Islamic Finance 

Fitch Affirms Qatar International Islamic Bank’s IDR at ’A’/Stable

| 14 March, 2019

Fitch Ratings-London-14 March 2019: Fitch Ratings has affirmed Qatar International Islamic Bank's (QIIB) Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook. It has also affirmed QIIB's Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this Rating Action Commentary. 

KEY RATING DRIVERS 
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
QIIB's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect Fitch's expectation of an extremely high probability of support from the Qatari authorities for domestic banks in case of need. This reflects Qatar's strong ability to support its banks, as indicated by the sovereign's rating (AA-/Stable), combined with Fitch's belief of a strong willingness to support the banking sector and the bank. The latter is based on a strong record of sovereign support to the banking sector including i) between 2009 and 1Q11 when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks and ii) during 2H17 when the Qatari authorities placed significant deposits across the banks to support sector liquidity following the start of the blockade between Qatar and some of its neighbours. The government owns stakes in all Qatari banks.

The government has demonstrated a strong commitment to its banks and key public sector companies. The sovereign's capacity to support the banking system is sustained by significant sovereign reserves and revenue, mostly from hydrocarbon production, despite lower oil prices.

QIIB's SRF is at the Qatari bank's domestic systemically important bank (D-SIB) SRF of 'A', and is not differentiated by franchise or level of government ownership because we see an extremely high probability that all rated Qatari banks would receive support should they require it. This belief also partly reflects the risk of contagion (small number of banks and high concentration of banks in the system) and the importance of the banking system in building the local economy.

The Stable Outlook on QIIB's Long-Term IDR mirrors that on the Qatari sovereign. 

SPVs AND SENIOR DEBT 
The ratings of debt issued by QIIB's special purpose vehicle (SPV) are in line with the parent's Long- or Short-Term IDRs because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPV the same as the likelihood of the default of the bank.

VR 
The 'bb+' VR of QIIB reflects its narrow franchise (about 3.5% market share by total assets at end-2018) and high sector and single-obligor concentrations. However, QIIB records higher market shares in the Islamic banking segment in Qatar and has a particularly stronger franchise in the retail segment. It also factors in sound asset-quality metrics, adequate capital, strong profitability and a sound funding and liquidity profile.

QIIB generally records sound asset-quality metrics. However, the bank's impaired financing ratio increased to 2.1% at end-2018 following large financing contraction (by 15% in 2018; mainly due to the repayment of a government facility) and due to some asset-quality deterioration. Nevertheless, this ratio compares reasonably with peers'. QIIB's financing book remains highly concentrated by borrower, with the 20 largest exposures amounting to 2.5x Fitch Core Capital (FCC) at end-2018, which exposes the bank to event risk. However, this has decreased from 3.1x FCC at end-2017, but still remains high. 

Concentration by sector is also high as real estate and contracting financing accounted for 32% of the bank's portfolio - although, the loans to these sectors fell in nominal terms in 2018 and the bank plans to continue to deleverage in this space. Reserve coverage of impaired financing increased in 2018 with IFRS 9 implementation (92% at end-2018), but still compares weakly with most peers'. 

Capitalisation is adequate and compares reasonably with peers' with the bank recording a FCC/risk-weighted assets (RWAs) ratio of 15.4% at end-2018. Capital ratios, however, should be viewed in the context of high financing concentrations and the small absolute size of equity relative to peers'. QIIB's total capital ratio of 16.4% at end-2018 was adequately above the bank's minimum capital ratio of 13.5% (including all buffers). 

QIIB consistently demonstrates strong profitability metrics, although operating profit fell slightly relative to RWAs in 2018 to 2.3% (2017: 2.5%) due to increased impairments and higher RWAs. The bank's profitability is generally supported by fairly low impairment charges and sound cost efficiency. Financing margins have remained stable since 2017 despite increased funding costs reflecting the bank's repricing efforts. 

QIIB's funding and liquidity profile is sound, supported by one of the lowest financing/deposits ratios in Qatar (90% at end-2018). Liquid assets (comprising cash (net of reserves), bank advances and securities) were a high 58% of deposits at end-2018. The amount of non-domestic funding (7% of total non-equity funding at end-2018; nearly all bank borrowings) is only moderate, which reduces refinancing risk. 

RATING SENSITIVITIES
[IDR, SR AND SRF 
QIIB's IDRs, SR and SRF are sensitive to a change in Fitch's assumptions around the Qatari authorities' propensity or ability to provide timely support to the banking sector or to QIIB. A downgrade of the sovereign would result in a downgrade of QIIB's IDRs.

VR 
A marked weakening in the operating environment would weaken QIIB's risk profile, as for all Qatari banks. In addition, a significant weakening in QIIB's asset quality, which could put pressure on profitability and capital, would put downward pressure on the VR. 
QIIB's VR could be upgraded if the bank strengthens its franchise or continues to reduce borrower and sector concentrations, which are the main constraints to the VR.

The rating actions are as follows:

QIIB
Long-Term Issuer Default Rating: affirmed at 'A'; Stable Outlook 
Short-Term Issuer Default Rating: affirmed at 'F1'
Viability Rating: affirmed at 'bb+' 
Support Rating: affirmed at '1' 
Support Rating Floor: affirmed at 'A'

QIIB Senior Sukuk Limited
Senior unsecured trust certificate programme: affirmed at 'A'/'F1'

In assessing the ratings of QIIB, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.

Media Relations Contact: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@fitchratings.com

Additional information is available on www.fitchratings.com
Applicable Criteria 
Bank Rating Criteria (pub. 12 Oct 2018)
Sukuk Rating Criteria (pub. 25 Jul 2018)

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