Capital Intelligence (CI), a global credit rating agency, has affirmed QIIB’s financial strength rating (FSR) at ‘A-’ with a ‘stable’ outlook, factoring in the bank’s very strong capital adequacy and good profitability at the operating level.
The bank’s established Islamic franchise also supports the FSR and the long-term foreign currency rating (FCR) has been raised to ‘A’, on a ‘stable’ outlook, reflecting the government’s demonstrated strong support for the banking system in the country.
The rating remains constrained by tight liquidity and by concentration risks, particularly to the housing sector and to realty, but in terms of capital, QIIB — the third largest lender by both total assets and market capitalisation — is well placed although it may possibly add AT-1 (additional Tier-I) funds in the second half of this year or early in 2018, CI said.
Although some deposit based liquidity metrics tightened in 2016 and the net liquid asset ratio has fallen to a very low level (due to previously medium-term sukuk liabilities becoming short-term), the position is to some extent mitigated by “what is a somewhat more comfortable net quasi-liquid asset ratio,” it said.
The long-term FCR and the affirmed short-term FCR of ‘A2’ are also based on the bank’s intrinsic financial strength, it said, adding the support rating has been affirmed at ‘2’.
“For the ratings to rise, the bank should be seen to sustain or improve profitability at the operating level, while also both significantly improving both liquidity and asset quality, without any significant weakening of capital adequacy,” CI said.
The bank’s non-performing financings (NPFs) continued to increase — albeit at a more moderate pace, although the NPF ratio still remains below the peer group average, it said.
QIIB’s diversification strategy has been gradually bringing about a more balanced business profile with a higher share of the government and small and medium enterprises business, even as the economic headwinds have been intensifying and this could impact financing growth and therefore growth in gross income, according to the rating agency.
Finding that while loss reserve coverage is not yet full, there is now 100% coverage for the large contractor exposure that became non-performing in 2015, it said in the meantime, the effective coverage ratio is expected to remain “very strong”.
“The main concern therefore for this year will be the liquidity metrics as these are the main area of vulnerability in QIIB’s financial profile — and any further tightening could place the ratings under pressure,” CI said.