Capital Intelligence affirms QNB)'s Financial Strength Rating (FSR) at 'AA-'

The Long- and Short-Term Foreign Currency (FC) Ratings are also affirmed at 'AA-' and 'A1+', respectively, at the same level as the Sovereign Ratings for the State of Qatar.

The Bank's Support Rating of '1' (affirmed) reflects ownership by the State of Qatar through Qatar Investment Authority (QIA) and the Bank's increasing role as the financial arm of the Qatari Government. The Outlook on all Ratings is 'Stable'.

The Ratings are supported by the Bank's fine asset quality, comfortable capital adequacy, and good profitability. QNB has demonstrated sound risk management and maintains a low non-performing loan (NPL) ratio, together with more than full loss reserve coverage of a high quality loan portfolio.

Although the Bank's profitability weakened in 2012 due to pressure on net interest margins, it is underpinned by a very strong cost to income ratio, which allowed it to produce the highest net profit among GCC banks. The Ratings are constrained by the small size in terms of geography and population of the Qatari banking market.

As is the case for most Qatari banks, there is very high dependence on the government sector for business, which leads to high concentration risks. Banking system liquidity in Qatar can be volatile, reflecting variations in the volume of Government deposits in accordance with QIA's foreign investment activities.

That said, "The Bank's liquidity improved in 2012, due to continued growth in deposits from international operations, as well as in Qatar and good access to term funds in international capital markets."

QNB's capital adequacy, which improved significantly following a substantial increase in equity capital in 2011, is a key source of balance sheet strength, underpinning the Bank's growth potential. However, the acquisition of National Societe Generale Bank (NSGB) in Egypt, expected to be completed by H1 2013, would bring that ratio down noticeably including through the impact of goodwill.

It would also expose QNB's operations to country risk and its capital base to a substantially higher level of Forex translation risk. Although CI notes that at the current level, ratings would begin to be pressured on capital adequacy, CI is also of the opinion that more capital would be forthcoming from the Qatari Government through QIA as necessary. The acquisition would also represent a shift to a more balanced business profile (in terms of a higher share of retail and commercial business), and a major step forward in QNB's international expansion.

QNB was founded in 1964 as the first Qatari-owned joint stock commercial bank in the country. At end 2012 QNB was the largest among GCC banks in terms of total assets ($100.8bn) and net profit ($2.3bn). In Qatar the Bank operates a growing domestic network of 69 branches.

QNB's international operations have been gradually expanded over the years and cover 24 countries through 400 branches and offices, including branches in London, Paris, Singapore, Kuwait, Algeria, and Oman, investments in associate banks and subsidiaries in Switzerland, Jordan, Iraq, Tunisia, Libya, the UAE, Indonesia, and Syria, as well as representative offices in other markets.