Negative rating actions taken on Qatari banks

Funding or liquidity profile may weaken amid diplomatic row

DUBAI, June 10: S&P Global Ratings today lowered its longterm counterparty credit rating on Qatar National Bank S.A.Q (QNB) to ‘A’ from ‘A+’. At the same time, we placed the ratings on QNB, Commercial Bank (P.S.Q.C.) (CBQ), Doha Bank Q.S.C., and Qatar Islamic Bank (S.A.Q) (QIB) on CreditWatch with negative implications.

These rating actions reflect our recent action on the sovereign rating on Qatar. They also reflect our view that Qatari banks’ funding or liquidity profile might weaken as a result of recent developments.

On June 5, 2017, a group of states--including Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt, Libya, and Yemen--moved to cut diplomatic ties and trade and transport links with Qatar. The measures imposed include a blockade of land, sea, and air access and the expulsion of Qatari officials, residents, and visitors from the group of states. We consider that this will exacerbate Qatar’s external vulnerabilities and could put pressure on economic growth and fiscal metrics. We have therefore downgraded the long-term sovereign rating on the State of Qatar to ‘AA-’ from ‘AA’ and placed it on CreditWatch negative.

The CreditWatch placement encompasses numerous downside risks to the ratings as a consequence of recent events. At this stage, we note that it is unclear how Qatar will respond and the extent to which these measures will be enforced, or for how long. As further details emerge, we expect to review these aspects and their potential impact on our projections. The next scheduled review of the sovereign rating is due on Aug. 25, 2017.

We regard CBQ, Doha Bank, and QIB as systemically important banks in Qatar and the Qatari authorities as being highly supportive of the banking system. The ratings on these three banks include three notches of support above their respective stand-alone credit profiles (SACPs). We have therefore placed the long- and shortterm ratings on these banks on CreditWatch negative as a further lowering of the sovereign rating would be likely to affect them.

We classify QNB as a government-related entity that has a very high likelihood of extraordinary support, in case of need. As a result of the sovereign downgrade, we now incorporate three notches of support in our longterm rating on QNB, rather than four, and have therefore lowered the rating on QNB to ‘A’ from ‘A+’. Again, our long- and short- term ratings on QNB have been placed on CreditWatch negative because a further lowering of the sovereign rating would be likely to affect it.

Moreover, we have previously identified Qatari banks’ increasing dependence on external funding as a potential source of tail risk in the event that these funds suddenly dry up. The Qatari banking system’s total net external debt stood at about Qatari riyal 182 billion on April 30, 2017.

The majority of these funds are from Asia and Europe. We consider that recent events have the potential to reduce external funding sources. Although we do not expect this to pose an immediate significant risk to Qatari banks, it could mean that government support could be needed to offset a potential major outflow. Should we observe a significant deterioration in the funding or liquidity profiles of Qatari banks, their SACPs and ratings would come under pressure.

Finally, our assessment of the Qatari banks’ creditworthiness would be revised downward if a deterioration of their operating environment had an impact on their financial profile, especially their asset quality or capitalization.

The CreditWatch placement encompasses downside risks to our ratings on the banks as a consequence of recent events. We will review these as further details emerge. Specifically, we could lower the ratings on these banks if we were to take similar action on the sovereign ratings. We could also lower the ratings on these banks if we saw a significant deterioration in their funding or liquidity profiles.

We could remove the ratings from CreditWatch and affirm them if we were to take the same action on the sovereign rating. In such a case, we would expect the embargo to be short-lived or that Qatar had responded in a way that would maintain its credit metrics in line with our current expectations. At the same time, we would not expect to observe a significant deterioration in Qatari banks’ funding and liquidity profiles or operating environment.