Capital Intelligence (CI), an international credit rating agency, has affirmed QIIB’s financing strength rating (FSR) at ‘A’ with a “stable” outlook.
The long-term foreign currency rating (FCR) is affirmed at ‘A’, reflecting the support rating of ‘2’, which in turn derives from the strong government support that has been demonstrated for all banks in the Qatari system, most recently in the form of substantial injections of liquidity following the blockade.
The FSR reflects QIIB’s still fairly strong capital adequacy and good − albeit falling − profitability at the operating level. The bank’s established Islamic franchise also supports the FSR.
The rating, however, remains constrained by tight liquidity and by concentration risks, particularly to real estate, and by QIIB’s limited growth potential beyond the confines of what is a small market for retail business, although the new Moroccan venture adds opportunities in the medium term.
Although deposit based liquidity metrics tightened further in 2017, and the net liquid asset ratio has fallen even further to what was at end 2017 a very low level, the position is to some extent mitigated by what is a somewhat more comfortable net quasi-liquid asset ratio, it said.
As replacement long-term sukuk are planned to be issued this year, ratios in general and the net liquid asset ratio in particular should show improvement looking ahead, it said.
As funding was largely from domestic sources, direct impacts from the blockade were minimal, especially in view of the strong liquidity support from the government for the sector as a whole.
“The challenge for QIIB in 2018-19 in terms of liquidity is therefore to broaden and diversify its capital markets funding in order to alleviate what are currently rather tight (and tightening) liquidity ratios,” CI said.
With a strong capital position and still satisfactory profitability at the operating level, the other areas for attention will be asset quality in terms of reserve coverage, it added.
While the domestic economy will continue to grow, banks are expecting only modest loan growth in 2018 – somewhere in the 7%-8% range – so growth in net financial income may be again muted, the rating agency highlighted.
“This underlines the importance of boosting non-financing income (or stemming its downward trend) if gross income is to show significant growth,” it said.
The expense side of the profitability equation is under good control, and cost of credit was low (possibly too low) in 2017 so any significant improvement at the net level will have to be driven by improvement in income, CI stressed.
It said the low level of NPF (non-performing financing) reserve coverage is mitigated by the high effective coverage ratio (with the strong collateral position providing additional support), although CI would strongly welcome a rather higher level of NPF reserve coverage.
“The main concern therefore for this year will remain the liquidity metrics as these are the main area of vulnerability in QIIB’s financial profile – and the absence of what are the currently expected improvements could place ratings under added pressure,” it said.