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    QIBK   QA0006929853

QATAR ISLAMIC BANK (Q.P.S.C.)

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Qatar Islamic Bank Q P S C : Fitch Places Qatar Islamic Bank on Rating Watch Negative

10/22/2021 | 04:23am EDT

Fitch Ratings has placed Qatar Islamic Bank (Q.P.S.C.)'s (QIB) Long-Term Issuer Default Rating (IDR) of 'A' on Rating Watch Negative (RWN).

The Short-Term IDR and Support Rating Floor (SRF) were also placed on RWN. QIB's Viability Rating (VR) has been affirmed at 'bbb'. A full list of rating actions is below.

The RWN reflects the Qatari banking sector's increasing reliance on external funding and recent rapid asset growth, which may have moderately weakened the sovereign's ability to provide support to the system, in case of need.

Key Rating Drivers

Non-resident funding reached USD193 billion or 48% of the Qatari banking sector's liabilities at end-August 2021 (up from USD121 billion or 38% at end-2018), while banks' foreign assets remained broadly stable (USD60 billion at end-August 2021). As a result, the banking sector's net external debt at end-August 2021 increased to a substantial USD133 billion or 82% of forecast 2021 GDP (USD57 billion or 31% at end-2018). This high level of external funding, coupled with the large size of the banking system (total assets increased to 302% of forecast 2021 GDP at end-August 2021 from 212% at end-2018), could have moderately weakened the authorities' ability to support the banking sector, if needed, notwithstanding the substantial resources at the sovereign's disposal.

The 'A' SRF for Qatari domestic systemically important banks (D-SIB) is at the higher end of the typical range for D-SIB SRFs in jurisdictions where the sovereign is rated 'AA-' and in Fitch's view, reflects a high propensity to support the banking system.

Fitch will resolve the RWN following further analysis of the current composition and stability of Qatari banks' non-resident funding, the evolution of this funding in volumes and sources, banks' liquidity-management plans and the sovereign's ability to provide liquidity support to banks, in case of need. In case of a downgrade, QIB's Long-Term IDR and SRF are expected to remain in the 'A' category.

IDRs, SR and SRF

QIB's IDRs, Support Rating (SR) and SRF continue to reflect an extremely high probability of support from the Qatari authorities for domestic banks, if needed. This considers Qatar's still strong ability to support domestic banks, as reflected in the sovereign's 'AA-'/Stable rating and substantial net foreign assets (end-2020: equivalent to 187% of GDP) and revenues. It also reflects Fitch's view of a strong propensity to support the banking sector, including QIB, based on past episodes of support. These include in 2H17, when the authorities placed significant deposits with domestic banks to support sector liquidity, following the start of the blockade between Qatar and some of its neighbours, and between 2009 and 2011, when some banks received capital injections to enhance their capital buffers and the government purchased some problem assets from the banks. The government owns stakes in all Qatari banks.

QIB's Short-Term IDR of 'F1' is the lower of two options mapping to an 'A' Long-Term IDR, reflecting that a significant proportion of the banking sector's funding is government-related and a stress on QIB is likely to come at a time when the sovereign itself is experiencing some form of stress.

VR

The 'bbb' VR of QIB reflects its high exposure to Qatar's operating-environment risks, a strong company profile, which is underpinned by its leading domestic Islamic-banking franchise, sound asset quality, despite high financing concentration, and solid profitability. The VR also reflects QIB's adequate capitalisation and stable funding and liquidity.

Fitch has revised the outlook on Qatari banks' operating environment to stable from negative as short-term downside risks from the pandemic fallout on banks' credit profiles have subsided. Fitch forecasts Qatar's real GDP growth to rebound to 1.6% in 2021 (2022: 2.5%), following a 3.6% contraction in 2020, supported by higher hydrocarbon prices and the North Field LNG expansion. The sector's credit growth was a healthy 6.7% (annualised) in 1H21 (2020: 8.5%), despite capex cutbacks by the government.

We believe near-term risks to the sector's asset quality (end-1H21: average impaired Stage 3 (S3) loans ratio of about 2%) are largely contained - even after the expiry of the Qatar Central Bank's credit deferrals - and offset by the recovering operating environment and banks' strong provisioning levels (end-1H21: 140% average total reserve coverage of impaired loans). Qatari banks have adequate excess capital buffers (end-1H21: average common equity Tier 1 (CET1) of 14% against 8.5% regulatory minimum requirements) and healthy pre-impairment operating profitability offsetting a potential moderate increase in problem loans.

QIB is the second-largest bank (end-2020: 10% of sector assets) and largest Islamic bank in Qatar, accounting for around half of total Islamic-banking assets. Its operations are focused on Qatar (end-1H21: 92% of assets), which results in high financing concentration, given the Qatari economy's limited diversification. QIB's high exposure to the real-estate and contracting sectors (end-1H21: 23% of financing), which is in line with the sector average, exposes the bank to event risk.

QIB's asset-quality metrics compare favourably with those of peers. We expect QIB's impaired financing ratio (end-1H21: 1.4%) to remain stable in 2021, given a recovery in the operating environment, limited deferred financing (1.9% of total financing) and large financing exposures to the highly rated Qatari government and government-related entities (GREs; 20%). However, the impaired financing ratio is sensitive to enduring pressures on the domestic real-estate and contracting sectors and the migration of Stage 2 (S2) financing (13.7%) to S3. The bank's total reserve coverage of impaired financing is conservative (end-1H21: 236%) and well above the sector average.

QIB's profitability (annualised operating profit/risk-weighted assets of 2.6% in 1H21) is superior to peers', owing to excellent cost efficiency (cost/income ratio: 17.6%) and a healthy net profit margin (3%). QIB's strong franchise helps to attract low-cost retail deposits (end-1H21: 38% of deposits), which ensures a lower cost of funding than peers'. Pre-impairment operating profit provides an adequate buffer to absorb rising financing impairment charges (1H21: 1.4% of average gross financing).

Capitalisation is adequate for the bank's level of risk and concentration. QIB's CET1 ratio (end-1H21: 14%) is in line with peers' and comfortably above the bank's regulatory minimum of 9.5% (including a 1% D-SIB buffer). We expect the CET1 ratio to remain stable, supported by solid internal capital generation, despite asset growth (of around 6%) and a return to higher dividends in 2021. Its capital adequacy ratio (end-1H21: 18.4%) was comfortably above its regulatory minimum requirement (14.5%), supported by additional Tier 1 capital of QAR4 billion (17% of equity).

Customer deposits were 78% of QIB's total funding at end-1H21, but with a moderately high dependence on non-resident deposits (24% of total deposits) and high funding concentrations (20- largest depositors: 33% of total deposits), which expose the bank to funding volatility. These risks are balanced against high deposits from the Qatari government and GREs (end-1H21: 29% of deposits), strong liquidity buffers and good market access. QIB's gross financing/deposits ratio was stable at 105% at end-1H21, broadly in line with the peer average.

In assessing the ratings of QIB, we considered important differences between Islamic and conventional banks. These factors include close 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.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IDRs and SRF

The IDRs and SRF could be downgraded and revised lower, respectively, if Fitch concludes that the Qatari authorities' ability to support the banking sector or the bank has moderately reduced as a result of the increase in external funding and the growth in system assets. In case of a downgrade, QIB's Long-Term IDR and SRF are likely to remain in the 'A' category.

A downgrade of the sovereign or a negative change in Fitch's assessment of the government's propensity to provide support could also result in a downgrade of QIB's IDRs and downward revision of the SRF.

VR

QIB's VR is primarily sensitive to a significant weakening in the operating environment, if this leads to asset quality and profitability deterioration or a weaker company profile. Materially weaker core capitalisation or a large increase in non-domestic funding could also put pressure on the VR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

IDRs and SRF

QIB's IDRs and SRF could be affirmed at their current levels if Fitch concludes that the sovereign's ability to support the sector, and QIB in particular, has not materially reduced, notwithstanding the increase in external funding and system assets.

Rating upgrades are highly unlikely given the RWN on the ratings, their already high level relative to the sovereign's, and the Stable Outlook on the sovereign's ratings.

VR

Upside to the VR is unlikely at present unless the domestic operating environment further improves, the bank's company profile, profitability and capitalisation strengthen, and external funding risks lessen, while maintaining sound asset quality.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SPVs and SENIOR DEBT

The rating of senior long-term debt issued by QIB's special purpose vehicle (SPV), QIB Sukuk Ltd, is in line with the bank's Long-Term IDR because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPV as the same as the likelihood of default of the bank.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The senior long-term debt rating is sensitive to negative changes in QIB's Long-Term IDR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The senior long-term debt rating is sensitive to positive changes in QIB's Long-Term IDR.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The Long-Term IDR of QIB is linked to the Qatari sovereign IDR. QIB sukuk's long-term rating is driven by the bank's Long-Term IDR.

ESG Considerations

Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Relevance Score of '4' for Governance Structure for all Islamic banks including QIB (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the banks' credit profile, in combination with other factors.

In addition, Islamic banks have an ESG Relevance Score of '3' for Exposure to Social Impacts (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Qatar Islamic Bank (Q.P.S.C)	LT IDR	A 	Rating Watch On		A
	ST IDR	F1 	Rating Watch On		F1
	Viability	bbb 	Affirmed		bbb
	Support	1 	Affirmed		1
	Support Floor	A 	Rating Watch On		A

QIB Sukuk Ltd

senior unsecured

LT	A 	Rating Watch On		A

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2021 Electronic News Publishing, source ENP Newswire

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Financials
Sales 2022 6 307 M 1 732 M 1 732 M
Net income 2022 3 811 M 1 047 M 1 047 M
Net Debt 2022 - - -
P/E ratio 2022 15,2x
Yield 2022 2,94%
Capitalization 58 742 M 16 136 M 16 136 M
Capi. / Sales 2022 9,31x
Capi. / Sales 2023 8,34x
Nbr of Employees 998
Free-Float 76,1%
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Technical analysis trends QATAR ISLAMIC BANK (Q.P.S.C.)
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Income Statement Evolution
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Mean consensus OUTPERFORM
Number of Analysts 6
Last Close Price 24,25 QAR
Average target price 24,18 QAR
Spread / Average Target -0,29%
EPS Revisions
Managers and Directors
Bassel Gamaludin Mohamed Ali Group Chief Executive Officer
Gourang Hemani Chief Financial Officer
Jassim Hamad Jassim Jabr Al-Thani Chairman
Saleem Ul Haq Chief Operating Officer
Mohammad Issa Hamad Al-Hassan Al-Mohannadi Vice Chairman