Fitch Ratings has affirmed Doha Bank Q.P.S.C.'s Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook.

Doha Bank's Viability Rating (VR) has also been affirmed at 'bb'. A full list of rating actions is below.

Key Rating Drivers

Doha Bank's IDRs reflect potential support from the Qatari authorities, if needed. Its Short-Term IDR of 'F2' is the lower of two options mapping to an 'A-' Long-Term IDR because a significant proportion of the banking sector's funding is government-related and financial stress at Doha Bank is likely to come at a time when the sovereign itself is experiencing some form of stress.

The 'bb' VR reflects the bank's high-risk profile with a historical focus on lending to sensitive sectors, which has exacerbated asset-quality problems, and below peers' performance metrics that are weighed down by increased cost of risk. The VR also captures a high reliance on wholesale and external funding (including deposits) as well as reasonable liquidity and capitalisation metrics.

Government Support Rating (GSR) of 'a-':The Qatari authorities have a strong propensity to support domestic banks, irrespective of their size or ownership. They also have a strong ability to do so, as indicated by the sovereign rating ('AA-'/Stable) and substantial net foreign assets and revenue, albeit weakened by the Qatari banking sector's high reliance on external funding and recent rapid asset growth.

Strengthened Operating Environment: High hydrocarbon prices have supported the strengthening of the operating environment for Qatari banks. The 2022 FIFA World Cup and higher private-sector demand from the improving business sentiment also underpin this trend.

Medium-Sized Qatari Bank: Doha Bank was the fourth-largest bank in Qatar at end-1H22 with 6% of sector assets. It has a large branch network in Qatar and some overseas operations (4% of total consolidated assets).

High Exposure to Vulnerable Sectors: Doha Bank has historically been focusing on lending to the contracting and real-estate sectors (38% of gross loans at end-1H22), which resulted in high loan concentration and in asset-quality vulnerabilities in recent years. Doha Bank tightened its underwriting standards in the pandemic, which caused lending to decline in 2020-1H22 but also stabilisation of asset quality. The latter was reflected in the Fitch-calculated Stage 3 loans origination ratio (net increase in Stage 3 loans plus write-offs in the period/average gross loans, annualised) that decreased to 0.3% in 1H22, from 3% in 2021 and 5.8% in 2020.

Still High Problem Loans: Doha Bank's Stage 3 loans ratio (5.95% at end-1H22 compared with a sector average of 2.8%) has been stable since end-2019. Stage 3 loans coverage by total reserves was 92%, which Fitch views as only moderate since Stage 2 loans made up an additional 30% of gross loans at end-1H22. Stage 2 loans are concentrated mainly in the contracting and real-estate sectors. According to Fitch's base case the Stage 3 loans ratio is unlikely to decrease below 6% in 2H22-2023.

Lower Loan Impairment Charges: Doha Bank's profitability metrics improved in 1H22 (after a dip in 2019-2021) on reduced loan impairment charges (LICs). LICs consumed 38% of pre-impairment operating profit in 1H22, down from 60%-65% in 2019-2021. Operating profit improved to 1.9% of risk- weighted assets (RWA) in 1H22 from 1% in 2020-2021.

Moderate Capitalisation: Doha Bank's common equity Tier 1 (CET1) ratio of 12.6% at end-1H22, down from 13.5% at end-2021, due to dividend payments and some adjustments to RWAs. We view the ratio as moderate for its risk profile, high concentration risks and modestly reserved Stage 2 loans.

High External Liabilities: The bank's loans/deposits of 120% is at the higher end of the sector's, reflecting its high reliance on wholesale funding (35% of total funding at end-1H22), while the regulatory ratio was lower at 102% at the same date. Similar to other Qatari banks, Doha Bank has a high reliance on longer-term deposits from overseas counterparties (25% of total customer accounts at end-1H22, down from 40% at end-2021), which makes its funding profile vulnerable to changes in investor sentiment.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of the sovereign or a negative change in Fitch's assessment of the government's propensity to provide support to Qatari banks in general or to Doha Bank specifically would result in a downgrade of Doha's GSR and IDR.

Material deterioration of asset-quality metrics (ie as a result of migration of Stage 2 loans into the Stage 3 category), resulting in a significant increase of capital encumbrance, could lead to a VR downgrade. Inability to refinance wholesale funding or outflows of overseas deposits may lead to a downgrade of IDR and VR if not compensated by liquidity support from the authorities.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Doha Bank's GSR and IDR could be upgraded if Fitch views that the sovereign's ability to support the sector strengthens, either through a sovereign upgrade or through a substantial reduction in external funding and system assets relative to GDP.

The VR could be upgraded if the bank executes its de-risking strategy with a higher share of lending to state-related entities and a lower share of loans to the higher-risk contracting and real estate sectors. A lower Stage 2 loans ratio (below 10%) with impaired loans stabilising at about 6% of total loans and a CET1 ratio above 13% could lead to a VR upgrade.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

The ratings of senior debt issued by Doha Bank 's special purpose vehicle (SPV) Doha Finance Limited are in line with the bank's Long and Short-Term IDRs because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPV the same as that of the bank.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The notes issued by Doha Finance Limited are subject to same sensitivities as Doha Bank's IDR.

VR ADJUSTMENTS

The operating environment score of 'bbb' is below the 'aa' category implied score due to the following adjustment reasons: size and structure of economy (negative), financial market development (negative) and regulatory and legal framework (negative).

The funding and liquidity score of 'bb' is below the 'bbb' category implied score due to the following adjustment reason: deposit structure (negative).

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The Long-Term IDR of Doha Bank is linked to the Qatari sovereign's IDR.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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