QATAR INTERNATIONAL ISLAMIC BANK (Q.P.S.C)
Fitch Ratings has affirmed
QIIB's Viability Rating (VR) has also been affirmed at 'bb+'. A full list of rating actions is below.
Key Rating Drivers
QIIB's IDRs are based on potential support from the Qatari authorities. 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 QIIB is likely to come at a time when the sovereign itself is experiencing some form of stress. The Positive Outlook on the IDR reflects that on the sovereign.
QIIB's VR reflects its fairly small, albeit established, Islamic banking franchise in
Government Support Rating (GSR) of 'a-': The Qatari authorities have a strong propensity to support domestic banks, irrespective of the banks' size or ownership. They also have a strong ability to do so, as indicated by the sovereign rating (AA-/Positive) and substantial net foreign assets and revenue, although this is weakened by the Qatari banking sector's high reliance on external funding and recent rapid asset growth.
Stable Domestic Operating Environment: High hydrocarbon prices continue to support Qatari banks' domestic operating environment.
High Concentration Risk: QIIB's financing book is highly concentrated by borrower and sector. QIIB has deleveraged in real estate and contracting since 2018, but exposure to these sectors is still high (27% of financing at end-1H23) and at the higher end of the Qatari banking sector's.
Sound Asset Quality: The bank's Stage 3 financing ratio stabilised at 2.8% at end-1H23 (end-2022: 2.8%; end-2021: 2.6%) despite a contracting financing book in 2022. Total reserve coverage of Stage 3 financing strengthened to a high 165% at end-1H23 (end-2022: 155%) due to ample provisioning of the financing book.
Solid Profitability: QIIB's profitability metrics are stronger than its direct peers' owing to its high margins and good cost management. These have strengthened since 2021 with an improvement in the operating environment. Annualised operating profit of risk-weighted assets (RWAs) increased to 2.5% in 6M23 from 2.2% in 2022, supported by higher net financing margin and contained impairment charges.
Only Adequate Capitalisation: QIIB's common equity Tier (CET1) ratio of 12% at end-1H23 is only adequate in light of its high concentration risks. Nevertheless, capital ratios benefit from the bank's healthy internal capital generation and remain well above regulatory minimums. We expect a moderate increase of the CET1 ratio in near term, supported by reasonable internal capital generation and modest growth.
Stable Funding: QIIB is primarily funded by customer deposits, which are largely sourced from retail (66% of total deposits at end-1H23) and government and government-related corporate customers (25%). Concentration in the deposit base is lower than local peers' due to a high portion of retail deposits.
Reliance on external funding is also lower than peers'. QIIB's gross financing/customer deposits increased to 103% at end-1H23 (end-2022: 100%) as financing growth rebounded. Liquidity is supported by a large stock of liquid assets.
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 QIIB' GSR and IDR. However, a sovereign downgrade is unlikely, given the Positive Outlook on the sovereign.
A VR downgrade could come from a material weakening in asset quality and earnings, or unexpected rapid growth that erodes the bank's capital ratios, in particular if the bank's CET1 ratio goes below 10.5%.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
QIIB's GSR and IDR could be upgraded if Fitch believes that the sovereign's ability to support the sector has strengthened, either through a sovereign upgrade or through a substantial reduction in external funding and system assets relative to GDP.
QIIB's VR could be upgraded with improved capital ratios, in particular if the CET1 ratio exceeds 13% on a sustained basis.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The ratings of senior unsecured sukuk certificates issued by QIIB's special-purpose vehicle (SPV),
QIIB's Long-Term IDR (xgs) is at the level of the VR. The Short-Term IDR (xgs) is mapped to the bank's Long-Term IDR (xgs).
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The sukuk certificates are subject to the same sensitivities as the bank's IDRs.
QIIB's Long-Term IDR (xgs) would mirror changes to its VR. A downgrade of QIIB's Short-Term IDR (xgs) could come from a multi-notch downgrade of its Long-Term IDR (xgs), which is unlikely. An upgrade of QIIB's Short-Term IDR (xgs) could come from an upgrade of its Long-Term IDR (xgs).
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 the economy (negative), financial market development (negative) and the regulatory and legal framework (negative).
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 linked to the Qatari sovereign ratings.
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 QIIB (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profile, and is relevant to the ratings 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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