DOHA: Moody’s Investors Service yesterday downgraded the subordinated debt ratings of 12 banks in the Gulf Cooperation Council (GCC) countries, including Qatar.
The affected banks in Qatar are Commercial Bank of Qatar, Doha Bank QSC, Qatar National Bank and the UAE-based Mashreqbank PSC. The other GCC banks are Arab National Bank, Banque Saudi Fransi, Abu Dhabi Commercial Bank PJSC, Emirates NBD PJSC, First Gulf Bank, Burgan Bank SAK, Bank Muscat SAOG and BBK BSC.
Moody’s downgrading of the subordinated debt ratings of the banks (by one to three notches) reflect the heightened risk of the imposition of losses on these instruments. Although the downgrades capture the evolving risk profile of subordinated debt, the rating agency continues to recognise the unique record, capacity and willingness of Gulf authorities to extend support, particularly to government-owned banks.
Accordingly, and in contrast to Moody’s standard of fully removing government support assumptions from subordinated debt globally, Moody’s has still retained some support for the affected subordinated debt ratings. The degree of rating uplift from the banks’ baseline credit assessments (BCAs) takes into account the level of government ownership across the banks.
The downgrade of the subordinated debt ratings, which is expected to affect approximately $3bn of securities, is driven by Moody’s view that the risk profile of junior debt instruments has increased, given global regulatory trends of imposing losses on junior creditors as part of bank bailouts orchestrated by governments.
Moody’s standard rating approach for subordinated bank debt fully excludes systemic support from these junior instruments, and subordinated debt ratings are now typically positioned below the banks’ BCAs, rather than one notch below the senior unsecured rating. However, in the case of the Gulf banks the rating agency has applied an exception to its standard approach and retained elements of rating uplift for subordinated debt from the BCAs of these banks.
The ratings agency noted under Basel III, which will be implemented in all GCC countries over the next few years, subordinated debt instruments will likely have mandatory loss-absorbing features that can be triggered by the provision of government support. While the subordinated debt downgraded yesterday does not include such loss-absorption features, Moody’s has observed regulators in other jurisdictions using their statutory powers to share losses with existing subordinated debt holders regardless of the contractual obligations within such instruments.
Although there have been limited policy signals from GCC regulators regarding the introduction of burden-sharing for subordinated debt instruments, Moody’s recognises that the local authorities, like their global counterparts, are generally keen to reduce the moral hazard that is present within such supportive systems.
The Peninsula
