Moody's rating assignment reflects SIB's (1) very strong capital buffers, (2) relatively low borrower and sector concentrations, which reduce vulnerability to event risk and (3) satisfactory profitability and liquidity metrics. These strengths are moderated by SIB's (1) relatively weak, although improving, asset quality and coverage metrics.
"Moody's assessment of
SIB is a small (around one per cent market share in terms of total assets) but growing Islamic franchise particularly in the emirate of Sharjah. Although the bank grew in line with the market (CAGR of around eight per cent) until 2012, the bank has grown faster than the market in 2013 (19 per cent total assets growth vs.
A key driver of Moody's assessment is SIB's extremely strong capital position. Despite low profit retention (around 78 per cent dividend payout rate in 2013) combined with high asset growth, the bank's Tier 1 ratio (under Basel II standards) stood at around 31 per cent as of
Such strong capital levels are driven by a capital increase exercise concluded by the bank in
SIB's borrower and sector concentration levels are relatively low when compared to many of the banks in the region and the concentration levels reduce further when excluding the highly rated exposures. Such relatively low levels reduce the bank's vulnerability to event risk. In addition, like other GCC banks, SIB exhibits real estate sector concentrations – however the level is well below 100 per cent of Tier 1 capital (under Moody's sector classification) which compares favourably to most of its peers. However, although SIB's real estate concentration levels are relatively low, they still contribute significantly (directly or indirectly) towards the bank's high levels of non-performing exposures.
SIB exhibits satisfactory profitability metrics with a net profit margin (analogous to net interest margin) of around 2.5 per cent (down from 2.9 per cent for 2012) which is lower than the
The declining trend in the bank's profitability is driven by margin compression due to increased competition in a low interest rate environment. As a result, the bank's pre-provision income and net income to risk weighted assets (RWAs) at 2.7 per cent and 2.2 per cent compares unfavourably to the 3.3 per cent and 2.3 per cent
SIB's liquidity position is comfortable with liquid assets to total assets at around 25 per cent. However such levels compare unfavourably to 30 per cent
Moody's assessment also recognises SIB's weak asset quality metrics as exhibited by the bank's non-performing financing (NPF: analogous to NPL ratio) ratio at nine per cent as of
The bank's loss coverage ratio at 29 per cent is also relatively weak compared to both local and global peers. However, SIB's solid buffers can absorb the uncovered amounts and still retain capital levels that are strong with respect to both global and local peers. Please note that Moody's considers all financing exposures which are overdue by more than 90 days as impaired for the calculation of NPF and coverage ratios. In addition, Moody's do not consider collateral in loss coverage calculations.
SIB's A3 issuer rating incorporates a high three notch uplift from its baa3 BCA. This reflects Moody's assessment of a high likelihood of systemic (government) support in case of need. Moody's base this view on (1) SIB's 31 per cent ownership by the
Upward pressure on SIB's ratings could develop from a combination of the following: (1) a strengthening and diversification of its franchise and (2) a significant improvement in financial fundamentals, i.e. liquidity, capitalisation and asset quality.
Downwards pressure on SIB's ratings could develop from (i) an unexpected decline in capital levels or (ii) a further weakening of asset quality metrics or (iii) a significant increase in concentration levels increasing event risk.
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