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Rating Action:

Moody's affirms The Commercial Bank's A2 long-term deposit ratings; changes outlook to negative from stable

18 May 2017

Limassol, May 18, 2017 -- Moody's Investors Service, ("Moody's") has today affirmed the A2 long-term deposit ratings and baa3 baseline credit assessment (BCA) of The Commercial Bank (P.S.Q.C.) ('Commercial Bank') and changed the outlook on the long-term deposits to negative from stable.

Moody's affirmation of Commercial Bank's A2 long-term deposit ratings reflects the bank's solid capital metrics which improved following the completion of a rights issue in Q1 2017 and solid liquidity buffers, which underpin its baa3 BCA, and Moody's assessment of a 'very high' probability of government support in case of need, resulting in four notches of uplift from the bank's BCA.

The change in outlook to negative, from stable, reflects Moody's expectation of pressures on the bank's solvency, arising from asset quality deterioration stemming from the bank's legacy exposures domestically and its Turkish subsidiary. As a result, profitability is likely to weaken, driven by (1) high loan loss charges and (2) lower contribution from Commercial Bank's Turkish subsidiary and UAE based associate.

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

RATINGS RATIONALE

---RATIONALE FOR AFFIRMING THE RATINGS

IMPROVED CAPITAL LEVELS FOLLOWING THE RIGHTS ISSUE AND SOLID LIQUIDITY BUFFERS

A key driver underpinning the BCA affirmation is the bank's improved capital adequacy. Following a rights issue of QAR1.5 billion completed in Q1 2017, the bank has strengthened its capital ratios, with tangible common equity (TCE) to risk-weighted assets ratio improving to 12.9% as of March 2017, up from 12.1% as of December 2016. At the same time, the bank's Tier 1 ratio stood at 14.6% as of March 2017, a level which compares well with the 13.3% median of global banks with baa3 BCA. Going forward, however, Moody's expects that weakening profitability will dampen the bank's internal capital generation and coupled with continued asset growth, will pressure the bank's still solid capitalisation metrics.

The ratings affirmation also takes into account the bank's sound liquidity buffers, with liquid banking assets comprising 31% of total assets as of December 2016, a ratio which compares well with its domestic and global peers.

---RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE

ASSET QUALITY DETERIORATION STEMMING FROM LEGACY EXPOSURES AND TURKISH SUBSIDIARY

According to Moody's, the main driver for the negative outlook is the asset quality deterioration stemming from the bank's legacy exposures domestically and its presence in the challenging Turkish market. Commercial Bank's asset quality has continued to deteriorate in recent quarters with non-performing loans (NPLs) increasing to 4.5% of total loans as of March 2017 (Dec 2015: 3.8%), comparing unfavourably with the 1.8% average for the Qatari banking system and the 2.2% baa3 global median. Despite management changes and the bank's new five year strategic plan introduced in November 2016, Moody's expects Commercial Bank's asset quality to continue to deteriorate in 2017 as the bank will continue to recognise and clean up its legacy exposures and exit riskier sectors and borrowers.

Additional asset quality pressure is expected to arise from the bank's international operations in Turkey (Ba1 negative), where it operates through its fully owned subsidiary Alternatifbank A.S. (Abank; Ba1 deposits local currency, negative outlook, b1 BCA). Abank currently accounts for 14% of the bank's assets and 16% of its NPLs. In the context of the challenging operating conditions in Turkey, as evidenced by a slowing economy, depreciating currency, high inflation and heightened political, security and geopolitical tensions, Moody's expects NPL levels to increase for Turkish banks, including Abank.

PROFITABILITY IS WEAK OWING TO HIGH LOAN LOSS CHARGES COMBINED WITH LOWER CONTRIBUTION FROM OVERSEAS OPERATIONS

The second, and interrelated, driver underpinning the negative outlook relates to the bank's high loan loss charges and weak contribution from its international operations that are weighing on its profitability. High loan loss charges have dampened the bank's profitability, with the bank's net income to tangible assets declining sharply to just 0.2% in 2016 (2015: 1.1%), comparing unfavourably with its domestic and global peers. Provisions absorbed 76% of the bank's pre-provision income in 2016, significantly higher than 2015 and 2014 when these stood at 39% and 29% of pre-provision income respectively. Moody's expects that provisioning charges will remain high, driven by the bank's strategic plan to clean up legacy exposures and builds its coverage of NPLs.

Profitability pressures also stem from the lower contribution from the bank's associate in the UAE and its Turkish subsidiary. Legacy issues in the bank's UAE based associate, United Arab Bank PJSC (UAB; Baa2 deposits negative outlook, ba1 BCA) resulted in a negative contribution to the group's profitability for 2016, and the negative outlook on UAB's ratings signals that pressures are likely to persist. The profitability of the Turkish subsidiary, Abank was flat in 2016, a result of lower growth, shift in the bank's loan book and high provisioning requirements. Moody's does not expect Abank's contribution to group profitability to increase materially, despite its focus on reducing costs. In addition to this, higher impairment of goodwill (2016: QAR50 million) which was created at the time of acquisition of these operations (in 2013 for an amount of QAR405 million), will negatively impact Commercial Bank's profitability in 2017.

In line with the outlook change, Moody's will monitor the trends in the bank's asset quality and profitability metrics over the next 12-18 months and continue to assess the bank's relative positioning to its local and global peers.

GOVERNMENT SUPPORT

Commercial Bank's A2 deposit ratings continue to incorporate four notches of government support uplift from the bank's standalone BCA of baa3. 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 approximately 9% in deposits; (2) the government's 16.7% shareholding in CBQ; and (3) the very strong track record of the Qatari government of providing support to local banks.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Commercial Bank's rating is limited, given the negative outlook. A sustained improvement in the bank's asset quality and profitability, easing of the challenges related to the bank's Turkish subsidiary could lead to a stabilization of the ratings.

Downward pressure on Commercial Bank's rating could develop from: (1) further asset quality deterioration, (2) higher than expected provisioning impacting profitability, and (3) declining capital and liquidity buffers. Deterioration of domestic operating conditions in Qatar or Turkey, as described in Moody's Macro Profile for the country, could also put negative pressure on the bank's ratings.

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Doha, The Commercial Bank reported total consolidated assets of QAR135 billion (around $37 billion) as of March 2017.

The local market analyst for the bank's ratings is Nitish Bhojnagarwala +971.4.2379563.

LIST OF AFFECTED RATINGS:

The Commercial Bank (P.S.Q.C.)

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

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

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

- Senior Unsecured MTN affirmed at (P)A2 and Subordinate MTN affirmed at (P)Baa2

CBQ Finance Limited

-Backed Senior Unsecured affirmed at A2; outlook changed to negative, from stable

-Backed Senior Unsecured MTN affirmed at (P)A2

-Backed Subordinate MTN affirmed at (P)Baa2

-Backed Subordinate affirmed at Baa2

CB Global Limited

-Backed Commercial Paper affirmed at P-1

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Alexios Philippides
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 852 3758 1350
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 852 3758 1350
Client Service: 44 20 7772 5454

No Related Data.
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