Capital Intelligence (CI), the international credit rating agency, announced today that it has lowered Commercial Bank of Qatar’s (Cb) Financial Strength Rating (FSR) to ‘a-’ from ‘a’, to reflect the Bank’s weaker asset quality and the decline in capital adequacy, with the Outlook reverting to ‘Stable’.
The FSR remains supported by the Bank’s diversified franchise, a good level of non-interest income (NII) and the sustained growth potential of the Qatari economy. Despite good access to capital markets, the Bank’s tight liquidity and refinancing risks, and high exposure to the real estate sector remain constraining factors.
In view of the Bank’s systemic importance, the Support Rating is affirmed at ’2′. Accordingly, the Long-and Short-Term Foreign Currency (FC) Ratings of ‘a’ and ‘a2′, are affirmed on a ‘Stable’ Outlook, reflecting the Bank’s intrinsic financial profile and franchise, together with demonstrated government support for Qatari banks.
The Bank has consistently generated good and diversified revenues from its investments in associate banks in the UAE and Oman. Despite Qatar’s high economic growth potential, the local market remains small, particularly for a bank like Cb which has a low share of government sector business. In 2013, Cb took a major step forward in its international expansion through the acquisition of a 74.2% share in Alternatif Bank (Abank) in Turkey, for a consideration of $492mn. Abank, a medium sized bank which mainly caters to the SME segment, contributed 17% to Cb’s consolidated assets. As a result of goodwill on the acquisition and growth of risk weighted assets (RWAs), and because of a put option liability and foreign exchange translation losses, Cb’s capital adequacy weakened considerably at end 2013.
Asset quality, which had been showing signs of weakness in preceding years in the form of a high level of renegotiated and past due not impaired loans, weakened considerably in 2013 due to a sharp rise in non-performing loans (NPLs) and a large drop in loss reserve coverage. Contingent credit losses on the Bank’s real estate exposure could further weaken asset quality because of concentration risks.
Cb has had a long record of success in refinancing and raising further amounts of term funds in international markets. However, at end 2013, liquidity as measured by the net liquid asset ratio and the net interbank position weakened further because of short term debt maturities. Although growth in customer deposits was much stronger, including from the government sector, loan based liquidity ratios remain tight.
Despite renewed growth in net interest income and a continued increase in core NII, a sharp rise in operating expenses kept operating profit growth at a minimum, with the 41% increase in total assets taking operating profitability down sharply. The more than threefold increase in net loan loss provisions caused a 20% decrease at the level of net profit, which translated into a full 100 basis point fall in the return on average assets (ROAA) to 1.66%, the peer group’s second lowest.
With total assets of $31.1 billion, Cb is the second largest commercial bank in Qatar by total assets and capital. Cb was the first wholly privately owned local bank to be established in Qatar with prominent local businessmen as its founding shareholders. Following a special issue of shares in 2009 and 2011, the Bank’s single largest shareholder is the Qatar Investment Authority with 16.7%. Cb provides a broad range of retail, wholesale and commercial banking services through its domestic operating platform of 30 full service branches. The Bank also has an international presence through its strategic investments in National Bank of Oman and United Arab Bank (UAE).
Senior Credit Analyst
Tel: +357 2534 2300