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Rating Action:

Moody's affirms Commercial Bank's A1 deposit ratings; changes outlook to negative from stable

09 Dec 2015

Limassol, December 09, 2015 -- Moody's Investors Service has today affirmed the A1 deposit ratings and baa2 baseline credit assessment (BCA) of Qatar-based The Commercial Bank (Q.S.C.) 'Commercial Bank' and changed the outlook to negative from stable.

The ratings affirmation takes into account Qatar's 'Strong-' Macro Profile, which underpins Commercial Bank's high profitability, and sound and improving capital buffers, which provide strong loss absorption capacity, and high liquidity buffers that partially offset risks relating to the bank's significant reliance on market funding.

The outlook change to negative from stable reflects: (1) the downside risk of further asset quality deterioration, stemming from the still high, albeit declining, exposure to the volatile construction and real estate sector and weakening Turkish market; and (2) pressure on profitability due to elevated provisioning requirements, the weakening performance of its international operations, and further margin compression given tightening system liquidity.

For a full list of affected ratings see the end of this press release.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION

--QATAR'S 'STRONG-' MACRO PROFILE UNDERPINS COMMERCIAL BANK'S HIGH PROFITABILITY

A key driver of the ratings affirmation is Qatar's 'Strong-' Macro Profile, which supports Commercial Bank's high profitability, with net income at 1.5% of banking assets in the nine months ending September 2015, which is well above the 0.9% median for banks with baa2 BCAs. Despite the sharp decline in oil prices since 2014, the operating environment in Qatar remains underpinned by the country's continued economic growth (Moody's forecasts real GDP growth of 4.7% in 2016), very high levels of sovereign wealth, and high public spending which fuels lending growth and the bank's high profitability levels. Commercial Bank's operations are primarily domiciled (63% of assets) in Qatar (Aa2, stable) and the bank benefits from its long-established presence in both retail and corporate markets.

-- SOUND AND IMPROVING CAPITALISATION PROVIDES HIGH LOSS ABSORPTION CAPACITY

Another key driver for the ratings affirmation is Commercial Bank's sound and improving capital buffers, which provide the bank with a high loss absorption capacity and underpin the ratings at the current level. The bank's capitalization compares well with global peers, with tangible common equity to risk weighted assets of 14.2% as of September 2015, well above the 12.5% median for banks with baa2 BCAs. Moody's expects Commercial Bank's Tier 1 capital ratio, which stood at 12% as of September 2015, to strengthen further as it completes the second issuance of Additional Tier 1 capital.

-- HIGH LIQUIDITY BUFFERS PARTIALLY OFFSET RISKS RELATED TO SIGNIFICANT MARKET FUNDING RELIANCE

The ratings affirmation also takes into account Commercial Bank's high liquidity buffers, with liquid assets comprising 30% of total assets as of September 2015, a ratio that is one of the highest compared to its domestic peers. These buffers help offset risks related to the bank's relatively high reliance on confidence-sensitive but long-term market funding, with market funds constituting 26% of banking assets as of September 2015.

-- GOVERNMENT SUPPORT CONTINUES TO UNDERPIN THE DEPOSIT RATINGS

The affirmation of Commercial Bank's A1 deposit ratings also reflects the incorporation of four notches of government support uplift from the bank's standalone BCA of baa2. This reflects Moody's view of a very high probability of support from the Qatari government in case of need. Moody's bases this view on: (1) the bank's importance to the local financial system with a market share of around 10% in deposits; (2) the demonstrated willingness and ability of the Qatari government to provide support to local banks, through capital injections and the purchase of real-estate and equity investment portfolios from banks and; (3) the government's 16.7% shareholding in Commercial Bank.

RATIONALE FOR CHANGING OUTLOOK TO NEGATIVE

-- DOWNSIDE RISK TO ASSET QUALITY OWING TO STILL-SIZEABLE CONSTRUCTION AND REAL ESTATE EXPOSURES AND PRESENCE IN WEAKENING TURKISH MARKET

Despite the aforementioned strengths, a key driver for the negative outlook is the downside risks to Commercial Bank's already weakened asset quality, owing to the bank's still-sizeable construction and real estate exposures and the challenging Turkish market. Commercial Bank's asset quality has weakened in recent years, with non-performing loans (NPLs) constituting 3.1% of loans as of September 2015, which, although slightly lower than end-2014 level, compares unfavourably with the 1.7% average for the Qatari banking system and banks with a baa2 global medians. The asset quality weakness was driven by a few large borrowers in the Qatari construction and real estate sector, which face increasing pressure in light of both more disciplined public spending and tightening market liquidity.

Moody's expects the bank's asset quality will remain exposed to further downside risks given its still sizeable exposure to the volatile construction and real estate sector, which, although recently reduced, remains substantial at 26% of loans and 148% of reported Tier 1 capital as of September 2015. In addition, Moody's expects the stock of restructured loans to stand at 6% by year-end 2015, an indication of potential further pressure on asset quality.

Downside risks to asset quality also stem from Commercial Bank's substantive presence in the weakening environment of Turkey (Baa3, negative) through its subsidiary, Alternatifbank A.S. (Baa3 deposits, ba3 BCA), which accounted for 15% of group's assets as of end-September 2015. The Turkish operating environment remains challenging due to subdued economic growth and geopolitical risks, as well as currency volatility. Alternatifbank's loan book has grown rapidly by 35% year-on-year in September 2015 and comprised 18% of group's total loans. While the reported NPL ratio in Turkey stood at 4.2% as of end-September 2015, the unseasoned nature of the book leaves Commercial Bank more exposed to an increase in problematic exposures in the current environment.

-- PRESSURE ON PROFITABILITY

The second driver underpinning the negative outlook is the pressure on Commercial Bank's profitability due to elevated provisioning, the weakening performance of its international operations, and further margin compression given the tightening liquidity in the system.

Moody's notes that elevated provisioning requirements may further dampen profitability in coming quarters. Credit costs went up by 44% year-on-year in the nine months ending September 2015 and absorbed 30% of pre-provision income. The rating agency expects that provisioning will likely remain elevated as the bank builds further its coverage of NPLs by loans loss reserves, which has improved to 78% as of September 2015.

Moody's also expects the contribution from international operations in the UAE and Turkey will be remain under pressure. Firstly, Commercial Bank's 40% stake in the UAE-based United Arab Bank PJSC (Baa1 deposits, baa3 BCA on review for downgrade) has pressured the group's profitability due to the weakening performance of the associate, which resulted in a decline in the contribution to the group's pre-tax profitability to less than 1% for the first nine months of 2015, compared to 14% during the same period of 2014. Likewise, Moody's also notes that contribution from the Turkish subsidiary remained relatively flat in the nine months ending September 2015, given the severe devaluation of Turkish Lira over 2015, while the outlook for the subsidiary remains challenging.

The pressure on profitability also stems from further margin compression as competition for deposits intensifies. In addition to the tightening liquidity driven by lower oil prices, the new regulatory ceiling of 100% loans to deposits (LDR) ratio by December 2017 will further add to the existing pressure on liquidity and consequently intensify competition for deposits. The rating agency expects Commercial Bank to be particularly challenged given its LDR of 114% as of September 2015, which is among the highest compared to its domestic peers.

What Could Change the Rating -- Up/Down

Upwards pressure on the ratings is limited, given the negative outlook. A material improvement in the asset risk and profitability metrics and more specifically a reduction in the level of NPLs, reducing further exposure to the construction and real estate sector while ensuring low level of future impairments, could result in the stabilisation of the current ratings.

Downward pressure could be exerted if NPLs increase beyond current expectations and materially impact profitability through high provisioning needs. A weakening in the group's capital and liquidity buffers could also exert pressure on the ratings.

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS:

The Commercial Bank (Q.S.C.)

- Long-term and short-term foreign currency and local currency deposit ratings: affirmed at A1/Prime-1; outlook changed to negative from stable on the long-term ratings

- Baseline credit assessment and adjusted baseline credit assessment; affirmed at baa2

- Counterparty Risk Assessment: affirmed at Aa3(cr)/Prime-1(cr)

- Senior Unsecured MTN of (P)A1 and Subordinate MTN of (P)Baa1; affirmed

CBQ Finance Limited

-Backed Senior Unsecured of A1; affirmed with a negative outlook

-Backed Senior Unsecured MTN of (P)A1; affirmed

-Backed Subordinate MTN of (P)Baa1; affirmed

-Backed Subordinate Baa1; affirmed

CB Global Limited

-Backed Commercial Paper of P-1; affirmed

Headquartered in Doha, The Commercial Bank reported total consolidated assets of QAR119 billion (around $33 billion) as of September 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elena Panayiotou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Commercial Bank's A1 deposit ratings; changes outlook to negative from stable
No Related Data.
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