Commercial Bank International's ratings affirmed

The Foreign Currency Ratings are maintained at 'BB' Long-Term and 'B' Short-Term, with the Support Rating at '3'. The FC Ratings are underpinned by the high likelihood of support from both the federal government and the principal shareholder in case of need.

In view of the continuing improvement in operating profitability, the increased shareholding of QNB and the proposed capital injection, a 'Stable' Outlook is assigned to all the ratings. However, the ratings would come under pressure if capital is not increased over the next few quarters.

A significant development in the recent weeks has been the increased shareholding of Qatar National Bank (QNB), which is now the Bank's largest single shareholder with a strong representation on the board and which is closely involved in managing the Bank. CBI is in the process of exploiting synergies with QNB in a number of areas and the Bank can expect to benefit from its close association with one of the Gulf region's largest and strongest banks. CBI was in consolidation mode last year, but its new senior management team is now focusing on building its asset base, diversifying its resources and generating multiple revenue streams. One of the areas that will require significant attention for some years is asset quality. Improved risk underwriting standards introduced by the present management team are likely to slow accretions to the non-performing loan (NPL) portfolio, but management time and effort are likely to be tied up in remedial activities on the current portfolio of bad loans for some years.

Meanwhile, initiatives are underway to expand the 'good' portfolio and there are plans to raise new capital to support the Bank's ambitious growth targets. H1 2012 saw a modest increase in net loans, mostly in the retail segment of the market, and asset quality remained weak, with a high NPLs to gross loans ratio and a low coverage ratio.

The strong improvement in operating profitability in H1 2012 is a favourable development and is attributed to a wider net interest margin (reflecting the continuing decline in funding costs), some growth in lending and higher fee and commission income. Although ROAA rose substantially in the first half of this year, this was, disappointingly, at the cost of reducing the impairment provision charge. CBI's capital remains severely impaired by the high level of unprovided NPLs. Liquidity, measured by the net loans to stable funds ratio, is satisfactory, but the liquid asset ratio continues to be fairly low compared with peer banks. The support of QNB is, however, a mitigating factor here.

CBI is primarily a corporate bank with a growing retail banking business. Trade finance continues to be its mainstay and customers are still mainly small and medium-sized companies. However, the Bank is gradually expanding its corporate banking business to include larger companies and public-sector entities. The Bank is owned 40% by QNB, which has four seats on the board.