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DOHA: Standard & Poor’s Ratings Services has revised its outlook on Commercial Bank of Qatar (CBQ) to negative from stable. At the same time, the ratings agency affirmed its ‘A-/A-2’ long- and short-term counterparty ratings on the bank.
The outlook revision follows CBQ’s announcement that it has entered into an agreement with Anadolu Endustri Holding A.S., through which CBQ will acquire a majority stake (70.84 percent) in Turkisk bank Alternatifbank. The transaction is valued at $460 m and is scheduled for completion in the second or third quarter of 2013, subject to regulatory approval. As of December 2012, Alternatifbank reported total loans of $2.9bn, equal to almost 18 percent of CBQ’s pro forma consolidated loans.
“We believe CBQ has enough internal and external financial flexibility to absorb this acquisition without jeopardizing its strong risk-adjusted capital (RAC) position, as the cost of the acquisition is less than one year’s profit. We believe CBQ will maintain a double-digit RAC ratio over the next 12-24 months, according to our measures”, the ratings agency said yesterday.
It noted the acquisition as positive for the bank’s development strategy. Alternatifbank is a commercial bank that focuses on small and midsize enterprises (SMEs) and is the 15th-largest lender in Turkey. A successful integration of the bank could materially strengthen CBQ’s business position over time and improve its business diversification by increasing the weight of CBQ’s international operations and reducing the dominance of its Qatar-based business. Moreover, we consider that there is a strong growth potential in this segment in Turkey due to the low corporate and SME banking penetration rate. The negative outlook reflects our view that the acquisition could constrain CBQ’s capital position and lead to other acquisition-related execution risks.
“We believe the acquisition could bring a large amount of goodwill and put pressure on CBQ’s capitalization. We estimate that, in the absence of capital increases or balance sheet management actions, CBQ’s RAC ratio could decrease to less than 10 percent after the acquisition is complete, compared with 10.9 percent as of December 31, 2012”.
The S&P said it could revise the outlook to stable if the bank managed to maintain a RAC ratio materially higher than 10 percent after completion of the acquisition and if we believe the benefits of the acquisition outweigh the associated execution risks.