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.
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.
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
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.
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
Business Position Adequate (0)
Capital and Earnings Strong (1)
Risk Position Weak (-2)
Funding and Liquidity Average and Adequate (0)
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
Qatar Islamic Bank (S.A.Q)
Counterparty Credit Rating A-/Stable/A-2