QATAR ISLAMIC BANK (Q.P.S.C.)
Fitch Ratings has affirmed
QIB's Viability Rating (VR) has also been affirmed at 'bbb'. A full list of rating actions is below.
Key Rating Drivers
QIB's IDRs are based on potential support from the Qatari authorities, if needed. Its Short-Term IDR of 'F2' is the lower of two options mapping to an 'A-' Long-Term IDR because a significant proportion of the banking sector's funding is government-related and financial stress at QIB is likely to come at a time when the sovereign itself is experiencing some form of stress.
QIB's VR reflects the bank's high exposure to
Government Support Rating (GSR) of 'a-': The Qatari authorities have a strong propensity to support domestic banks, irrespective of their size or ownership. They also have a strong ability to do so, as indicated by the sovereign rating (AA-/Stable) and substantial net foreign assets and revenue, albeit weakened by the Qatari banking sector's high reliance on external funding and recent rapid asset growth.
Strengthened Operating Environment: High hydrocarbon prices support the strengthening of the operating environment for Qatari banks. The 2022 FIFA World Cup and higher private-sector demand from improving business sentiment also underpin this trend.
Leading Domestic Islamic Bank: QIB is the second-largest bank (end-1H22: 10% of sector assets) and the largest Islamic bank in
High Concentration Risk: QIB exhibits high financing concentration risks given the Qatari economy's limited diversification. QIB's high exposure to the real-estate and construction sectors, though in line with the sector average, exposes the bank to event risks.
Strong Asset Quality: QIB's asset-quality metrics compare favourably with peers'. Fitch expects QIB's impaired financing ratio to remain stable in 2022, supported by a strengthening operating environment. However, it remains sensitive to pressures in the domestic real-estate and construction sectors. The bank's total reserve coverage of impaired financing is very strong (end-1H22: 290%) and well above the sector average, which provides protection against potential asset-quality deterioration.
Solid Profitability: QIB's profitability is solid and superior to most domestic peers' owing to excellent cost efficiency and a healthy net financing margin (NFM). QIB's strong franchise helps attract low-cost retail deposits (end-1H22: 40% of deposits) and ensures a low cost of funding.
Adequate Capitalisation: QIB's capitalisation is adequate for the bank's level of risk and concentration. QIB's common equity Tier 1 (CET1; end-1H22: 14.4%) compares well with most peers' and is comfortably above the bank's regulatory minimum of 9% (including a 0.5% domestic systemically important bank buffer). We expect the CET1 ratio to remain stable, supported by solid internal capital generation and modest growth. Its capital adequacy ratio is supported by additional Tier 1 capital.
Stable Funding and Liquidity: Customer deposits were 77% of QIB's total funding at end-1H22, but a moderately high dependence on non-resident deposits and high funding concentration (20-largest depositors: 35% of the total) expose it to funding volatility. These risks are balanced by high deposits from the government and government-related entities (end-1H22: 29% of deposits), strong liquidity buffers and good market access. QIB's gross financing/deposits, as calculated by Fitch, fell to 102% by end-1H22 (end-2020: 105%) on higher government deposits in 2021 and muted growth in 1H22.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the sovereign or a negative change in Fitch's assessment of the government's propensity to provide support would likely result in a downgrade of QIB's GSR and IDR.
Materially weaker core capitalisation, reflected by a CET1 ratio below 13%, or a large increase in non-domestic funding could lead to a VR downgrade. Weakening asset quality or profitability could also lead to a VR downgrade, in particular if the impaired financing ratio exceeds 4% on a sustained basis, or operating profit is sustainably below 1.5% of risk-weighted assets (RWAs).
Factors that could, individually or collectively, lead to positive rating action/upgrade:
QIB's GSR and IDR could be upgraded if Fitch views that the sovereign's ability to support the sector strengthens, either through a sovereign upgrade or through a substantial reduction in external funding and system assets relative to GDP.
Upside to the VR is unlikely unless the domestic operating environment improves further, 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
The rating of senior long-term sukuk issued by QIB's special purpose vehicle (SPV),
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The sukuk certificates are subject to the same rating sensitivities as the bank's IDR.
VR ADJUSTMENTS
The operating environment score of 'bbb' is below the 'aa' category implied score due to the following adjustment reasons: size and structure of economy (negative), financial market development (negative) and regulatory and legal framework (negative).
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's 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 certain sharia limitations being embedded in Islamic banks' 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.
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