TEXT-S&P rates Qatar Islamic Bank 'A-/A-2'
April 12 - Overview -- We are assigning our 'A-/A-2' long- and short-term counterparty credit ratings to Qatar Islamic Bank (S.A.Q.) (QIB). -- Our ratings on QIB reflect our 'bbb' anchor for a commercial bank operating in the State of Qatar, and our view of the bank's adequate business position, strong capital and earnings, weak risk position, average funding, and adequate liquidity. -- The long-term rating also benefits from three notches of uplift, reflecting our view of the high likelihood of extraordinary government support for QIB if needed. -- The stable outlook reflects our expectation that QIB will remain an important player in Qatar, with no significant change in its business and financial profiles over the next 12 to 24 months. Rating Action On April 12, 2012, Standard & Poor's Ratings Services assigned its 'A-' long-term and 'A-2' short-term counterparty credit ratings to Qatar Islamic Bank (S.A.Q.) (QIB). The outlook on the long-term rating is stable. Rationale The ratings on QIB factor in our 'bbb' anchor for banks operating in Qatar and our view of the bank's "adequate" business position, "strong" capital and earnings, "weak" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. We assess QIB's stand-alone credit profile (SACP) at 'bbb-'. The long-term rating also benefits from three notches of uplift, reflecting our view of the "high" likelihood of extraordinary government support for QIB if needed. Our bank criteria use the Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating in Qatar is 'bbb', based on an economic risk score of '4' and an industry risk score of '5'. We view the Qatari economy as having strong momentum but being dependent on oil and liquefied natural gas (LNG) production, and large infrastructure development programs. With regard to industry risk, the banking industry is underpinned by a high and stable share of core deposits, strong efficiency, and recently more stringent lending practices. However, Qatari banks' risk appetite is high in our view, given rapid growth in assets, high exposure to real estate lending, and the banks' ambitious expansion abroad. We view QIB's business position as "adequate." Our assessment reflects the bank's leading position in the fast-growing Qatari Islamic banking segment, simple and predictable business model, and adequate management. At the same time, the bank shows limited business and geographic diversification and pursues an aggressive growth strategy. Established in 1982, QIB is the oldest Islamic bank in Qatar and the third-largest bank, with total assets of $16 billion on Dec. 31, 2011. Between 2007 and 2011, QIB's lending market share improved from 5.9% to 7.3% and its deposit market share from 5.5% to 7.6%. The Qatar Investment Authority (QIA), the country's wealth fund, currently holds 20.8% of the bank's share capital. QIB is predominantly a corporate bank, with retail lending constituting less than 15% of its loan book in 2011. The bank's revenues are largely driven by its lending business with very limited contribution from trading or market-dependent transactions. The lending book is predominantly domestic, and therefore directly tied to the domestic environment in Qatar, including the real estate sector. We assess QIB's capital and earnings as "strong." Our risk-adjusted capital (RAC) ratio before adjustments for QIB, based on 2011 financial statements, stood at an estimated 15.1%. We expect the bank to register strong loan growth and believe its operating margins should largely remain stable, enabling the bank to continue to operate with healthy internal capital generation. However, we expect the dividend payout to remain high, albeit lower than previous levels. The bank paid 67% and 78% of its earnings in the form of dividends in 2010 and 2011, respectively. Coupled with strong balance sheet growth, we anticipate a gradual decline in the bank's capitalization. Therefore, we project that our RAC ratio before adjustments for QIB will stand between 13.5% and 14.0% in the next 18 to 24 months. We expect QIB's pre-provision earnings generation to remain healthy in the coming years, and anticipate an earnings buffer ratio of about 100 basis points. Our risk position assessment for QIB is "weak." QIB has high single-party and industry concentration and a large real estate and construction book, a usual feature for Qatari banks. This results from the economy's small size and high concentration in few economic sectors. Top 20 corporate exposures constituted around 40% of the bank's lending book and more than 100% of its total adjusted capital as of Dec. 31, 2011. Although the level of its nonperforming loans (NPLs) is low at about 1.2% of total loans on the same date, given high concentration levels, a sharp deterioration in Qatar's real estate sector would result in a major acceleration of defaults, in our view. QIB's rapidly increasing loan portfolio, which we include in our projections, is another negative factor in our assessment. We consider QIB's funding as "average" and its liquidity "adequate." The bank's loan-to-deposit ratio stood at 107% at year-end 2011, largely in line with the 111% average for the Qatari banking system. The bank enjoys large noninterest-bearing funds in the form of current accounts, which represent about one-third of its deposit base. QIB's only wholesale long-term debt is a $750 million sukuk maturing in 2015. The bank operates with adequate liquidity metrics and held about 15% of its assets in cash and interbank deposits at year-end 2011. QIB also held Qatari riyal (QAR) 10.3 billion (equivalent to $2.8 billion) in Qatari government sukuk, which it can use to create additional liquidity. The long-term rating on QIB is three notches higher than the SACP, reflecting our view of the "high" likelihood of extraordinary government support for QIB if needed. We consider QIB to be of "high" systemic importance in Qatar and the Qatari government (State of Qatar; AA/Stable/A-1+) to be "highly supportive" toward its banking sector. Outlook The stable outlook reflects our expectation that QIB will remain an important player in Qatar, with no significant change in its business and financial profiles over the next 12 to 24 months. We expect strong balance sheet growth accompanied by continued high dividend payouts. We nevertheless anticipate that QIB's capital and earnings will remain strong, as we project that QIB's RAC ratio before adjustments will remain between 13.5% and 14% in the next 18 to 24 months. We would lower the ratings on QIB if we perceived a deterioration in its business position owing to a continued increase in competition. However, this scenario seems unlikely in light of recent favorable regulation on Islamic banking. Similarly, if we were to see an unexpected deterioration in QIB's funding or liquidity profile, we would lower our SACP and ratings on QIB. A positive rating action, although quite remote at this stage, would likely result from an improvement in our assessment of the bank's risk position from "weak" to "moderate" in the case of major reduction in the bank's exposure to real estate and less aggressive asset growth. Ratings Score Snapshot Issuer Credit Rating A-/Stable/A-2 SACP bbb- Anchor bbb Business Position Adequate (0) Capital and Earnings Strong (1) Risk Position Weak (-2) Funding and Liquidity Average and Adequate (0) Support 3 GRE Support 0 Group Support 0 Sovereign Support 3 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Ratings List New Rating Qatar Islamic Bank (S.A.Q) Counterparty Credit Rating A-/Stable/A-2
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