(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has raised the Core Financial Strength (CFS) rating of Al Janoob Islamic Bank for Investment and Finance (JIB) to ‘b+’ from ‘b‘. At the same time, CI Ratings has affirmed the Bank’s Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency (ST FCR) of ‘B-‘ and ‘B‘, respectively, and the Bank Standalone Rating (BSR) of ‘b-’. The Outlook for both the LT FCR and the BSR is affirmed Stable. The Extraordinary Support Level (ESL) is Uncertain.

CI has also upgraded JIB’s Long-Term Rating on the Iraq National Scale to ‘iqBBB’, from ‘iqBBB-’, with a Stable Outlook. The Short-Term Rating was affirmed at ‘iqA3’. These ratings are supported and constrained by the same factors as the CFS as outlined below.

The Bank’s LT FCR and BSR are derived from an improved CFS rating of ‘b+’ and the constraints imposed by Iraq’s operating environment risk anchor (OPERA) of ‘c+’. Both the LT FCR and BSR are set at the same level as ESL is Uncertain. The change in the CFS and Long-Term national rating is supported by JIB’s strengthened profitability, improved financing asset quality, solid CAR and balance sheet leverage ratio, coupled with improved capital flexibility. The main constraints on the CFS are the Bank’s high credit risk profile (due to a difficult operating environment despite favourable oil prices), concentrations in assets and customer deposits, and a small balance sheet due to a relatively short (though growing) track record. Although the business model has yet to be tested across a full economic cycle, JIB’s track record so far has been satisfactory within the context of Iraq’s high-risk operating environment.

We consider the likelihood of sufficient and timely official extraordinary support being made available to JIB in the event of financial distress to be uncertain and, consequently, do not incorporate such support into the Bank’s LT FCR. Moreover, even if the government may be willing to provide extraordinary support in case of need, its financial capacity to do so is limited as indicated by our internal assessment of Iraqi sovereign credit risk.

Since establishment some seven years ago, JIB has made steady progress building the business franchise as a Shari’a-compliant corporate bank in Iraq’s still underdeveloped banking system. The emphasis now is to develop retail banking in order to diversify assets and revenue streams and, in turn, reduce the high concentration risks. On the grounds of the Bank’s satisfactory track record thus far in the face of a still challenging operating environment, we consider the adopted business growth strategy to be a credit positive. That said, significant challenges remain with respect to gaining further market credibility and building market share in a banking system dominated by government-owned institutions.

The Bank’s financing portfolio – although a comparatively small component of the balance sheet – remains concentrated in terms of both borrowers and economic sector. This reflects the scarcity of sound credit opportunities in Iraq’s economy and, crucially, the risks inherent in a small balance sheet.

More positively, buoyed by favourable oil prices in 2022, financing asset quality saw a significant improvement as a result of non-performing financing (NPF) settlements. As a result, the NPF ratio declined to a very low 0.7% of gross financings, and was the best seen among the CI-rated banks in Iraq. Although new NPFs could emerge in the short term in the face of ongoing economic and social challenges, the magnitude of any increase is expected to be manageable given JIB’s cautious lending policy and strong collection processes. Meanwhile, coverage of NPFs by financing-loss reserves (FLRs) increased to a strong 204% as a result of a decline in impaired financings. FLRs, together with the Bank’s augmented operating profit, provide strong credit loss absorption capacity on a forward-looking basis. The noted improvement in financing asset quality is a credit strength.

As is the case with peer banks, JIB has significant Iraq sovereign risk exposure in the form of balances at the Central Bank of Iraq (CBI). These assets represented a high multiple of total equity in 2022, and a significant share of total assets. Under CI’s rating criteria, central bank balances come firmly under the sovereign risk category. This raises concentration risk issues, particularly in the context of Iraq’s high sovereign credit risk. Given Iraq’s high credit risk profile, in our view, a significant sovereign credit event could potentially transmit sovereign stress to the Bank’s balance sheet, as well as earnings. This is an important risk factor for the ratings.

Although growing, the small and undiversified customer deposit base is currently a potential source of vulnerability, particularly in the context of the limited public confidence in private sector banks in Iraq. While we expect the customer deposit base to continue growing as the branch network expands, there is likely to be some volatility given significant depositor concentrations and a high probability of event risk in Iraq. This risk factor is mitigated by JIB’s large stock of liquid assets. The focus on building granular retail deposits is also expected to reduce funding concentration risk and bring some degree of diversity to customer deposits. That said, there remain very scarce opportunities in which to profitably invest surplus liquidity in the Iraqi banking system. JIB’s holdings of liquid assets increased again at end-2022 as excess funds gathered from customer deposits were channelled into cash and balances with other banks and CBI. The preservation of liquidity is very crucial in a banking system where there is no official lender of last resort, and where there is no real interbank market either.

Capitalisation is considered strong – as is the case with almost all other private sector banks in Iraq. This is an important rating supporting factor. The quality of capital is also high given the dominance of CET funds. The solid capital buffer is capable of withstanding any weakening in asset quality. Capital flexibility improved significantly thanks to strengthened profitability and full retention of earnings. As is the case with other Iraqi banks, the Bank’s risk weighted asset (RWA) based capital ratios are flattered to some degree by the zero-weighted CBI balances.

The recent improvements in profitability at all levels is a credit strength. The underlying stability and quality of the Bank’s revenue streams are good, notwithstanding the limited sources of net financing income (NFI) and non-financing income (non-FI). The bulk of income is generated from core NFI and fees and commissions. Although customer concentrations introduce some degree of potential income volatility, the planned expansion into retail banking is likely to mitigate this risk factor in the medium term. Retail banking is also expected to broaden the product mix and improve JIB’s cross-selling capability. We expect the Bank to sustain growth in both NFI and non-FI as it continues to leverage its equity base. That said, some degree of volatility is likely to recur given a developing business franchise, customer concentrations and Iraq’s high-risk environment.

Iraq’s OPERA is at a level indicative of a high degree of risk and 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 2021-22 from the economic fallout of the pandemic – buoyed by high 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. The latter elevate banking systemic risks. Both the legal system and corporate governance standards are also rather weak. The latter is at a level indicative of a high degree of risk.

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 JIB’s credit risk profile will more than likely be maintained at the current level, notwithstanding possible economic headwinds and geopolitical tensions.

Rating Dynamics: Upside Scenario

While not our current expectation, the Outlook for the ratings could change to Positive if our internal assessment of Iraq’s sovereign credit risk and OPERA significantly improve, and provided JIB’s key risk metrics strengthen further.

Rating Dynamics: Downside Scenario

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

Contact

Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: morris.helal@ciratings.com
Secondary Analyst: Rory Keelan, Senior Credit Analyst
Chairperson: Karti Inamdar, 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 FY2018-22. 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

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