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Rating Action:

Moody's upgrades Masraf Al Rayan's issuer ratings to A1 from A2: outlook stable

25 Aug 2016

Limassol, August 25, 2016 -- Moody's Investors Service, ("Moody's") has today upgraded Masraf Al Rayan's (MAR) long term issuer ratings to A1 from A2 and Counterparty Risk (CR) Assessment to Aa3(cr) from A1(cr). At the same time the baseline credit assessment (BCA) and adjusted BCA were raised to baa2 from baa3. Concurrently, the rating agency affirmed the Prime-1 short term issuer ratings and Prime-1(cr) short term CR Assessment. The outlook on the long-term ratings has changed to stable from positive.

The upgrade of MAR's ratings reflects (1) continued business diversification as a result of growth and profitability of the UK subsidiary, (2) consistently strong asset quality performance and (3) strong profitability and capital metrics. These strengths remain moderated by (1) the bank's dependence on key management relationships to generate new business, (2) high degree of concentration on both the asset and liability side of the balance sheet and (3) the impact of tightening regional liquidity on MAR's funding profile.

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

RATINGS RATIONALE

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

The key driver of the upgrade is the bank's increasing geographical diversification following the growth and first time profitability of its subsidiary ARB UK (Al Rayan Bank UK originally Islamic Bank of Britain/IBB). MAR completed the acquisition of ARB UK in January 2014 and took the institution to profitability for the first time in the history of the bank (IBB started operations in 2004). ARB UK has since grown significantly and supports a modest but growing retail business outside the saturated Qatari domestic market. This business has increased the contribution of retail operations towards MAR's operating income to 22% for the first six months of 2016 from 5% for the year 2011. Going forward, we expect these diversification trends to continue as the bank's UK subsidiary grows further and helps offset the slowdown in asset growth expected in its domestic market.

-- CONSISTENTLY STRONG ASSET QUALITY PERFORMANCE

The rating upgrade also takes into account 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 0.10% of total financing assets. This unique performance (when compared to both local and global peers) is driven by the high volume of prime Qatari government (Aa2/Negative) business conducted by the bank. Much of the remainder of MAR's credit portfolio is exposed indirectly to the government through private companies contracted for state-sponsored projects. Going forward, we do not expect MAR's NPF ratio to increase significantly from its current levels.

-- STRONG AND STABLE PROFITABILITY SUPPORTS HIGH CAPITALISATION

Despite systemic margin compression driven by increased competition in the current low interest rate environment, (Qatari system average return on assets to 1.9% for the year 2015 from 2.2% for the year 2012), MAR has maintained a solid return on assets at around 2.5% since 2011 (2.4% for the first six months of 2016). As a result of this strong profitability and despite rapid loan growth (20% CAGR during 2010-15), MAR has maintained strong capitalization levels with tangible common equity (TCE) to risk weighted assets at around 21% as of December 2015. Such capital levels compares both favorably to the 17% local average and the 13% median for banks' with baa2 BCAs. Going forward, we expect that the bank will maintain strong capital ratios, as healthy internal capital generation supports the needs of future -- although decelerating - asset growth.

-- STRENGTHS MODERATED BY DEPENDENCE OF FRANCHISE ON KEY MANAGEMENT RELATIONSHIPS, HIGH CONCENTRATION RISKS AND PRESSURED FUNDING PROFILE

MAR, the fourth largest Qatari bank with a 7.5% market share in terms of total assets (as of June 2016), benefits from its close ties to the Qatari Government and related entities through key management relationships. Although these relationships will be particularly valuable in the context of the country's ongoing infrastructure investment program and related lending opportunities, Moody's considers that this relationship driven business model potentially leaves the institution vulnerable to any changes in key bank personnel.

Additionally, concentration risks are also a key moderating factor on the bank's risk profile. MAR exhibits very high single name concentration and sector concentration to real estate (22% of financing assets as of December 2015). 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 prime Qatari Government.

Our assessment also takes into account the softening liquidity and funding position of MAR. The bank's stock of liquid assets declined to 24% of the total assets as of June 2016, down from a 28% as of December 2012 and, at the same time, the banks net financings-to-deposits (analogous to net loans-to-deposits) ratio has increased to around 111% as of June 2016. However, going forward we expect these pressures to partially ease after the government's recent debt issuance.

-- UPGRADE OF MAR'S ISSUER RATINGS AND CR ASSESSMENT ARE DRIVEN BY THE BANK'S HIGHER BCA AND MOODY'S SUPPORT ASSUMPTIONS

MAR's A1 issuer rating has also been upgraded and is driven by four notches of government support uplift we apply to the bank's baa2 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

Upward pressure on MAR's ratings could develop from a combination of the following: (i) a continued strengthening of the bank's retail franchise combined with prudent expansion of the bank's corporate franchise beyond the Qatari government business; (ii) a sustained reduction in the bank's credit and funding concentrations and (iii) an improved solid funding and liquidity.

Downward pressure on MASRAF's ratings could develop from: (i) deterioration of the bank's asset quality, and/or (ii) weakening of its Qatari Government related franchise and/or (iii) a decline in the bank's capitalization and/or (iv) a sustained weakening of the bank's liquidity levels.

LIST OF AFFECTED RATINGS:

Masraf Al Rayan Q.S.C.:

- Long-term and short-term foreign currency and local currency issuer ratings: upgraded to A1/Prime-1 from A2/Prime-1; outlook stable.

- Baseline credit assessment and adjusted baseline credit assessment: raised to baa2 from baa3

- Counterparty Risk Assessment: raised to Aa3(cr)/Prime-1(cr) from A1(cr)/Prime-1(cr)

Outlook Actions:

....Outlook, Changed To Stable From Positive

PRINCIPAL METHODOLOGY

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

Headquartered in Doha, Masraf Al Rayan reported total consolidated assets of QAR 88 billion (around $24 billion) as of June 2016.

The Local Market analyst for this rating is Nitish Bhojnagarwala, +971 (423) 795-63.

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.

Elena Panayiotou
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: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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