April 12, 2012 / 1:45 PM / 5 years ago

TEXT-S&P rates Qatar Islamic Bank 'A-/A-2'

9 Min Read

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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