Fitch Ratings: Qatari Islamic banks see stronger asset quality & funding than conventional peers

Fitch Ratings-London-16 October 2019: Fitch Ratings says in a new report that Qatari Islamic banks had stronger asset-quality metrics than their conventional peers at end-1H19. They also have less foreign funding and typically higher retail deposits and are, therefore, less at risk of deposit flight. Profitability improved slightly in 1H19.

For 2019, asset-quality metrics are likely to see deterioration, particularly in the real-estate sector and we expect higher financing impairment charges and continued financing restructuring. Qatari Islamic banks are looking to expand abroad (including in Morocco and in the UK) to achieve faster growth, improved funding costs and funding diversification. However, expansion abroad could bring additional risks.

The average impaired financing ratio was significantly lower for Islamic banks than for conventional banks at end-1H19. This is largely attributable to the two largest Islamic banks having ratios of around 1%, and two conventional banks having much higher ratios. However, these ratios for all banks do not include an increasing volume of restructured financing.

Islamic banks' profitability metrics remained healthy in 1H19 but the average operating profit/risk-weighted assets ratio is higher at conventional banks as Qatar National Bank is lifting the ratio at conventional banks. Cost efficiency remains strong.

Islamic banks have less foreign and wholesale funding and higher portions of retail deposits than conventional peers and, therefore, less funding pressures. The Qatar Central Bank auctioned QAR8.8 billion of government sukuk in 2018 with various tenors; this provides a structural improvement in liquidity management for Islamic banks.