QNB’s Finansbank acquisition a strategic move: Moody’s
26 May 2016 - 1:53
DOHA: Qatar National Bank’s (QNB) planned acquisition of Turkish lender Finansbank AS offers considerable advantages for the group, but the large acquisition in a relatively volatile emerging market will expose the bank’s asset quality to downside risks and add to the headwinds in its domestic operations owing to low oil prices, Moody’s Investors Service has said in a report published yesterday.
However, the rating agency expects that these risks will remain manageable given QNB’s high capital buffers, which will be restored following a planned capital injection and contributions from its strong earnings, offsetting the impact of higher credit costs post acquisition.
Moody’s report, titled “Qatar National Bank: Downside Risks From Turkish Expansion are Balanced By Strong Capital and Liquidity Buffers” noted “Finansbank is a good strategic fit for Qatar National Bank. Its balanced portfolio among various sectors and a well-established presence in the Turkish market offers high long-term growth potential.
However, the acquisition comes with downside asset quality risks due to the geopolitical tensions, currency volatility and a slowdown in economic growth all which may weigh on Turkish borrowers’ repayment capacity, said Elena Panayiotou, an Assistant Vice President -- Analyst and author of the report.
Following the conclusion of this transaction, due by end-June 2016, around 30 percent of QNB’s operations will be in Middle Eastern and North African markets that Moody’s generally views as posing greater risks than Qatar, QNB’s domestic market. This will continue to test the bank’s risk management capabilities, and will require prudent risk control and oversight. Nevertheless, Moody’s expects that QNB’s strong capital buffers can offset the heightened risks and that the challenges posed by the Turkish acquisition and the bank’s other international operations will remain manageable over the next 12-18 months.
“We believe that any potential asset quality pressures internationally and domestically, owing to protracted low oil prices which could impact confidence and asset prices in Qatar, can be offset by QNB’s strong capital buffers which we expect to be restored by a capital increase by the end of June 2016’’ said Elena Panayiotou. The deal will increase the geographical diversification of QNB’s assets and revenues. Moody’s expects Finansbank will contribute to QNB’s earnings growth given the higher net interest rate margins in Turkey. While credit costs for the group will increase post-acquisition given the higher risks in Turkey’s volatile market, Moody’s expects they will remain at low levels and continue to underpin QNB’s profitability and internal capital generation.
The transaction will further enhance the geographic diversification of QNB’s assets, deposits and revenues and help to reduce, to some extent, its reliance on concentrated exposures in Qatar’s oil-driven economy. Finansbank will contribute around 16 percnet to the group’s post-consolidation assets, 16 percent to loans and 12 percent to deposits.
The entry into Turkey will also increase business opportunities for the group, owing to the growth potential in Turkey’s large and densely populated market (GDP of $760bn as of end-2015, compared to $183bn for Qatar). Trade links between Turkey and Qatar are already well established, with many Turkish companies participating in Qatar’s infrastructure development. QNB’s increased balance sheet will raise the cap on loans to single borrowers and allow the bank to continue to participate in large infrastructure projects in the Gulf region.