QNB Alahli – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of QNB Alahli S.A.E. (QNB AA) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed QNB AA’s Bank Standalone Rating (BSR) of ‘b+’, Core financial Strength (CFS) rating of ‘bbb-’, and Extraordinary Support Level (ESL) of High. The Outlook for the ratings remains Stable.

The Bank’s BSR is based on a CFS rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. Egypt’s OPERA reflects the improved – although still high – sovereign risk profile of the country, as well as the adverse impact of Covid-19 on economic activity and credit conditions, government borrowing needs and the balance of payments. These risks are mitigated by financial support from the IMF and GCC countries and the sound condition of the banking system, which reduce the economy’s external refinancing and macro-financial risks.

The CFS rating is supported by the Bank’s strong capitalisation, consistently high profitability (both operating and net basis), and sound asset quality with strong credit absorption capacity. Also supporting the CFS is the very comfortable liquidity and funding profile based on customer deposits, and the high stock of liquid assets & investments. Non-financial supporting factors include its market position as the second largest private sector bank in Egypt, with a diversified business operation and well-established domestic franchise, and the support by its strong parent, Qatar National Bank (QNB) (rated ‘AA-’/‘A1+’/Stable by CI). Although in CI’s view QNB would provide a high level of liquidity and capital support if needed, the uplift for the Bank’s extraordinary support is constrained by Egypt’s sovereign LT FCR of ‘B+’.

The main rating constraints are the challenging operating environment due to the economic impact of Covid-19, concentration of credit exposure in government securities, concentrations in both lending and deposits, and exposure to systemic liquidity risk – all in line with the domestic banking sector.

QNB AA’s conservative risk appetite within its targeted banking segments is executed by sound underwriting standards. Overall asset quality metrics are sound. The customer lending book (equivalent to 50% of balance sheet) is skewed towards the corporate segment and to a much lesser extent retail loans. Moreover, it has a substantial liquid asset and investment portfolio (46% of balance sheet). As at end 9M 21, the NPL ratio increased but to a level which is lower than the peer average. In mitigation, NPLs are more than fully covered by LLRs. Reflecting the Bank’s robust capitalisation, the extended NPL coverage ratio remained high. Moreover, QNB AA’s stage 2 exposure remained at satisfactory levels, and better than the average of its peers.

The Bank’s profitability has consistently been amongst the best in what is a profitable banking system. The solid profitability, on an operating and net basis, is supported by a strong franchise and high brand recognition, with this factor expected to remain a key credit strength in the medium term. COF continues to decline, net interest margins are wide, and cost management is effective. Overall earnings are of good quality, although more dependent on NII in common with other Egyptian banks. Credit costs have been under control. CI expects QNB AA’s profitability to improve as the challenging operating environment eases.

The Bank’s liquidity and funding profile is strong and supports the CFS rating. QNB AA is primarily customer deposit funded (close to 82% of balance sheet), with limited refinancing risks. Its deep customer deposit base is supported by a well-established domestic franchise, together with a large nationwide distribution network and solid position in retail and middle market corporates. The Bank has minimal dependence on wholesale funding, either from bank deposits or senior debt obligations.
 
QNB AA’s capital ratios are strong, providing an ample buffer for unforeseen setbacks. The balance sheet leverage ratio is also at a very good level. Capital flexibility is seen to be strong given a high rate of internal capital generation. Furthermore, in CI’s view, QNB has the financial capacity to provide capital (as well as liquidity) support in case of need particularly given the importance of QNB AA to the QNB Group.

Rating Outlook

The Outlook for the LT FCR and BSR is Stable, reflecting CI’s expectation that the ratings are unlikely to change over the next 12 months given QNB AA’s sound credit risk profile. We expect key profitability metrics and capital adequacy to remain strong, and liquidity to be maintained at sound levels.

Rating Dynamics: Upside Scenario
As the Bank’s LT FCR is already set at the same level as the sovereign, we do not expect a change in that rating unless the rating of the sovereign itself was raised. This is currently seen as being unlikely within a 12 month timeframe.

Rating Dynamics: Downside Scenario

While not our current expectation, QNB AA’s ratings could be lowered by one notch over the next year if Egypt’s sovereign rating is lowered.

Contact

Primary Analyst: Luis Maglanoc, Senior Credit Analyst; E-mail: luis.maglanoc@ciratings.com
Secondary Analyst: Morris Helal, Senior Credit Analyst: E-mail: morris.helal@ciratings.com
Committee Chairperson: Morris Helal, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s audited financial statements for FY2017-20 and 9M 21. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

The principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in July 1994. The ratings were last updated in September 2020. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.
 
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Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: Yes
With Access to Internal Documents: No
With Access to Management: Yes

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