Capital Intelligence (CI), the international credit rating agency, announced that it has maintained the Financial Strength Rating (FSR) of the UAE’s Sharjah Islamic Bank (SIB) at ‘BBB+’ with the Bank’s solid capital adequacy ratio (CAR), good net Islamic financing facilities (IFFs) to stable funds ratio and improving operating profitability being major supporting factors.
The continuing high level of non-performing IFFs (NPIFFs, although CI acknowledges that there have been improvements in key metrics), a low financing loss reserve coverage ratio and high customer concentrations in both deposits and IFFs are constraining factors. Mitigating this are the Bank’s sizeable collateral security against its impaired financing portfolio, rising collateral values due to recovering real estate markets and a history of successful collateral enforcement. A ‘Stable’ Outlook is appended to the FSR on the expectation that both profitability and asset quality metrics would continue to improve further this year.
The Foreign Currency ratings are affirmed at ‘A-’ Long-Term and ‘A2’ Short-Term with a ‘Stable’ Outlook.
The ratings are strongly underpinned by the Bank’s solid capitalisation and government ownership. The Support rating of ‘2’ is maintained, indicating a very high likelihood of official support in case of need.
SIB is an important player in the emirate of Sharjah and a banker to the government. The Bank is currently in growth mode with retail banking and corporate banking (mainly small and medium-sized entities) being the major business drivers. SIB has a considerable exposure to the well-performing sovereign and its major entities. The Bank has limited direct exposure to builders and developers of real estate and its investment properties portfolio is relatively small, but a large part of its IFFs are secured by mortgaged real estate.
SIB experienced an increase in NPIFFs a few years ago, but there have been no major impairments in recent periods and some of its key asset quality metrics improved in 2013 and in Q1 2014. The coverage ratio on impaired financings, excluding past due not impaired (PDNI) IFFs over 90 days, also strengthened owing to new provisions made last year; impaired financings are also substantially secured by mortgaged property.
Collateral values are expected to rise over the coming quarters as real estate prices improve. The Bank’s large capital provides additional cover. However, the continuing high level of PDNI IFFs over 90 days suggests that there are residual problems in certain sectors and credit risks remain heightened.
The Bank’s CAR continued to decline in 2013 owing to the substantial growth in risk-weighted assets (RWAs) and the marginal increase in regulatory capital; however, the ratio remained at a solid level and is a major strength which in part compensates for the higher NPIFF ratio. The CAR is expected to continue to fall as the Bank expands its RWAs and grows its non-government related business, but management is expected to maintain it at a high level.
Customer deposits and capital provide the principal sources of funding for the Bank. In 2013, there was a substantial increase in medium-term borrowings via sukuk issuances, which compensated for the decline in SIB’s time deposit base. However, demand and savings balances continued to rise at a strong pace. Key IFF-based liquidity ratios tightened slightly at end 2013, but the Bank’s net IFFs to stable funds ratio remained strong and was much better than the peer group average.
The Bank has increased its stock of liquid assets over the last few years. The sukuk issuance in 2013 narrowed its asset/liability maturity gap in the one-to-five-year bucket, but the short-term gap widened further. SIB receives funds from the government, which has led to some customer concentration in the deposit base. However, government deposits tend to be stable and the availability of Central Bank liquidity support is a mitigating factor.
There was an improvement in many of the Bank’s profitability ratios last year. Operating profitability strengthened owing to a substantial rise in non-profit sharing income (NPSI), reflecting higher levels of fees and commissions, increased income generated by subsidiaries, and sizeable gains from the sales and revaluation of investment properties. Although there was good year-on-year growth in IFFs last year, this did not translate into higher net profit sharing income because most of the business had been booked in the latter half of the year. However, the impact was seen in the Q1 2014 results, which recorded strong growth in net profit-sharing income and margin. SIB’s cost to income ratio strengthened last year and despite more aggressive provisioning for NPIFFs, the Bank was able to record good growth in net profit as well. Q1 2014 saw a major improvement in return on average assets (ROAA) and operating profitability, owing to a wider net profit-sharing margin and continued strong growth in NPSI.
SIB is a full-fledged Islamic bank with total assets of AED22 billion at end Q1 2014. It is regarded as the national bank of its emirate of incorporation and has a close relationship with the local government.
Its core businesses are corporate and retail banking and investments. The Bank currently operates 27 branches and has a presence in all the emirates. The government of Sharjah and Kuwait Finance House are major shareholders with 31% and 20% stakes, respectively.
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