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Fitch: Less Funding Pressure at Qatari Islamic Banks than Conventional Peers.

London: Qatari Islamic banks have less foreign funding and typically higher retail deposits than their conventional peers and are therefore less at risk of deposit flight, Fitch Ratings says. Nevertheless, liquidity pressures remain as for all Qatari banks due to the financial and economic embargo on Qatar as well as higher funding costs. Islamic banks made up 23% of sector assets at end-2017.

Qatari Islamic banks typically have better asset-quality metrics than their conventional peers. However, the deterioration in metrics has been more pronounced due to pressure on the contracting and real-estate sectors, in which Islamic banks are concentrated, and to high single-name concentration. Reserve coverage is also weaker for Islamic banks. The average financing impairment charges-to-gross financing ratio remains below conventional banks due to specific asset-quality issues in a small number of conventional banks.

Islamic banks' profitability metrics are mildly weaker than their conventional peers due to lower returns on non-financing assets. Nevertheless, the main difference in the operating profit/risk-weighted assets (RWAs) ratio is QNB pulling up the conventional banks due to its strong metrics and lower RWAs. Rising rates and the political dispute resulted in increased funding costs in 2017, continuing pressure on profitability metrics.

Islamic banks have less foreign funding and higher proportions of retail deposits than their conventional peers, so are less sensitive to funding pressures. However, liquidity pressures re-emerged in 2H17 due to the political dispute, with conventional and Islamic banks having high gross financing/deposits ratios. The deterioration in the two metrics for Islamic banks was due to strong financing growth and resistance to raise costly deposits.

Qatari Islamic banks' capital ratios are slightly better than conventional peers' and have typically been more stable. The average capital ratios for conventional banks, especially equity/assets, are skewed by QNB. Capital ratios remain adequate for their risk profiles due to slower financing growth and reasonable internal capital generation.

The 2011 Qatari Central Bank's (QCB) barring of Islamic windows at conventional banks led to consolidation of Islamic banking assets at four Islamic banks. Merger talks of three Qatari banks, if realised, would mean even more concentration.

Islamic banks are required to report in accordance with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) accounting standards and to use IFRS standards whenever the AAOIFI standards are not available. There is no sharia supervisory body at the national level in Qatar and sharia governance is left to each institution provided it follows the general parameters required by QCB law.

Lower margins are expected to continue to be the norm. Asset-quality metrics will remain under pressure, particularly from difficulties in the contracting and real-estate sectors. Financing growth is expected to be in the mid-single digits in 2018.

The full report, "Qatari Islamic Banks' 2017 Results Dashboard - Less Funding Pressure than Conventional Peers", is available at www.fitchratings.com.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Aug 8, 2018
Words:471
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