Fitch Affirms Qatar International Islamic Bank at ‘A’; Outlook Stable

      Published on Tuesday, 3 November , 2020      592 Views     
Fitch Affirms Qatar International Islamic Bank at ‘A’; Outlook Stable


Fitch Ratings has affirmed Qatar International Islamic Bank’s (QIIB) Long-Term Issuer Default Rating (IDR) at ‘A’ with a Stable Outlook. QIIB’s Viability Rating (VR) has also been affirmed at ‘bb+’. A full list of rating actions is below.





KEY RATING DRIVERS

IDRS, SR and SRF

QIIB’s IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch’s expectation of an extremely high probability of support from the Qatari authorities for domestic banks in case of need. This reflects the strong ability of Qatar to support its banks, as indicated by its rating (AA-/Stable), although the size of the banking system relative to GDP is high, combined with Fitch’s belief of a strong willingness to support the banking sector and the bank. The latter is based on a record of sovereign support to the banking sector including between 2009 and 1Q11 when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks, and during 2H17 when the Qatari authorities placed significant deposits across the banks to support sector liquidity following the start of the blockade between Qatar and some of its neighbours. The government owns stakes in all Qatari banks.

The government has shown a strong commitment to its banks and key public sector companies.

The sovereign’s capacity to support the banking system remains very strong owing to solid sovereign reserves and revenue, mostly from hydrocarbon production, despite lower prices.

QIIB’s SRF is at the Qatari banks’ domestic systemically important bank (D-SIB) SRF of ‘A’, and is not differentiated by franchise or level of government ownership because we see an extremely high probability that all rated Qatari banks would receive support should they require it. This belief also partly reflects the risk of contagion (small number of banks and high concentration of banks in the system) and the importance of the banking system in building the local economy.

We assign Short-Term IDRs according to the mapping correspondence described in our rating criteria. An ‘A’ Long-Term IDR can correspond to a Short-Term IDR of either ‘F1’ or ‘F1+’. In the case of QIIB, whose Long-Term IDR is ‘A’, we opted for ‘F1′, the lower of the two Short-Term IDR options. This is because a significant proportion of the bank’s funding is related to the government and a stress scenario for the bank is likely to come at a time when the sovereign itself is experiencing some form of stress.

The Stable Outlook on the Long-Term IDR mirrors that on the Qatari sovereign.

VR

Fitch believes that pressures on Qatari banks’ operating environment from the spread of the pandemic could pose further pressures on banks’ financial metrics. The Qatari banking sector is highly exposed to the distressed real-estate sector with real estate and contracting representing 24% of sector lending at end-3Q20. However, we believe banks’ real exposure is much higher given their holdings of real-estate collateral and lending to high-net-worth individuals that indirectly finance these sectors. Fitch expects banks with a high stock of Stage 2 real-estate and contracting exposures to see higher restructuring and migration rates to Stage 3 financing. However, the full impact on asset quality is not expected to materialise before 1Q21 with the expiration of the Qatar Central Bank credit moratorium in December. Qatari banks have adequate excess capital buffers (average common equity Tier 1 (CET1) and total capital adequacy ratio (CAR) of 14% and 19%, respectively, at end-2019 against minimum regulatory requirements of 8.5% and 12.5%, excluding DSIB buffers, respectively) but an increase in Stage 2 and Stage 3 financing origination could quickly erode these buffers.

QIIB’s relatively small, but established, Islamic banking franchise highly influences its VR, which captures the bank’s intrinsic creditworthiness. QIIB is the smallest of four Islamic banks in Qatar, with about a 14% market share of Islamic banks’ assets. By total banking assets at end-1H20, QIIB’s market share is lower at 3.7%. The bank’s established Islamic deposit franchise supports its funding profile, which comprises largely domestic retail deposits, with low reliance on external funding. The VR also reflects the bank’s high financing concentrations but sound asset quality, solid profitability and only adequate core capitalisation, which has weakened since 2016.

QIIB’s financing book remains highly concentrated by borrower and sector, which exposes the bank to event risk. QIIB has deleveraged in real estate and contracting, but financing to these linked sectors is still high at 25% of total financing at end-1H20, down from 32% at end-2018 and 26% at end-1H19. QIIB’s 20 largest financing exposures were a high 4.2x equity at end-1H20, and are all classified in Stage 1 given that a significant proportion are to government-related entities (GREs).

Asset-quality is sound, supported by the bank’s concentration to the Qatari government and government-related entities, equivalent to 16% of total financing at end-1H20. However, we expect the bank’s Fitch-adjusted impaired financing ratio (2.1% at end-1H20) to increase given the slowdown in economic activity, QIIB’s high, but decreasing, exposure to the vulnerable real-estate sector, and unseasoned financing following very high growth of 32% in 2019. Total financing loss allowances increased to 99% of impaired financing at end-1H20 from 84% at end-2019, but remain lower than most peers.

QIIB’s profitability metrics are strong compared with peers given relatively higher margins, lower financing impairment charges and cost efficiency. The bank’s cost/income ratio improved to 21% in 1H20 from 25% in 2019 given resilient operating income and sound cost management. Operating profit/risk-weighted assets (RWAs) was stable at 2.3% in 1H20, but we expect pressure on profitability into 2021 from higher financing impairment charges.

QIIB’s CET1 ratio declined to 11.8% at end-1H20 from 17.6% at end-2016 and 12.6% at end-2019 due to high dividend pay-outs (69% for 2019) and fast growth in RWAs. We consider QIIB’s CET1 buffer over its minimum regulatory CET1 capital ratio requirement of 8.5% at end-1H20 to be adequate. QIIB’s solid Tier 1 capital ratio and total CAR of 16.5% and 17.3% at end-1H20, respectively, are well above regulatory minimums and supported by QAR2.1 billion of additional Tier 1 capital qualifying sukuk, issued in 2016 and 2019.

QIIB is primarily funded by customer deposits (about two thirds of non-equity funding at end-1H20). Customer deposits (excluding interbank deposits) are largely made up of domestic retail deposits (66% of total deposits at end-1H20) and deposits by the government and GREs (23%). Concentration in the deposit base compares well with local peers due to the higher portion of more granular retail deposits. The 20 largest deposits were 30% of total deposits at end-1H20.

Other non-equity funding consisted of interbank borrowings (26% of non-equity funding) mainly from Qatari banks. Reliance on external funding (foreign interbank and non-resident deposits) was 9.6% of total non-equity funding at end-1H20, which is lower than peers and positive for our assessment of funding and liquidity.

QIIB’s Fitch-adjusted gross financing/customer deposits ratio was 103% at end-1H20, which is in line with domestic peers. Liquidity is supported by a large buffer of liquid assets that were 38% of total assets at end-1H20. QIIB’s liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) were comfortable at 215% and 124%, respectively, at end-1H20.

In assessing the ratings of QIIB, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks’ ratings do not express an opinion on the bank’s compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.

SPVs AND SENIOR DEBT

The ratings of debt issued by QIIB’s special purpose vehicle (SPV) are in line with the parent’s Long- or Short-Term IDRs because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPV as the same as the likelihood of the default of the bank.

RATING SENSITIVITIES

IDRS, SR and SRF

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

The IDRs, SR and SRF are sensitive to a change in Fitch’s assumptions around the Qatari authorities’ propensity or ability to provide timely support to the banking sector or the bank. A downgrade of the sovereign or a negative change in Fitch’s assessment of the authorities’ ability or propensity to provide support would result in a downgrade of QIIB’s IDRs and downward revision of the SRF.

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

An upgrade of QIIB’s IDRs and upward revision of the SRF could result from an upgrade in the sovereign rating, although this is unlikely given its high level and Stable Outlook.

VR

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

QIIB’s VR is sensitive to material weakening in asset quality and earnings that erodes core loss-absorption capacity or a significant increase in non-domestic funding that weakens the bank’s funding and liquidity profile.

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

Upside potential for the bank’s VR is limited given expected pressures on its financial profile from the weaker operating environment. However, QIIB’s VR could be upgraded if the bank strengthens its franchise and continues to reduce concentration risks, while maintaining stable asset quality and capitalisation.

SPVs and SENIOR DEBT

The senior debt ratings are sensitive to changes in QIIB’s Long- and Short-Term IDRs.

 

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 QIIB is linked to the Qatari sovereign IDR.

QIIB senior sukuk’s ratings are driven by QIIB’s IDRs.

ESG CONSIDERATIONS

Qatar International Islamic Bank: Governance Structure: ‘4’

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

Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of ‘4’ for all Islamic banks including QIIB (in contrast to a typical ESG relevance score of ‘3’ for comparable conventional banks), which has a negative impact on the banks’ credit profile, in combination with other factors. In addition, Islamic banks have an Exposure to Social Impacts relevance score of ‘3’ (in contrast to a typical ESG relevance score of ‘2’ for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.

RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Qatar International Islamic Bank LT IDR A Affirmed A
ST IDR F1 Affirmed F1
Viability bb+ Affirmed bb+
Support 1 Affirmed 1
Support Floor A Affirmed A
QIIB Senior Sukuk Limited
  • senior unsecured
LT A Affirmed A
  • senior unsecured
ST F1 Affirmed F1


Additional information is available on www.fitchratings.com

ENDORSEMENT STATUS

Qatar International Islamic Bank EU Issued
QIIB Senior Sukuk Limited EU Issued

Keywords:
Category Government | 2020/11/03 latest update at 6:01 PM
Source : Fitch Ratings | Photocredit : Google
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