Fitch Ratings has assigned Al Khalij Commercial Bank (al khaliji) a Long-term foreign currency Issuer Default Rating (IDR) of A- with a stable outlook, Short-term IDR of F2, Viability Rating (VR) of bb+, Support Rating of 1 and Support Rating Floor of ‘A-.
Al khaliji’s long- and short-term IDRs and support rating reflect the extremely high probability of support, in Fitch’s opinion, from the Qatari authorities if needed. Fitch’s view of likely support is based on the strong history of support from the Qatari authorities for local banks, reflected in recent support measures. While Fitch views al khaliji’s small size and franchise as constraints from a support perspective, the agency considers the Qatari government’s overall 47% indirect stake as a positive.
The VR reflects the bank’s very short track record, high concentrations on both sides of the balance sheet, moderate profitability, a significant level of past-due but not impaired exposure and small size. It also reflects al khaliji’s strong capitalisation and experienced management team. Fitch considers the overall prospects for the Qatari banking sector to be solid in light of the government’s expansionary budget and numerous infrastructure projects.
Al khaliji’s business model is corporate and international/treasury led and is geographically centred on Qatar. In corporate banking al khaliji offers a range of products and services, including working capital and trade finance, syndicated loans and credit underwriting, contract and project finance as well as corporate advisory. The bank’s main client focus in this segment is on enterprises that have direct links to government sponsored projects or that are partially or wholly government owned. In consumer banking, it targets premium and high net-worth clients.
Al khaliji’s financial performance is moderate, but on an improving trend, and reflects its start-up character. Its net interest margin is narrow. While funding costs compare favourably, its spreads on assets suffer from the high proportion of lower yielding fixed income securities on its balance sheet, when compared with Qatari peers, and the short average tenor of its loan book. Fitch expects performance to improve with the bank generating higher business volumes and starting to benefit from increasing economies of scale.
Asset quality has remained sound to date, with a non-performing loans ratio of 0.8% at end-9M11. However, due to its short track record, Fitch does not consider that the loan-book has seasoned yet. Impaired loans are comfortably covered by reserves. Exposures classified as past-due but not impaired are high, driven by one large exposure which is in the process of being restructured. Given its high single-name concentration, risks to asset quality from a single borrower are significant.
Al khaliji’s funding base is dominated by deposits from the Qatari government, government related entities and interbank borrowings. At end-9M11, the ten largest depositors accounted for a high 45% of non-equity funding, of which 62% related, directly and indirectly, to Qatar government related entities. While the contractual maturity of these deposits is short, the behavioural stickiness, given most of the depositors’ strategic interest in the development of the bank, has proven to be high. In order to diversify and increase the duration of its funding base, al khaliji has increased its unsecured term funding.
Al khaliji’s liquidity position benefited from the bank’s substantial holdings of Qatari government debt and its low loan-deposit ratio. Liquidity is supported by unencumbered, repayable securities which stood at QR4.3billion at end-9M11.
Al khaliji’s Fitch core capital ratio stood at a strong 24% at end-9M11. Leverage is low. This is partly due to the bank still being in a start-up phase but management is aiming to maintain a Tier 1 capital ratio of at least 15% in the long run. Dividend payout ratios are high, but Fitch believes that payouts will be kept at levels supportive to al khaliji’s development.