Fitch Ratings has placed
The Short-Term IDR and Support Rating Floor (SRF) were also placed on RWN. QIB's Viability Rating (VR) has been affirmed at 'bbb'. A full list of rating actions is below.
The RWN reflects the Qatari banking sector's increasing reliance on external funding and recent rapid asset growth, which may have moderately weakened the sovereign's ability to provide support to the system, in case of need.
Key Rating Drivers
Non-resident funding reached
The 'A' SRF for Qatari domestic systemically important banks (D-SIB) is at the higher end of the typical range for D-SIB SRFs in jurisdictions where the sovereign is rated 'AA-' and in Fitch's view, reflects a high propensity to support the banking system.
Fitch will resolve the RWN following further analysis of the current composition and stability of Qatari banks' non-resident funding, the evolution of this funding in volumes and sources, banks' liquidity-management plans and the sovereign's ability to provide liquidity support to banks, in case of need. In case of a downgrade, QIB's Long-Term IDR and SRF are expected to remain in the 'A' category.
IDRs, SR and SRF
QIB's IDRs, Support Rating (SR) and SRF continue to reflect an extremely high probability of support from the Qatari authorities for domestic banks, if needed. This considers
QIB's Short-Term IDR of 'F1' is the lower of two options mapping to an 'A' Long-Term IDR, reflecting that a significant proportion of the banking sector's funding is government-related and a stress on QIB is likely to come at a time when the sovereign itself is experiencing some form of stress.
VR
The 'bbb' VR of QIB reflects its high exposure to
Fitch has revised the outlook on Qatari banks' operating environment to stable from negative as short-term downside risks from the pandemic fallout on banks' credit profiles have subsided. Fitch forecasts
We believe near-term risks to the sector's asset quality (end-1H21: average impaired Stage 3 (S3) loans ratio of about 2%) are largely contained - even after the expiry of the
QIB is the second-largest bank (end-2020: 10% of sector assets) and largest Islamic bank in
QIB's asset-quality metrics compare favourably with those of peers. We expect QIB's impaired financing ratio (end-1H21: 1.4%) to remain stable in 2021, given a recovery in the operating environment, limited deferred financing (1.9% of total financing) and large financing exposures to the highly rated Qatari government and government-related entities (GREs; 20%). However, the impaired financing ratio is sensitive to enduring pressures on the domestic real-estate and contracting sectors and the migration of Stage 2 (S2) financing (13.7%) to S3. The bank's total reserve coverage of impaired financing is conservative (end-1H21: 236%) and well above the sector average.
QIB's profitability (annualised operating profit/risk-weighted assets of 2.6% in 1H21) is superior to peers', owing to excellent cost efficiency (cost/income ratio: 17.6%) and a healthy net profit margin (3%). QIB's strong franchise helps to attract low-cost retail deposits (end-1H21: 38% of deposits), which ensures a lower cost of funding than peers'. Pre-impairment operating profit provides an adequate buffer to absorb rising financing impairment charges (1H21: 1.4% of average gross financing).
Capitalisation is adequate for the bank's level of risk and concentration. QIB's CET1 ratio (end-1H21: 14%) is in line with peers' and comfortably above the bank's regulatory minimum of 9.5% (including a 1% D-SIB buffer). We expect the CET1 ratio to remain stable, supported by solid internal capital generation, despite asset growth (of around 6%) and a return to higher dividends in 2021. Its capital adequacy ratio (end-1H21: 18.4%) was comfortably above its regulatory minimum requirement (14.5%), supported by additional Tier 1 capital of
Customer deposits were 78% of QIB's total funding at end-1H21, but with a moderately high dependence on non-resident deposits (24% of total deposits) and high funding concentrations (20- largest depositors: 33% of total deposits), which expose the bank to funding volatility. These risks are balanced against high deposits from the Qatari government and GREs (end-1H21: 29% of deposits), strong liquidity buffers and good market access. QIB's gross financing/deposits ratio was stable at 105% at end-1H21, broadly in line with the peer average.
In assessing the ratings of QIB, we considered important differences between Islamic and conventional banks. These factors include close 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.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRs and SRF
The IDRs and SRF could be downgraded and revised lower, respectively, if Fitch concludes that the Qatari authorities' ability to support the banking sector or the bank has moderately reduced as a result of the increase in external funding and the growth in system assets. In case of a downgrade, QIB's Long-Term IDR and SRF are likely to remain in the 'A' category.
A downgrade of the sovereign or a negative change in Fitch's assessment of the government's propensity to provide support could also result in a downgrade of QIB's IDRs and downward revision of the SRF.
VR
QIB's VR is primarily sensitive to a significant weakening in the operating environment, if this leads to asset quality and profitability deterioration or a weaker company profile. Materially weaker core capitalisation or a large increase in non-domestic funding could also put pressure on the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRs and SRF
QIB's IDRs and SRF could be affirmed at their current levels if Fitch concludes that the sovereign's ability to support the sector, and QIB in particular, has not materially reduced, notwithstanding the increase in external funding and system assets.
Rating upgrades are highly unlikely given the RWN on the ratings, their already high level relative to the sovereign's, and the Stable Outlook on the sovereign's ratings.
VR
Upside to the VR is unlikely at present unless the domestic operating environment further improves, the bank's company profile, profitability and capitalisation strengthen, and external funding risks lessen, while maintaining sound asset quality.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SPVs and SENIOR DEBT
The rating of senior long-term debt issued by QIB's special purpose vehicle (SPV),
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The senior long-term debt rating is sensitive to negative changes in QIB's Long-Term IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The senior long-term debt rating is sensitive to positive changes in QIB's Long-Term IDR.
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 '
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 QIB is linked to the Qatari sovereign IDR. QIB sukuk's long-term rating is driven by the bank's Long-Term IDR.
ESG Considerations
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 Relevance Score of '4' for Governance Structure for all Islamic banks including QIB (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 ESG Relevance Score of '3' for Exposure to Social Impacts (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.
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
RATING ACTIONSENTITY/DEBT RATING PRIOR
Qatar Islamic Bank (Q.P.S.C) LT IDR A Rating Watch On A
ST IDR F1 Rating Watch On F1
Viability bbb Affirmed bbb
Support 1 Affirmed 1
Support Floor A Rating Watch On A
senior unsecured
LT A Rating Watch On A
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
(C) 2021 Electronic News Publishing, source