Moody's Investors Service has downgraded the long-term ratings of nine banks in Qatar from stable to negative. The ratings agency also affirmed the banks' baseline credit assessments (BCA), adjusted BCAs and Counterparty Risk Assessments (CRA)s.

The nine affected banks are Qatar National Bank (QNB), Doha Bank, al khaliji, Ahli Bank, Barwa, International Bank of Qatar, Masraf Al Rayan, Qatar International Islamic Bank and Qatar Islamic Bank.  

A key driver of the negative outlook for Qatari banks' ratings is the downside risk that a prolongation of the ongoing dispute between Qatar and a group of peer countries, including its fellow GCC neighbours Bahrain, Saudi Arabia and the UAE, could trigger some outflows of external funding (which represents around 36 per cent of total banking system liabilities as of May 2017) and a generalised increase in the cost of funding, according to Moodys.

As a result, the banks' liquidity buffers would likely reduce, as domestic funding sources remain tight due to current oil prices. This could negatively impact the supply of credit and weaken economic growth, stated the ratings agency.

Consequently, this could increase asset quality pressures and provisioning charges on the banks over the coming quarters. A combination of these factors, could result in lower profits for Qatari banks. Moody's has captured these risks by lowering its macro profile for Qatar to Moderate+ from Strong-, it added.

The rating actions were driven by two key factors:

*The weakening domestic operating environment, particularly for banking funding, resulting in the rating agency lowering the Macro Profile it assigns to Qatar to Moderate+ from Strong
*The weakening capacity of the Qatar government to support the country's banks, as indicated by Moody's change in outlook for the Qatari government's Aa3 government bond rating to negative from stable.

While all these nine got a ratings downgrade, Moody's maintained negative outlook on long-term deposit ratings of The Commercial Bank mainly driven by its expectation of pressures on the bank's solvency arising from asset quality deterioration and the weakening of profitability owing to higher loan loss charges and a lower contribution from the bank's Turkish unit and UAE-based associate.

Additional pressure is now exerted on the The Commercial Bank's ratings due to the challenges in the operating environment and the negative outlook for the Qatar government rating, it added.

Moody's pointed out that its decision to affirm the ratings of all 10 banks reflects the resilience in their financial performance underpinned by continued strong asset quality and capital buffers.

Despite challenges emerging from the ongoing GCC dispute, the banks' liquidity buffers now remain solid. However, Moody's expects funding costs to rise, dampening banks' profitability.

Additionally, the negative outlook also captures the weakening capacity of the government of Qatar to provide support in case of need, as implied by the negative outlook on the Aa3 government bond rating.

Although Moody's continues to incorporate a very high probability of government support for the long-term issuer and deposit ratings of the Qatari banks, the change in their outlook is also driven by the change in outlook to negative from stable on the Aa3 Qatar government bond rating.

This reflects the potential weakening of the government's capacity to provide support to banks in case of need. Moody's very high probability of support for the banks in Qatar is driven by the government's shareholding in the banks, the importance of the banking system to the country's economy and past track record of pre-emptively supporting banks in 2009-2010.-TradeArabia News Service