GCC Islamic banks show stronger growth than conventional peers

LONDON: Fitch Ratings says in a new report that all Issuer Default Ratings (IDRs) assigned by Fitch to Islamic banks in the Gulf Cooperation Council (GCC) region are investment-grade. About 89 per cent of IDRs are driven by potential sovereign support either directly or via a parent. The remaining 11 per cent are driven by banks’ standalone creditworthiness, as defined by their Viability Ratings (VRs). The IDRs are all on Stable Outlook with the return of the Qatari sovereign to Stable in June 2018. Sovereign willingness to provide support has remained extremely strong throughout the GCC and virtually no progress towards resolution has been made.

Only 31 per cent of VRs are investment-grade (compared with 43 per cent for all GCC banks), with high-risk appetite and weak asset quality as the main shortfalls. The average VR in Saudi Arabia is a strong at ‘bbb+’ but is a weak ‘bbb-’ in Qatar. The average VR is in the ‘bb’ category for Kuwait (bb+) and the UAE (bb). The two largest Islamic banks by assets are in Saudi Arabia, which has the largest GCC banking system but a modest number of banks. The third-largest bank, Kuwait Finance House, is about half the size of the two largest banks by assets and by financing. A proposed merger between Qatar’s Barwa Bank (Islamic) and International Bank of Qatar (not yet Islamic), if completed, could lead to the merged entity advancing to 10th place by assets.

Islamic banks are growing faster than conventional banks as they benefit from strong demand for Islamic banking products and products are now broadly equivalent. Some of these banks are in the start-up/growth phase and are looking to gain market shares. However, not all Islamic banks are growing fast. Kuwait advanced to first place from last place due to strong growth in 2017 from three of the country’s five Islamic banks. Profitability remained strong in all countries due to a low cost of funding, benefitting from stronger retail franchises, and improved slightly in 2017 due to rising rates and strong cost management.