Sharjah Islamic Bankâ€™s ratings affirmed with a â€˜Stableâ€™ Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed the Financial Strength Rating (FSR) of UAE’s Sharjah Islamic Bank (SIB) at ‘BBB+’ based on the strength of its solid capital adequacy ratio (CAR), good liquidity, moderately good operating profitability and return on average assets (ROAA), and improving coverage ratio.
The rating is constrained by the challenging environment, customer concentration in the customer deposit base, and asset/liability maturity mismatches. SIB’s Long-Term Foreign Currency Rating (FCR) is affirmed at ‘A-’ and the Short-Term FCR at ‘A2’. The FCR set one-notch above the FSR is strongly underpinned by the Bank’s good capitalisation and government ownership, and the very high likelihood of official support from the federal government and the central bank should it become necessary. The Support Rating of ‘2’ is maintained. The operating environment in the country remains challenging due to low economic growth. This has slowed the pace of the banking sector’s asset expansion, affecting income growth. However, CI Ratings believes that SIB’s key financial parameters will continue to be maintained at their current good levels and accordingly a ‘Stable’ Outlook is appended to all the ratings.
As the flagship bank of the emirate of Sharjah, the Bank receives substantial support from its largest shareholder, the government of Sharjah. A proposed convertible Sukuk issuance this year would raise the government’s shareholding from the current level of 31 per cent. SIB’s capital ratios continue to be maintained at solid levels, although all major ratios have fallen over the last several years due to the growth in balance sheet assets and relatively high cash dividend payouts, which have led to low internal capital generation rates. The Bank opted to conserve capital in 2016 and issued bonus shares for that year instead of cash dividends. CI notes that SIB’s CAR and capital to total assets ratio are both better than the already strong peer group average. Basel III capital ratios will be gradually phased in by the central bank over the next few years. We expect the Bank’s ratios to be comfortably above the regulatory minimum.
Asset quality strengthened last year after weakening in the previous financial year. SIB’s non-performing Islamic Financing Facilities (NPIFFs) had risen substantially in late 2015 owing to increased classifications in the SME credit portfolio, but declined slightly in 2016. The NPIFF ratio improved, although it remained at a high level. Historically low levels of write-offs, even of fully provided NPIFFs, have contributed to the size of the non-performing book. The coverage ratio strengthened to 100 per cent for the first time in many years – management is committed to maintaining this high level of coverage going forward. The Bank’s IFFs to total assets ratio is low compared to the sector average (which contributes to its relatively lower margins).
SIB’s underwriting standards are conservative; exposures to the financially sound Sharjah sovereign and its well managed entities account for a little less than a third of financing facilities. Other exposures are substantially secured by the value of mortgaged properties. The Bank has grown its investment book in recent periods but the portfolio is still at a moderate level and consists primarily of readily marketable securities issued by sovereigns, banks, and top-rated private sector entities.
The Bank’s liquidity ratios continue to be fairly comfortable and key ratios are on a par with or better than the peer group average. SIB has a higher level of medium-term borrowings on its balance sheet than many banks in the country. Refinancing risks are still at manageable levels, but significantly higher levels of borrowings could make the balance sheet vulnerable to external shocks. Despite the high level of capital and medium-term funds on the balance sheet, SIB’s asset/liability maturity mismatches in the short-end of the spectrum continue to be wide, reflecting very low levels of less-than-one-year tenor IFFs. In addition, SIB’s exposures to the real estate market through mortgage financing, building construction financing, and investment properties have also contributed to maturity mismatches.
Short-term interbank liabilities increased in 2016 but are covered by a high level of liquid assets and marketable securities. Liquid assets and marketable securities increased last year raising the quasi-liquid asset ratio to a strong 36 per cent. The investment portfolio is of good quality. SIB’s portfolio of investment properties and properties held for sale is moderately high compared to conventional banks, but is generating some revenue.
Customer concentrations in the customer deposit base are high because the Bank receives sizeable funds from the government and its related entities. However, SIB’s levels are not as high as many of its peers.
In common with the sector average, SIB’s profit sharing margin declined sharply last year due to low growth in profit-sharing income and a sizeable increase in depositors’ profit-sharing expenses. The Bank has a large non profit-sharing income base with good contributions from fees, commissions, and securities trading profits. Real estate related activities have contributed to earnings volatility in recent years. Although the operating profit declined last year, reduced provisioning expenses led to a moderately good increase in net profit. Both the operating profit to average total assets ratio and ROAA were lower than the peer group average in 2016, but were still at a reasonably good level.
SIB is a full-fledged Islamic bank with total assets of AED 33.5 billion ($9.1 billion) at end 2016. It is regarded as the national bank of its emirate of incorporation and has a close relationship with the local government. Its core businesses are corporate and retail banking, and investments. The Bank currently operates in all the emirates. The government of Sharjah and Kuwait Finance House are major shareholders with 31 per cent and 20 per cent stakes, respectively.