Fitch Ratings has placed Qatar International Islamic Bank's (QIIB) Long-Term Issuer Default Rating (IDR) of 'A' on Rating Watch Negative (RWN).

The Short-Term IDR and the Support Rating Floor (SRF) were also placed on RWN. QIIB's Viability Rating (VR) has been affirmed at 'bb+'.

A full list of rating actions is provided below.

The RWN reflects the Qatari banking sector's increasing reliance on external funding and the 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 USD193 billion or 48% of the Qatari banking sector's liabilities at end-August 2021 (up from USD121 billion or 38% at end-2018), while banks' foreign assets remained broadly stable (USD60 billion at end-August). As a result, the banking sector's net external debt at end-August 2021 increased to a substantial USD133 billion or 82% of forecast 2021 GDP (USD57 billion or 31% at end-2018). This high-level of external funding, coupled with the large size of the banking system (total assets increased to 302% of forecast 2021 GDP at end-August 2021 from 212% at end-2018), could have moderately weakened the authorities' ability to support the banking sector, if needed, notwithstanding the substantial resources at the sovereign's disposal.

The 'A' domestic systemically important bank (D-SIB) SRF for Qatari banks 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, QIIB's Long-Term IDR and SRF, are expected to remain in the 'A' category.

IDRS, SR and SRF

QIIB'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 Qatar's still strong ability to support domestic banks, as reflected in the sovereign's 'AA-'/Stable rating and substantial net foreign assets (end-2020: equivalent to 187% of GDP) and revenues. It also reflects Fitch's view of a strong propensity to support the banking sector, including QIIB, based on past episodes of support. These include in 2H17, when the authorities placed significant deposits with banks to support sector liquidity, following the start of the blockade between Qatar and some of its neighbours, and between 2009 and 2011, when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks. The government owns stakes in all Qatari banks.

QIIB'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 QIIB is likely to come at a time when the sovereign itself is experiencing some form of stress.

VR

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 Qatar's real GDP growth to rebound to 1.6% in 2021 (2022: 2.5%), following a 3.6% contraction in 2020, supported by higher hydrocarbon prices and the North Field LNG expansion. The sector's credit growth was a healthy 6.7% (annualised) in 1H21 (2020: 8.5%), despite capex cutbacks by the government.

We believe the near-term risks to the sector's asset quality (end-1H21: average Stage 3 loans ratio of about 2%) are largely contained - even after the expiry of the Qatar Central Bank's credit deferrals - and offset by the recovering operating environment and banks' strong provisioning levels (end-1H21: 140% average total reserve coverage of impaired loans). Qatari banks have adequate excess capital buffers (end-1H21: average common equity Tier 1 (CET1) ratio of 14% against 8.5% minimum regulatory requirements) and healthy pre-impairment operating profitability offsetting a potential moderate increase in problem loans.

QIIB is the smallest of four Islamic banks in Qatar, with about a 14% market share of Islamic banks' assets. By total banking assets, QIIB's market share is lower at around 4%. Its 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 sound asset quality, solid profitability, but high financing concentrations 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. It has reduced its real-estate and contracting exposures, but financing to these linked sectors was still high at 26% of total financing at end-1H21, albeit down from 32% at end-2018. QIIB's 20-largest financing exposures were a high 4.2x equity at end-1H21, and a significant proportion was to government-related entities (GREs).

QIIB's asset-quality metrics remains sound. The Stage 3 financing ratio remained stable at 1.7% at end-1H21. However, it could increase after the expiry of the QCB forbearance measures and as the financing book seasons, after a 32% financing growth in 2019 and an additional 10% growth in 2020. The Stage 2 financing ratio was 9% at end-1H21, comparing well against peers'. Total financing loss allowances increased to 145% of impaired financing at end-1H21 (end-2019: 94%), which is conservative, in our view.

QIIB's profitability metrics are strong compared with peers', given higher margins, lower financing impairment charges (FICs) and better cost efficiency. The net financing margin improved to 2.7% in 1H21 (2.5% in 2019), supported by lower cost of funding than peers', given the bank's higher portion of retail financing. Annualised operating profit/risk-weighted assets (RWAs) improved to 2.6% in 1H21 (2% in 2020), supported by lower FICs and flat RWAs.

QIIB has adequate capital buffers. The CET1 ratio declined to 11.2% at end-2020 (13% at end-2018), due to high financing growth and dividend pay-outs (69% of 2019 net income) weighing on the bank's internal capital generation. The CET1 ratio improved to 11.9% at end-1H21, due to the inclusion of 2020 retained profits and stable RWAs. QIIB's solid Tier 1 capital ratio and total capital adequacy ratio (CAR) of 16.3% and 17.3% at end-1H21, respectively, were well above regulatory minimum requirements 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). Customer deposits are largely made up of domestic retail deposits (61% of total deposits at end-1H21) and deposits by the government and GREs (26%). Reliance on non-resident deposits is lower than peers', accounting for 7% of total deposits at end-1H21.Total non-resident funding (including wholesale funding) represented around 12% of the bank's total liabilities at end-1H21. Concentration in the deposit base compares well with local peers', due to a higher portion of more granular retail deposits. The 20-largest deposits were 33% of total deposits at end-1H21.

QIIB has healthy liquidity. The gross financing-to-deposits ratio dropped to 107% at end-1H21 (114% at end-2020), due to flat financing growth and an increase in customer deposits. Cash balances less mandatory reserves, interbank placements and sovereign investment securities covered 44% of total deposits at end-1H21. This drops to 14% if interbank borrowings are deducted from liquid assets, given the bank's fairly high portion of short-term interbank funding (22% at end-1H21). The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) ratios were comfortably above the minimum 100% regulatory requirement at end-1H21.

In assessing the ratings of QIIB, 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.

The ratings of senior debt issued by QIIB's special purpose vehicle (SPV) are in line with the bank'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 a default by the bank.

Rating Sensitivities

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

IDRs, SR, SRF

The IDRs and SRF could be downgraded 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, QIIB'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 QIIB's IDRs and downward revision of the SRF.

VR

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.

SPVs and Senior Debt

The ratings of debt issued by the SPV are sensitive to adverse changes to the bank's IDRs.

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

IDRs, SR, SRF

QIIB's IDRs and SRF could be affirmed at their current levels if Fitch concludes that the sovereign's ability to support the sector, 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

QIIB's VR could be upgraded with a longer record of moderate loan growth and continued reduction in related-party lending and concentration to the real-estate and contracting sectors. The VR may also be upgraded with improved capital ratios and buffers above the minimum regulatory requirements, which have been declining since 2016.

SPVs and Senior Debt

The ratings of debt issued by the SPV are sensitive to positive changes in the bank's 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

QIIB's IDRs are driven by sovereign support. The ratings of the issuance under the SPV are driven by the ratings of QIIB.

ESG Considerations

QIIB has an ESG Relevance Score of '4' for Governance Structure due to its Islamic-banking nature (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. As an Islamic bank, QIIB needs to ensure compliance of its entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit.

In addition, QIIB has a Relevance Score of '3' for Exposure to Social Impact (in contrast to a typical ESG Relevance Score of '2' for comparable conventional banks). This reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although it 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.

Additional information is available on www.fitchratings.com

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Qatar International Islamic Bank (Q.P.S.C.)	LT IDR	A 	Rating Watch On		A
	ST IDR	F1 	Rating Watch On		F1
	Viability	bb+ 	Affirmed		bb+
	Support	1 	Affirmed		1
	Support Floor	A 	Rating Watch On		A

QIIB Senior Sukuk Limited

senior unsecured

LT	A 	Rating Watch On		A

senior unsecured

ST	F1 	Rating Watch On		F1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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