Moody’s Affirms Ratings of Masraf Al Rayan

Moody’s Investors Service (Moody’s) yesterday affirmed the long-term and short-term issuer ratings of Masraf Al Rayan (Masraf) at A1/P-1.

 At the same time, the rating agency placed on review for upgrade long-term and short-term bank deposit ratings of Al Khalij Commercial Bank (al khaliji) (AKCB) at A3/P-2.

The rating action follows the significant progress Masraf and AKCB have made in seeking approvals, including an initial approval from Qatar Central Bank, following the merger announcement in January 2021.

The merger remains subject to regulatory and shareholder approvals and is expected to be completed in the first half of 2021. Once completed, the surviving entity will be Masraf and all assets and liabilities (including funding vehicles) of AKCB will be transferred to Masraf in exchange for new Masraf shares issued to AKCB’s shareholders.

The affirmation of Masraf’s ratings captures Moody’s view that the merger with AKCB, while offering longer-term potential benefits, will not immediately alter the bank’s strong standalone credit profile.

The rating agency also notes that the merger with AKCB will not result in a significant shift in Masraf’s business mix or solvency given that it is about twice the size of AKCB. Masraf is currently Qatar’s fourth-largest bank with a seven percent market share of banking system assets as at December 2020 which will increase to 10 percent following the completion of the merger.

The merger will position Masraf as Qatar’s second-largest bank and the largest Islamic bank in Qatar.

In addition to benefits related to scale, Masraf’s profitability will benefit from the cost and revenue synergies and stronger liquidity profile of AKCB.

The combined entity’s asset quality is expected to remain strong. The combined non-performing financing to gross financing ratio (NPF ratio analogous to NPL ratio for nonIslamic banks) will be around 1%, a similar level to Masraf’s standalone.

Moody’s expects the combined bank’s future profits to be lower in 2021 owing to both the ongoing pressure on Masraf’s profitability combined with nonrecurring integration costs related to the merger, before benefiting from anticipated synergies.

The combined entity’s pro-forma net income to tangible assets stood at 1.6% for the year 2020 whereas the bank’s standalone ratio was 1.8% for the same period.

However, the bank’s standalone profitability has declined in 2020 primarily due to higher provisioning cost driven by increase in problem financing.

The rating agency expects the provisioning charges to stabilize at current levels which should support profitability.

The bank’s liquidity profile will improve as a result of the merger given the stronger liquidity buffers of AKCB. The combined entity pro-forma liquid banking assets to tangible banking assets as of December 2020 was around 30%, compared to 26% for Masraf standalone.

While liquidity is expected to improve, the reliance on market funding expected to remain stable with a pro-forma market funding ratio of the combined entity at around 29% as of December 2020.

The review for upgrade of AKCB’s ratings and assessments reflects Moody’s views that they will converge with those of Masraf once the merger is finalised and receives all relevant authorisations.

Moody’s expects that AKCB will be legally merged into Masraf which will legally assume AKCB’s debt and liabilities upon closing.

The rating agency anticipates to conclude the ratings review once the transaction will be formally approved by both banks’ shareholders and governing bodies with AKCB’s ratings and assessments converging to those of Masraf’s.

The stable outlook on Masraf’s long-term issuer ratings balances the expected benefits from the successful closing of the overall merger relative to deal execution and integration risks.