Commercial Bank of Iraq – Ratings Assigned

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has assigned a first-time Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) to Commercial Bank of Iraq (CBIQ) of ‘B’ and ‘B’, respectively. The LT FCR Outlook is Stable. At the same time, CI Ratings has assigned to CBIQ a Bank Standalone Rating (BSR) of ‘b-’ with a Stable Outlook, a Core Financial Strength (CFS) rating of ‘b+’, and an Extraordinary Support Level (ESL) of High.

CI has also assigned CBIQ Long- and Short-Term Ratings on the Iraq National Scale of ‘iqA-’ and ‘iqA2’, respectively, with a Stable Outlook. These are supported and constrained by the same factors as the CFS as outlined below.

CBIQ’s LT FCR is set one notch above the BSR to underscore the high likelihood of extraordinary support from its parent Ahli United Bank (AUB). Although the ESL is High, there is only a one-notch uplift for the Bank’s LT FCR as the latter is constrained by CI’s internal assessment of sovereign risk for Iraq. CI considers AUB to be willing and able to provide extraordinary support based on CBIQ’s high degree of operational and financial integration with the parent. Despite the small balance sheet, CBIQ is considered strategically important for AUB as evidenced by the successive increases in capital over the years. CI considers Kuwait Finance House’s (KFH) recent acquisition of AUB group (via a share swap on 2 October 2022) as being a credit neutral event for CBIQ given the constraint imposed by our internal assessment of sovereign risk for Iraq.

CBIQ’s BSR is derived from a CFS rating of ‘b+’ and the constraints imposed by the Operating Environment Risk Anchor (OPERA) of ‘c+’. The CFS rating is underpinned by AUB ownership and management control, sound CAR including very high CET 1 component and strong capital flexibility, consistently strong ROAA and good liquidity. The principal credit challenges are the difficult operating environment and Iraq sovereign risk (as is the case with peer banks, despite high oil prices), very small balance sheet and market share, and large concentrations in assets and – to lesser extent – customer deposits. Iraq’s high systemic liquidity risk and weak regulatory and supervisory framework (though improving) are also credit challenges.

Iraq’s OPERA is at a level indicative of a high degree of risk. OPERA takes into account the volatility of the economy and underlying structural and fiscal weaknesses, as well as significant socio-economic imbalances and deficiencies in the country’s political and institutional frameworks. Although the Iraqi economy started to recover moderately in 2021 and into 9M 22 from the economic fallout of the pandemic – buoyed by higher oil prices − credit risk remains elevated. OPERA also takes into account the challenges inherent in a banking sector that is small, underdeveloped, and dominated by financially weak state-owned banks. Both the legal system and corporate governance standards are also rather weak.

CBIQ is the Iraqi subsidiary of the well-regarded AUB group and is managed under a technical management agreement with the parent. The strong parentage bestows significant financial and non-financial benefits to the Bank’s risk profile. Risk management practices are well developed and in general conservative. CBIQ also has access to financial backing from the parent as and when needed, despite being a self-funding entity. However, as is the case with almost all other Iraqi private sector banks, the business model is narrow in scope reflecting the small balance sheet size, as well as Iraq’s underdeveloped banking sector. These factors are a corollary of persistent elevated liquidity and credit risks across the banking system in the face of an ongoing difficult operating environment. This, in turn, has the effect of producing high concentrations in the balance sheet.

CI considers the Bank to have a high credit risk profile – in common with most peer banks – due to Iraq’s difficult operating environment coupled with large exposures to the sovereign (via government bonds and Central Bank of Iraq [CBI] balances). Both these asset classes come firmly under the sovereign risk category in accordance with CI’s criteria. The Bank’s aggregate exposure to the Iraq sovereign was equivalent to a high 123% of total equity in Q3 22. CBIQ’s exposure to government securities also translates into a considerable degree of asset concentration risk. In the context of Iraq’s high credit risk profile, any significant sovereign credit event could potentially transmit sovereign stress to CBIQ’s balance sheet, as well as earnings. This is an important risk factor for the ratings.

Given the negligible size of the credit portfolio in both money and proportionate terms, CI’s standard measures for loan asset quality analysis are inappropriate for CBIQ. While the headline NPL (stage 3) to gross loans ratio can be assessed to be high at 36% in Q3 22, an important risk mitigating factor is the Bank’s exceptionally low share of loans in total assets (3%), alongside a solid capital base. A more relevant measure of loan asset quality, therefore, is the ratio of NPLs to both total equity and total assets. On both counts, the NPL ratio is low and, crucially, NPLs were more than fully covered by loan loss reserves in Q3 22. Although the Bank plans to resume lending looking ahead – though from a very low base – the magnitude of any increase is likely to be measured given management’s cautious credit policy.

CBIQ’s good headline capital ratios support the ratings, despite CAR being to some degree inflated due to the zero risk-weight applied to Iraqi government securities and CBI balances (as stipulated by the regulator). The relatively low risk weighted asset density of 63% underscores this fact. Nonetheless, we consider capital quality as being strong given the dominance of CET 1 funds. Balance sheet leverage as measured by the ratio of total equity to total assets was also solid at 63% in 9M 22. These metrics underscore the strong buffer in place to withstand unforeseen losses, as well as ample scope to expand the balance sheet over time. CBIQ’s capital flexibility is considered robust given its strong ownership.

Notwithstanding the Iraqi banking sector’s high systemic liquidity risk, the Bank has consistently maintained good liquidity. This factor is a credit strength. The large stock of liquid assets underscores the exceptionally low share of net loans in total assets. The emphasis on safeguarding liquidity is crucial in a banking system where the central bank is understood to perform lender of last resort function only in exceptional circumstances (at least for the private sector banks), and where there is no real interbank market either. Although the contribution of customer deposits to total funding remains limited (30%), CI considers the stability − as well as future growth − of customer deposits sensitive to confidence shocks intrinsic in the banking system. That said, in common with most Iraqi banks, CBIQ does not actively seek to gather customer deposits given the limited avenues in which to deploy surplus liquidity in the banking system. Moreover, balances held at the CBI are non-remunerative. Although the high depositor concentrations elevate liquidity risk, this risk factor is mitigated by a good pool of liquid assets.

The Bank’s profitability at both the operating and net levels has been consistently good over the last five years, in contrast to most (but not all) private sector banks in Iraq. This is a credit strength. Driven by recurring and good levels of net interest income − thanks to a significantly improved net interest margin − the Bank has sustained good operating income generation. Despite a small decline, operating income measured against average total assets remained strong at 5.04% (annualised) in 9M 22. The quality of CBIQ’s recent income streams is considered good as the contribution of volatile FX income has declined. Iraqi government bonds are expected to continue to generate a steady and high level of recurring interest income. However, sources of interest income are anticipated to remain rather concentrated primarily due to a small loan portfolio.

Rating Outlook

The Outlook for both the LT FCR and BSR is Stable, indicating that the ratings are unlikely to change over the next 12 months. This reflects our view that despite challenges in Iraq’s operating environment and possible pressures on the Bank’s credit metrics, we expect CBIQ to maintain a strong capital buffer to withstand a financial setback.

Rating Dynamics: Upside Scenario

We do not expect a change in the ratings unless our internal assessment of Iraq’s sovereign credit risk and/or OPERA improves. This is currently seen as being unlikely within a 12-month timeframe. A significant improvement in asset concentrations may exert upward pressure on the ratings, provided other key metrics are maintained.

Rating Dynamics: Downside Scenario

While not our current expectation, CBIQ’s ratings could be reduced by one notch over the next 12 months should our internal assessment of Iraq’s sovereign credit risk and/or OPERA deteriorate. The ratings may also be lowered in the event the Bank’s key credit metrics deteriorated significantly.

*A National Rating summarises the repayment risk of an entity relative to other entities within the same economy. It is not an absolute measurement of risk. National Ratings are not directly comparable across borders.

Contact

Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: morris.helal@ciratings.com
Secondary Analyst & Committee Chairperson: Rory Keelan, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-21 and Q3 2022. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

The principal methodologies used to determine the ratings are the Bank Rating Methodology, dated 3 April 2019 (see and the National Scale Ratings Criteria for Iraq, dated 15 March 2020 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This is the first time CI has assigned International and National Ratings to the entity. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

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