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Rating Action:

Moody's affirms Masraf Al Rayan's issuer ratings: changed outlook to positive from stable

06 Aug 2015

London, 06 August 2015 -- Moody's Investors Service has today affirmed Masraf Al Rayan's (MAR) A2/Prime-1 issuer ratings and baa3 baseline credit assessment (BCA) and adjusted BCA. At the same time, Moody's changed the outlook on the bank's long term issuer ratings to positive from stable.

Moody's affirmation reflects MAR's continued strong core financial fundamentals with (1) consistently strong asset quality performance, (2) strong and stable profitability and (3) solid capital buffers. These strengths are moderated by (1) the bank's dependence on key management relationships to generate new government-related business and (2) high loan growth coupled with a high degree of concentration on both the asset and liability side of the balance sheet.

The change in the outlook to positive from stable reflects the ongoing improvements in MAR's business and geographic diversification, including the growth and transition to profitability of its recently acquired subsidiary Al Rayan Bank PLC based in UK (ARB UK- previously named Islamic Bank of Britain/IBB), coupled with our expectation that the bank will continue to maintain its strong overall financial performance. Further underpinning Moody's view on the outlook is Qatar's considerable economic strength, with robust growth prospects driven by the significant wealth and resources of the country, the large fiscal surpluses of the government and its continued demonstrated ability and willingness to maintain high levels of public spending despite lower oil prices.

A full list of the affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR CHANGING OUTLOOK TO POSITIVE

-- IMPROVED BUSINESS DIVERSIFICATION AS A RESULT OF GROWTH AND PROFITABLITY OF UK SUBSIDIARY

The key driver of the outlook change is the bank's increasing diversification following the growth and first time profitability of its subsidiary ARB UK (originally IBB). MAR completed the ARB UK acquisition in January 2014 and brought the institution to profitability for the first time in the history of the bank (IBB started operations in 2004). ARB UK has grown significantly (around 23% year-to date in 2015) and supports a modest but growing retail business outside the saturated Qatari domestic market, which has increased the contribution of retail operations towards MAR's operating income to 18% as of H1 2015 from 5% as of YE2011. Going forward, we expect these diversification trends to continue as the bank's UK subsidiary grows further and also supports expansion into other European Union markets where its strong Qatari customer base is active.

-- STRONG OVERALL FINANCIAL PERFORMANCE

In addition to the bank's growing diversification, our positive outlook is also driven by our expectation that the bank will continue to post strong overall financial performance, supported by Qatari government spending and the overall solid operating environment. During the outlook period, we will focus our assessment on the bank's ability to maintain its strong financial performance, and more particularly its strong asset quality and profitability metrics as well as the robustness of its loss-absorbing buffers.

RATIONALE FOR AFFIRMATION

-- CONSISTENTLY STRONG ASSET QUALITY PERFORMANCE

A key driver of today's rating affirmation is MAR's consistently strong asset quality performance (since it commenced operations in 2006) with a current non-performing financings (NPFs analogous to non-performing loans) of around 0.1% of total financing assets. This unique performance when compared to its peers in Qatar and globally is explained by the fact that MAR's credit portfolio is dominated by prime borrowers related to the Qatari government (Aa2/Stable) and by private companies engaged in Qatari government-sponsored projects. Going forward, we do not expect MAR's NPF ratio to increase significantly from its current levels.

However, these strengths are partially moderated by the bank's rapid financing growth (23% CAGR during 2010-14). While this growth allows the bank to increase scale and efficiency but has resulted in an unseasoned loan book and also drive the NPF ratio (the denominator effect) low.

-- SOLID AND STABLE PROFITABILITY SUPPORTS HIGH CAPITALISATION

Despite margin compression driven by increased competition in the current low interest rate environment, which has resulted in decline of Qatari system average return on assets to 2.1% as of December 2014 from 2.4% as of December 2012, MAR has maintained a solid return on assets at around 2.5% since 2011. As a result of this strong profitability and despite rapid loan growth (23% CAGR during 2010-14), MAR has maintained strong capitalization levels with an average tangible common equity (TCE) to risk weighted assets at around 23% during 2010-14. MAR's current TCE ratio of around 21% compares favorably to the 17% local average and around 13% median for banks' with baa3 BCAs. Going forward, we expect that the bank will maintain strong capital levels, as healthy internal capital generation would balance the capital requirements of loan book growth.

-- STRENGTHS MODERATED BY DEPENDENCE OF FRANCHISE ON KEY MANAGEMENT RELATIONSHIPS AND HIGH CONCENTRATION RISKS

MAR, the third largest of the Moody's rated Qatari banks, with a 8% market share, benefits from its close ties to the Qatari Government and related entities through key management relationships. These relationships will be particularly valuable in the context of the country's ongoing infrastructure investment program and related lending opportunities, but it does potentially leave the institution vulnerable to any changes in key personnel.

Additionally, concentration risks is also a key moderating factor on the bank's risk profile. MAR exhibits very high single name concentration and sector concentration to real estate (18% of financing assets as of December 2014). Although such credit concentrations are credit negative for the bank, the risks stemming from these are partly mitigated by the fact that the bank's largest borrowers are often related to the Qatari Government.

-- GOVERNMENT SUPPORT

MAR's A2 issuer rating has been affirmed and continues to benefit from four notches of government support uplift from the baa3 BCA. This reflects Moody's view of a very high probability of support from Qatari government in case of need. Moody's bases this view on (1) MAR's evolving role as a flagship Islamic bank in Qatar, (2) the bank's significant market share, particularly lending to the government; (3) 47% Qatari government & government institutions ownership and (4) strong track record of the Qatari government pre-emptively supporting all banks in the past.

WHAT COULD CHANGE THE RATING UP/DOWN

As indicated by the positive outlook, upward pressure on MAR's ratings could as a result of continued maintenance of strong financial performance coupled with growing business diversification.

Although not expected in the near term, downward pressure on MAR's ratings could develop from: (1) deterioration of the bank's asset quality and/or (2) a decline in the bank's liquidity and capitalization levels.

LIST OF AFFECTED RATINGS:

Masraf Al Rayan:

- Long-term and short-term foreign currency and local currency issuer ratings: affirmed at A2/Prime-1; outlook changed to positive from stable on the long-term ratings.

- Baseline credit assessment and adjusted baseline credit assessment: affirmed at baa3

- Counterparty Risk Assessment: affirmed at A1(cr)/Prime-1(cr)

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.

Headquartered in Doha, Masraf Al Rayan reported total consolidated assets of QAR 81.3 billion (around $22 billion) as of June 2015.

The Local Market analyst for these ratings is Nitish Bhojnagarwala +971.4.237.9563.

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.

Arif Bekiroglu
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Masraf Al Rayan's issuer ratings: changed outlook to positive from stable
No Related Data.
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