CI raises QIBâ€™s Long-Term Foreign Currency Rating Raised to â€˜A+â€™
Capital Intelligence Ratings (CI), has affirmed Qatar Islamic Bank’s (QIB) Financial Strength Rating (FSR) of ‘A’, with a ‘Stable’ Outlook—although this Outlook continues to be under considerable pressure due to tight liquidity.
According to a statement from the ratings agency, the FSR is supported by good overall capital adequacy including a strong and improved CET-1 ratio, and still fairly good profitability, which is underpinned by a low cost base. QIB’s position as the leading Islamic bank in Qatar is also a supporting factor given the demonstrated preference amongst Qataris for personal banking on a Shari’ah-compliant basis.
The main constraint on—and threat to—the rating is the still tightening liquidity. All liquidity measures tightened in 2015 and then again in 2016, with particular concern being focused on the now very tight net liquid asset ratio. In mitigation, however, QIB has a liquidity coverage ratio well in excess of both current and future regulatory requirements and a good net stable funding ratio, the ratios to which banks in Qatar increasingly manage their liquidity. With other financial metrics generally sound – and in a number of cases very sound—the other main constraints at present are in the form of the very significant concentrations in financings by sector and by obligor, in depositors, and in the form of the uncertainties around GDP growth and therefore the likely trajectory of credit growth.
The Bank’s Long-Term Foreign Currency Rating (FCR) is raised to ‘A+’ while the Short-Term FCR is affirmed at ‘A2’ on a ‘Stable’ Outlook. As well as reflecting the Bank’s generally strong financial profile (liquidity aside) and even stronger capital adequacy ratio following the 2016 perpetual Sukuk issue, these ratings are also supported by the robust growth potential of the economy and ongoing government support for all Qatari banks. The Qatari government has demonstrated strong support for both individual banks as well as the system as a whole and it is this level of support that mitigates the now rather tight liquidity ratios at most individual banks. Based on the strength of the Qatari government balance sheet, the Support Rating is affirmed at ‘2’.
QIB management also expects credit to grow, but again at a rather slower pace than was seen in the high growth 2014-15 period—perhaps 9 per cent or less. Growth in the asset base and in profit at the operating level is likely to closely track the growth rate of the financing book, although the performance at the net level (absent recoveries) is likely to be impacted by a continuing high cost of credit. Management is, however, hopeful that the NPF total may be substantially reduced this year should remedial action which is currently underway prove to be successful.
Despite the decline in hydrocarbon prices and its effect on the budget balance, the forecast is for real GDP growth to continue in Qatar, albeit at a slower pace than in the past. Qatar continues to spend on infrastructure in line with its development plans ahead of the World Cup 2022 event—although marginal projects have been either delayed or completely cancelled. Economic conditions in Qatar are therefore expected to remain better than those in most other GCC countries although there are signs of oversupply in the real estate sector.
A slower pace of asset growth in 2017 coupled with funds raised through probable longer tenor capital markets transactions should hopefully translate into a better liquidity position. The 21 February 2017 AGM increased the issue level for Perpetual Sukuk issuance from QAR 5 billion to QAR 7.5 billion. With the amount of such Sukuk already issued standing at QAR 4 billion, there is now considerable room for a further issue, possibly this year. This is important as liquidity is the one area where QIB has sufficient weaknesses that now threaten its current high FSR.
Qatar Islamic Bank was the first Islamic banking institution to be incorporated in Qatar in 1982. Following a special issue of shares in 2009 and 2011, the Bank’s single largest shareholder at end 2015 was the Qatar Investment Authority with 16.9 per cent. None of the Bank’s remaining 6,000 shareholders, comprising members of the ruling family, domestic institutions and nationals may individually hold more than five per cent – in line with the terms of the Bank’s articles of association. This five per cent rule has become a regulatory maximum for all banks following a directive from the Central Bank of Qatar but exceptions are being allowed on a temporary basis.
QIB is the leading Islamic Bank and the second by total assets ($38.4 billion at end 2016) in Qatar and one of the largest Islamic banks in the MENA region.