Fitch Rates QNB Finansbank Anonim Sirketi's Basel III-Compliant Tier 2 Notes 'CCC+(EXP)'

Fitch Ratings has assigned QNB Finansbank Anonim Sirketi's (QNBF) planned issue of Basel III-compliant Tier 2 capital notes an expected rating of 'CCC+(EXP)'.

The Recovery Rating is 'RR5'. The size of the issue is not yet determined but is expected to be in the range of USD300 million.

The final rating is subject to the receipt of the final documentation conforming to information already received by Fitch.

The notes qualify as Basel III-compliant Tier 2 instruments and contain contractual loss absorption features, which can be triggered at the point of non-viability. According to the draft terms, the notes are subject to permanent partial or full write-down, on the occurrence of a non-viability event (NVE). There are no equity conversion provisions in the terms.

An NVE is determined as occurring once the bank has incurred losses and has become, or is likely to become, non-viable as determined by the local regulator, the Banking and Regulatory Supervision Authority (BRSA). The bank will be deemed non-viable should it reach the point at which the BRSA determines its operating license is to be revoked and the bank liquidated, or the rights of QNBF's shareholders (except to dividend), and the management and supervision of the bank, are transferred to the Savings Deposit Insurance Fund (SDIF) on the condition that losses are deducted from the capital of existing shareholders.

The notes have an expected 10-year maturity and a call option after five years.

Key Rating Drivers

The notes are rated one notch below QNBF's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) of 'B-', in accordance with Fitch's Bank Rating Criteria.

The one notch for loss severity reflects Fitch's view of below-average recovery prospects for the notes in an NVE. The one-notch loss severity, rather than our baseline two notches, reflects our view that shareholder support from Qatar National Bank (Q.P.S.C.) (A/Positive), could help mitigate losses, and incorporates the cap on the bank's LTFC IDR at 'B-' due to our view of government intervention risk.

The anchor rating of QNBF's LTFC IDR reflects our view that Qatar National Bank (Q.P.S.C.), the parent of QNBF, would likely seek to restore QNBF's solvency without imposing losses on subordinated creditors. It also reflects the likelihood that a QNBF default would be driven by some form of transfer and convertibility restrictions, rather than a loss of solvency or liquidity.

QNBF's LTFC IDR is driven by shareholder support from Qatar National Bank (Q.P.S.C.), and underpinned by its Viability Rating (b-). We use the LTFC IDR as the anchor rating for the certificates as we believe that potential extraordinary shareholder support is likely to flow through to the bank's subordinated debt holders. Our view of support is based on QNBF's strategic importance to its parent, ownership, integration and role within the wider group.

Fitch has applied zero notches for incremental non-performance risk, as the agency believes that write-down of the notes will only occur once the point of non-viability is reached, there is no coupon flexibility prior to non-viability, and as the notes do not incorporate going-concern loss-absorption features.

The notes' 'RR5' Recovery Rating reflects below-average recovery prospects in default.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

As the notes are notched down from QNBF's shareholder support-driven LTFC IDR, their rating is sensitive to a downgrade of the IDR. The notes' rating is also sensitive to an unfavourable revision in Fitch's assessment of loss severity and incremental non-performance risk.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The notes' rating is sensitive to an upgrade of QNBF's LTFC IDR.

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

QNBF's ratings are underpinned by shareholder support from QNB.

ESG Considerations

The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the credit profile and is relevant to the rating in combination with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.