Capital Intelligence has affirmed Ahlibank’s Long- and Short-Term Foreign Currency Ratings at ‘A’ and ‘A2’, respectively, with a ‘Stable’ Outlook.
CI also maintained the Support Level of ‘1’ in view of the extremely high likelihood of support from the Bank’s strong government-related shareholders, as well as from official sources in case of need.
The Financial Strength Rating (FSR) was also affirmed at ‘A-’, with a ‘Stable’ Outlook, in recognition of the Bank’s sound and improved loan asset quality, ongoing strong profitability and solid capital adequacy.
Also supporting the FSR is the successful arrangement of term loans, which has diversified funding sources, and the reduced reliance on interbank sources of funding in the current year.
The factors constraining the FSR are the tightened net liquid asset ratio at end 2014, although CI understands this has improved in the current year, and ongoing concentration risks in both loans and customer deposits (mainly related to government and semi government entities), as is the case with peer banks.
The Bank’s moderate market shares of loans and deposits and the challenging operating environment due to the fall in hydrocarbon prices are also constraining factors.
Background
Ahlibank (profile) underwent a significant change in ownership in January 2013 after the Qatar Foundation (a trust) purchased the 29.41% ownership interest of Bahrain-based ‘Ahli United Bank’ (AUB). Qatar Foundation, together with Qatar Investment Authority (QIA), now control close to one-half of the Bank’s shares, thereby implying a strong degree of financial support.
Ahlibank had been previously managed by AUB under a technical services agreement. Although Ahlibank ranks among the smaller banks in the local market, it has nonetheless built and developed a successful business franchise. This is evidenced by its sound credit metrics which in a few cases are better than those of its larger peers, particularly in regard to loan asset quality.
Being the beneficiary of a diversified business model focused on commercial banking, trade finance and retail, the Bank is well placed to benefit from ongoing sound (though lower) economic growth in Qatar due to strong non-hydrocarbon activity, as well as continuing hydrocarbon production.
The strong capital adequacy ratio in combination with a significantly improved rate of internal capital generation provides a solid basis for Ahlibank to further grow risk weighted assets and consolidate market share.
Loan portfolio
The quality of the loan portfolio has considerably improved over the last four years, as demonstrated by the decline in the non-performing loan (NPL) to gross loans ratio.
The Bank’s excellent NPL ratio remained the best among the conventional banks in Qatar. Moreover, loan-loss reserves (LLRs) have continued to provide more than full cover for NPLs. Indeed, the LLRs to NPL ratio was the strongest among Qatari banks.
The Bank’s high level of LLRs together with a solid capital base provides an effective buffer against potential credit losses. However, as is the case with most other Qatari banks, there remain exposure concentrations in respect to borrowers, including to government and semi-government entities, underscoring the undiversified nature of the local economy.
Liquidity
Although liquidity has tightened as measured by the net loans to total customer deposits ratio due to faster credit expansion than the growth in the customer deposit base, the Bank’s ratio of net loans to stable funds remained satisfactory benefiting from the successful arrangement of new term loans in recent years.
These have diversified ABQ’s sources of funds and improved maturity mismatches to a moderate degree. Importantly, the reliance on interbank deposits and selling short-term CDs to other banks has declined in the current year after increasing significantly in 2014.
Ahlibank’s expanding customer deposit base however continues to be characterised by high customer deposit concentrations, a phenomenon common in the Qatar banking system.
With the change in the Bank’s ownership, those concentrations increased as additional Qatari government and semi-government entities placed deposits with the Bank.
Deposits received from state and other state entities have since declined, although they continued to provide more than one-fourth of total customer deposits. Concurrently, the share of corporate and retail deposits in total has expanded.
That said, given the prospect of tightening liquidity conditions in Qatar and the broader GCC market due to a decline in government revenue following the sharp fall in hydrocarbon prices, government and semi-government entities may be expected to draw down on their deposits in the near to medium-term. In turn, this may increase funding and liquidity risks for Qatari banks as a group.
Profitability
Ahlibank’s profitability as measured by the ROAA (return on average assets) remains strong and better than the Qatari sector average, supported by good gross income generation and effective cost control.
Although the Bank’s ROAA and operating profitability have slipped over the last few years, in line with most other Qatari banks, this is principally due to a narrower net interest margin.
Nonetheless, with interest rates trending downwards within the local market over last few years the Bank has improved its funding cost thanks to an increase in the share of low cost deposits.
Non-interest income (NII) continued to grow lifted by sustained increases in fee and commission income, as well as a significant level of investment income. Despite this, the contribution of NII to gross income remains moderately below the peer average.
The Bank is working on various initiatives to increase fee income, including the launch of new retail, private banking and corporate products.
About Ahlibank
Ahlibank’s business is segmented into retail banking, grouped together with private banking and wealth management, corporate banking, and treasury and investments. Currently, Qatar Foundation is the largest single shareholder with 29.41% of Ahlibank’s shares, and QIA (through its subsidiary Qatar Holding) has a 17.65% shareholding, bringing the total shareholding by government-related entities to 47.06%; other smaller investors in aggregate own 52.94% of the Bank’s equity. At end-September 2015, the Bank’s total assets were QAR32.2 billion (USD8.85 billion) and total capital was QAR4.4 billion (USD1.2 billion).
Capital Intelligence (CI) ratings can be found at http://www.ciratings.com.