Fitch Ratings has affirmed Qatar International Islamic Bank’s (QIIB) long-term issuer default rating (IDR) at ‘A-‘ with a stable outlook.
QIIB’s IDRs are support-driven and reflect Fitch’s opinion of an extremely high probability of support from the Qatari authorities if required. Support from the Qatar government for QIIB and the domestic banking sector has been clearly demonstrated in the recent past including significant capital injections and the purchase of equities and loan portfolios since 2008, following the global financial crisis. Fitch’s view of support also considers QIIB’s importance as one of the Islamic banks in the sector and the Qatari government being a shareholder in the bank with a 16.7% share.
QIIB’s Viability Rating (VR) is constrained by a relatively small and undiversified franchise combined with high sector and single name concentrations in financing (lending). Fitch believes that the bank’s new expansion strategy and reorganisation initiatives should put it in a stronger position to take advantage of opportunities arising from the government’s expansionary budget and numerous infrastructure projects.
The VR is sensitive to a material deterioration in asset quality although Fitch’s stress tests show that QIIB has a strong capital buffer which can withstand a sharp hike in impaired loans (NPLs). Following the repayment of a large problem loan, QIIB’s NPL ratio eased to 1.7% at end-2011 which is broadly in line with the sector average. Nevertheless, Fitch remains concerned about risk concentrations in financing. Specifically, QIIB’s high exposure to domestic real estate (56% of total financing at end-2011) and companies linked to prominent Qatari nationals, which also gives rise to potential corporate governance concerns.
The agency also highlights QIIB’s, as well as the entire banking sectors, rapid growth as a rating constraint as it puts considerable pressure on the bank’s operations including systems and risk management.
Fitch considers QIIB’s revenue generation to be weak reflecting its narrow franchise. Income from financing was flat in 2011 affected by subdued private sector growth and a low interest rate environment. Tighter Qatar Central Bank rules on retail banking also impacted revenue, although it was somewhat offset by a decline in the cost of funding. Furthermore, operating profitability is underpinned by a low cost base (cost/income ratio of 22%) and reducing impairment charges. Fitch expects profitability to increase rapidly as business volumes rise towards the end of 2012 as some of the larger government backed projects progress.
QIIB’s strong funding and liquidity position and capitalisation supports the VR at the current level. Customer deposits grew by 29% in 2011 sourced mostly from the retail segment. Large inter-bank balances and liquid investments, including an increasing Qatari government sukuk portfolio provide a strong buffer. QIIB is well capitalised with a Fitch core capital ratio of 21%.