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Rating Action:

Moody's upgrades Qatar International Islamic Bank issuer ratings and changes outlook to stable

11 May 2015

London, 11 May 2015 -- Moody's Investors Service has today upgraded Qatar International Islamic Bank's (QIIB) long term and short term issuer rating to A2/Prime-1 from A3/Prime-2, and changed baseline credit assessment (BCA) and adj. BCA to baa3 from ba1. Moody's also changed the outlook on the bank's long term ratings to stable. At the same time, Moody's assigned a new Counterparty Risk Assessment of A1 to QIIB.

Moody's rating action reflects QIIB's improved and consistently strong asset quality performance and its solid capitalisation, liquidity and funding profile. These strengths are moderated by high borrower and sector concentrations, risk management challenges stemming from rapid financing growth and margin pressures driving a modest decline in profitability.

A list of the affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR UPGRADE

-- IMPROVED AND CONSISTENTLY SOLID ASSET QUALITY PERFORMANCE SUPPORTED BY STRONG ISLAMIC RETAIL BUSINESS

Moody's rating action also takes into account QIIB's improved and consistently strong asset quality performance. The bank's Moody's adjusted non-performing financing (NPF) ratio has declined to around 1% as of December 2014, down from a peak of around 4% as of December 2010. These strong asset-quality metrics compare favourably with the 1.6% Qatari system average and 2.4% median for global banks with baa3 BCAs. Going forward, we expect the bank to sustain these strong metrics, owing to (1) a strong operating environment despite lower oil price, the consequences of which are largely offset by government spending (2) the increased diversification of QIIB's balance sheet, with a notable increase in the proportion of both granular retail assets (28% of total financings) and Qatari government related financings (13% of total financings) - away from construction and real estate, and (3) continued robust asset growth. A key driver of QIIB's ratings is also the bank's growing strength in the granular Islamic retail segment. This is indicated by a significant market share in the retail segment of around 7% versus a 4% share of total system assets as of December 2014 (up from 6% and 3.5% respectively in December 2009) This retail franchise supports the bank's healthy margins and provides a strong base of low cost deposits.

-- STRONG CAPITALISATION, PROFITABILITY, LIQUIDITY AND FUNDING BUFFERS

The upgrade considers QIIB's strong capitalisation position with a tangible common equity (TCE) to risk weighted assets (RWAs) of around 20% as of December 2014. Although capital buffers are under some pressure from asset growth (CAGR of 21% between 2010-14), the bank's capitalisation levels still compare favourably to the local average of around 17% and the 12% median for global banks with baa3 BCAs.

Going forward, we expect QIIB's capital position to remain above the local average and the global medians, thanks to robust profitability, albeit at more modest levels than in the recent past. The bank's net profit margin has declined to 2.2% for the year 2014 from 3.4% for the year 2010 and is lower than the 2.5% system average. As a result, the bank's net income to tangible asset has dropped to 2.2% from 3.1% during the same period. In addition to a highly competitive environment, increased exposure to lower yielding sovereign exposures coupled with reglatory caps on retail lending introduced in 2011, are driving the declining profitability trend. However, at the current levels the bank's net profitability remains marginally higher than the local average and it is broadly sufficient to support QIIB's growth.

Similarly, QIIB maintains a strong liquidity and funding position. The bank's liquid assets-to-total assets ratio of 36% (as of December 2014) is higher than the Qatari system average of 27%, while its financings-to-deposits ratio at around 83% as of December 2014 remains stronger than both the local system average as well as the global median of banks with baa3 BCAs, which collectively report a financings-to-deposits ratio of around 100%. Going forward, we expect that the continued focus on retail deposits will further support the liquidity and funding position of the bank.

-- STRENGTHS MODERATED BY HIGH BORROWER AND SECTOR CONCENTRATIONS AND RISK MANAGEMENT CHALLENGES STEMMING FROM RAPID FINANCING GROWTH

These strengths are moderated by (1) challenges stemming from rapid growth; and (2) relatively high borrower and sector concentrations, albeit declining, and (3) margin pressures driving a modest reduction in profitability. While Moody's acknowledges that the rapid growth has thus far occurred without asset quality deterioration, this growth nevertheless presents risk management challenges and additional asset quality risks generally posed by unseasoned assets. Also, similar to many GCC peers, the bank exhibits significant borrower and sector (to real estate) concentrations which exposes it to event risks. QIIB's largest sector exposure is to real estate, which accounts for around 38% of the bank's financing book and is equivalent to around 166% of TCE which is higher than both local and regional peers.

-- SUPPORT ASSUMPTIONS

QIIB's issuer rating has been upgraded to A2 and continues to benefit from four notches of systemic support uplift from the baa3 BCA. This reflects Moody's view of a very high probability of support from Qatari government in case of need. Moody's bases this view on (1) the very strong track record of the Qatari government pre-emptively supporting all banks in the past; (2) the bank's importance within the domestic banking system and (3) direct government ownership of around 16.7%.

RATIONALE FOR ASSIGNING COUNTERPARTY RISK ASSESSMENT

Moody's also assigned a Counterparty Risk Assessments (CR Assessment) to QIIB. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessments are an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

In most cases, the starting point for the CR Assessment -- which is an assessment of the ability to avoid defaulting on its operating obligations -- is one notch above the bank's Adjusted BCA, to which Moody's then adds the same notches of support uplift as applied to deposit and senior unsecured debt ratings.

As a result, the CR Assessment for QIIB is one notch higher than its senior unsecured debt and deposit ratings, reflecting Moody's view that the Qatari authorities are likely to honor the operating obligations the CR Assessment refers to in order to preserve the bank's critical functions and reduce potential for contagion in times of stress.

What Could Change the Rating Up/Down

Upward pressure on QIIB's ratings could develop from a combination of the following: (1) significant reduction in borrower and sector concentration; (2) sustained period of moderate growth coupled with a seasoning of the financing book without material deterioration in asset quality and (3) significant improvements in the bank's profitability and funding base.

Downward pressure on QIIB's ratings could develop from (1) deterioration in franchise which could further pressure profitability; (2) weakening of capitalisation and liquidity metrics.

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of the methodology.

As of December 2014, QIIB reported total assets of around QR 38 billion (approximately $10.5 billion).

The local market analyst for QIIB's rating is Nitish Bhojnagarwala +971.4.237.9563.

LIST OF AFFECTED RATINGS:

Qatar International Islamic Bank (Q.S.C.):

- Long-term foreign currency and local currency issuer ratings: upgraded to A2 from A3; outlook changed to stable from positive

- Short-term foreign currency and local currency deposit ratings: upgraded to Prime-1 from Prime-2

- Baseline credit assessment: changed to baa3 from ba1

- Adjusted Baseline credit assessment, changed to baa3 from ba1

- Counterparty Risk Assessment of A1 assigned to the bank for the first time

QIIB Sukuk Funding Limited:

- Senior unsecured rating: upgraded to A2 from A3; outlook changed to stable from positive

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Arif Bekiroglu
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Qatar International Islamic Bank issuer ratings and changes outlook to stable
No Related Data.
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