London, 01 November 2017 -- Moody's Investors Service (Moody's) has today assigned a baa2 baseline
credit assessment (BCA), an a2 adjusted BCA, Aa3/Prime-1
deposit ratings, as well as a Counterparty Risk Assessment (CR Assessment)
of Aa3(cr)/Prime-1(cr) to Al Rayan Bank PLC (ARB). The outlook
on the long-term deposit rating is negative.
ARB's baa2 BCA reflects the bank's: (1) sound asset
quality profile in both its secured and unsecured portfolios; (2)
Moody's expectation that capitalisation; and (3) levels of
liquid resources will remain robust. These strengths are balanced
against ARB's: (1) rapid growth in financing, which
could result in an asset quality deterioration in a downturn; (2)
limited operating history and evolving business model; (3) modest,
albeit improving profitability ; and (4) lack of access to market
funding and high reliance on funding from Qatar Central Bank and Qatar
Investment Authority.
The long-term deposit ratings are underpinned by: (1) the
bank's a2 adjusted BCA which reflects Moody's view that ARB benefits
from a very high probability of support from its parent Masraf Al Rayan
(Q.S.C.) (Masraf, A1 negative); (2) the
results of Moody's Advanced Loss Given Failure (LGF) analysis,
reflecting the agency's view that the bank's junior depositors
would face very low loss-given-failure, leading to
two notches of uplift from the adjusted BCA; and (3) a low expectation
of government support.
The outlook on the long-term deposit rating is negative,
and is aligned with the negative outlook assigned to the ratings of ARB's
immediate parent, Masraf. Masraf's negative outlook
is driven by (i) Moody's expectation that the downside risk of a
prolongation of the dispute between Qatar and a group of peer countries
could lead to some outflows of external funding, which would reduce
Masraf's liquidity buffers, while domestic funding sources
remain tight due to current oil prices ; and (ii) the weakening capacity
of the government of Qatar to provide support in case of need, as
implied by the negative outlook on its Aa3 government bond rating.
RATINGS RATIONALE
RATINGS RATIONALE - BCA
Established in 2004 as Islamic Bank of Britain, the first wholly
Sharia-compliant UK bank, ARB was renamed in 2014 following
their acquisition by Masraf, the second largest bank in Qatar.
The growth strategy which was implemented following the takeover led to
a compound annual growth rate of 49% between 2013 and 2016,
with total assets amounting to GBP1,436 million at YE 2016 compared
to GBP368 million at YE 2013. ARB focuses on three business segments:
(i) the retail business is mostly composed of Home Purchase Plans (HPP)
and Buy-to-Let Home Purchase Plan (BTLPP) products,
which adhere to Sharia principles; (ii) the commercial property finance
portfolio, which covers large residential investment private rental
sector (PRS) schemes, mixed used industrial warehouses, student
property as well as prime offices, and (iii) the GCC segment which
offers private banking services to high net worth GCC customers,
including real estate finance and day-today banking services.
ARB have improved their asset risk track record since the financial crisis,
by moving out of unsecured financing where they had incurred some losses,
into secured financing. Whilst Moody's recognises that since
the shift into secured financing ARB have reduced non-performing
financings and maintain conservative underwriting standards, their
asset growth has been significant, albeit from a small base over
the past two years. Although reflective of the customer base,
financing is concentrated in the south east of England, particularly
London, for which HPP financing equates to 44% of overall
HPP financing. In addition, ARB have large average financings
of GBP1 million outstanding to GCC customers accounting for 20%
of the book, increasing concentration in London further, as
well as reducing the granularity of the overall financing book.
Profitability had been largely negative up until 2014, driven historically
by losses made from financing, but also the high cost base maintained
by ARB. Cost-to-income has reduced to 72%,
but still remains above peers. This has been driven by costs such
as opening a branch in Knightsbridge, a key area for GCC customers.
Moody's expects profitability to increase going forward, as
costs are reduced, rental rates increase and the cost of funding
reduces, through a Sukuk issuance and a reduced reliance on more
expensive retail deposits. ARB are also looking to move into higher
margin SME financing, further aiding profitability.
ARB's tier 1 capital is predominantly made up of common equity,
reflecting retained earnings from prior periods. Capitalisation
remains solid at 17.7% (31 December 2016), though
this is required to support the continued financing growth and expansion
of the bank. ARB use the standardised approach to risk weighting
assets and have adequate capital to meet their growth plans, without
the further need for a capital injection. However, if asset
risk were to deteriorate through lower underwriting standards, or
a deterioration in the UK macro environment, additional capital
may be required or reduced financing growth would have to take place.
ARB have limited access to wholesale funding, given their requirement
to comply to Sharia principles and not pay interest. Given this,
they are highly reliant on the Qatar Investment Authority (QIA) and Qatar
Central Bank (QCB) for funding, to which ARB have drawn three-month
rolling contracts of $50 million and $75 million respectively.
Given the lack of market access, ARB offer very competitive retail
profit rates, attracting mainly non-Muslim retail deposits
through attractive profit rates on the best buy tables. However,
this increases the overall cost of funding, reducing margins and
negatively impacting profitability.
Moody's views liquidity as a strength for the bank, with above
average liquid banking assets to tangible banking assets maintained compared
with peers. Liquidity is largely made up of cash on demand and
short-term commodity Murabaha and Wakala transactions.
RATINGS RATIONALE -- ADJUSTED BCA
Given the strategic importance of ARB to its parent Masraf, allowing
GCC customers to have access to private banking services in the UK,
Moody's expects the probability of support from Masraf to be very
high. The parent has representation on ARB's board and is
active in the development of its forward looking strategy. Moody's
uses the parent's supported rating of A1, as the basis for
deriving support to ARB. This is based on Moody's expectation
that ARB would be supported in case of need, due to the interconnectedness
of the bank with its parent, its operating under the same brand
name, the 38% ownership (on a look-through basis)
by Qatar Holding and relatively modest size. As a result Moody's
assigns three notches of support to the bca of baa2, to arrive at
an adjusted BCA of a2.
RATINGS RATIONALE -- LOSS GIVEN FAILURE
Moody's applies the Advanced LGF analysis to ARB because it is domiciled
in the UK, which Moody's considers has an operational resolution
regime, following the implementation of the EU Bank Recovery and
Resolution Directive (BRRD). Under these assumptions, ARB's
deposits are likely to face very low loss-given-failure,
due to the loss absorption provided by the volume of deposits themselves.
This results in a PRA for ARB's deposits of aa3, two notches above
the a2 adjusted BCA.
The CR Assessment is positioned at Aa3(cr)/Prime-1(cr), in
line with the country ceiling of Qatar. The CR Assessment is two
notches above the adjusted BCA of a2, based on the cushion against
default provided to the senior obligations represented by the CR Assessment
by more subordinated instruments, i.e. bail-in-able
funding and deposits.
WHAT COULD CHANGE THE RATING UP / DOWN
An upgrade of the bank's BCA could be triggered by the establishment of
a stabilized asset quality profile as the financing book continues to
grow. An upgrade to the BCA could also arise should profitability
metrics improve.
A downgrade of ARB's BCA could be driven by a material deterioration
in the bank's asset quality or demonstration of a materially more aggressive
risk appetite in its financing book. Negative pressure could also
arise from significant deterioration in the bank's profitability metrics,
capitalisation and liquidity metrics.
A downgrade of ARB's deposit ratings could be driven by a downgrade
of its immediate parent's rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
September 2017. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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.
Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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