ratio to increase further in 2017, including from Abank, which accounts for about 15% of CBQ’s balance sheet and 20% of its impaired loans.
Capital is adequate. CBQ has obtained approval from its shareholders for a rights issue, which is expected to be completed by end-1Q17. This will boost capital levels and we believe dividends will be kept at levels supportive of the bank’s capital ratios. In addition Fitch expects the bank to return to profitability in 2018 as loan impairment charges normalise.
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank’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. At present, Fitch considers the likelihood of any change to be small.
Upside potential for CBQ’s VR could arise if the bank follows through with its strategy to improve its risk profile and strengthen risk controls, including rebalancing lending away from its concentration on real estate. A greater than expected deterioration in the bank’s asset quality, including from its Turkish subsidiary, to the extent that it impacted capital, could lead to a further VR downgrade. Failure in the bank’s plans to boost capital in 1Q17 could also be negative for the VR.
The rating actions are as follows:
Long-Term IDR affirmed at ‘A+’, Outlook Stable
Short-Term IDR affirmed at ‘F1’
Viability Rating downgraded to ‘bbb-‘ from ‘bbb’
Support Rating affirmed at ‘1’
Support Rating Floor affirmed at ‘A+’
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