Qatari Islamic banks are looking at overseas expansion (including in Morocco and in the UK) as part of strategy to achieve faster growth, improved funding costs and funding diversification, according to Fitch, an international credit rating agency.
However, expansion abroad could bring additional risks for the Islamic banks, whose asset quality metrics remains stronger than their conventional peers, the rating agency said in a report.
Qatar's Shariah-compliant lenders also have less foreign funding and typically higher retail deposits and are, therefore, less at risk of deposit flight, Fitch said, adding "profitability (in the Islamic banks) improved slightly in H1, 2019".
The average impaired financing ratio was significantly lower for Islamic banks compared with their conventional peers at end of H1, 2019.
This is largely attributable to the two largest Islamic banks having ratios of around 1%, and two conventional banks having much higher ratios. However, these ratios for all banks do not include an increasing volume of restructured financing, according to the report.
Islamic banks' profitability metrics remained healthy in the first half of this year but the average operating profit/risk-weighted assets ratio is higher at conventional banks, it said, adding cost efficiency remains "strong".
Islamic banks have less foreign and wholesale funding and higher portions of retail deposits than conventional peers and, therefore, less funding pressures.
The Qatar Central Bank (QCB) auctioned QR8.8bn of government sukuk in 2018 with various tenures; this provides a structural improvement in liquidity management for Islamic banks.
Qatari Islamic banks' capital ratios were slightly better than conventional peers' at the end of H1 2019, although the difference has narrowed, Fitch said, adding the Islamic banks' ratios benefit from slower financing growth and "reasonable" internal capital generation, and are adequate for the banks' risk profiles.
Highlighting that the QCB does not allow Islamic windows at conventional banks, Fitch said, therefore, Islamic banking assets are concentrated at four Islamic banks that made up 22% of sector assets at end-2018.
Barwa Bank's takeover of International Bank of Qatar (a conventional bank) and the conversion of the latter's assets to Islamic will increase the portion of Islamic assets in the sector, Fitch added.