International Development Bank for Investment and Finance – Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed International Development Bank for investment and Finance’s (IDB) Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of ‘B-’ and ‘B’, respectively. The LT FCR Outlook is Stable. At the same time, CI Ratings has affirmed IDB’s Bank Standalone Rating (BSR) of ‘b-’ with a Stable Outlook, Core financial Strength (CFS) rating of ‘bb-’, and Extraordinary Support Level (ESL) of Uncertain.

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

The Bank’s LT FCR and BSR are derived from a CFS rating of ‘bb-’ and the constraints imposed by the Operating Environment Risk Anchor (OPERA) of ‘c+’. The LT FCR is set at the same level as the BSR given that IDB’s ESL is Uncertain. As is the case with other Iraqi banks, CI considers the likelihood of sufficient and timely official support being made available to IDB in the event of financial distress to be uncertain and, consequently, does not incorporate such support into the Bank’s LT FCR. Even if the government may be willing to provide extraordinary support in case of need, its financial capacity to do so is considered limited given our internal assessment of Iraqi sovereign credit risk.

The CFS is supported by the Bank’s solid capital base including a significant Tier 1 element, high liquidity underpinned by an expanding retail customer deposit base, and improved loan asset quality and operating profitability in H1 22. The Bank’s diversifying and growing business franchise, despite its modest size, also supports the CFS. Major factors constraining the CFS are IDB’s high credit risk profile given Iraq’s difficult operating environment (in common with peer banks), and the concentrations seen in Central Bank of Iraq (CBI) balances, borrowers and economic sector. The weak regulatory and supervisory framework (although improving) is also a credit challenge.

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 continued to recover moderately in 2022 and into the current year from the economic fallout of the pandemic – buoyed by favourable 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 weak.

In contrast to most other Iraqi private sector banks, IDB has successfully expanded its business franchise and balance sheet over the last four years (albeit from a low base) − having crossed the USD1bn mark in 2021 − as both loans and customer deposits grew strongly. CI considers the business model rather resilient, having thus far withstood the significant challenges in Iraq’s operating environment. The business strategy continues to be well executed. Although corporate lending and trade finance still dominate the business franchise, IDB has made significant progress in diversifying its business model into retail banking. We expect the inherent granularity of retail banking to bestow significant diversification benefits to the balance sheet and revenue streams over time.

The Bank’s solid CAR and leverage remain major credit strengths. The strong capitalisation is particularly crucial given the high probability of event risk in Iraq. The very high Tier 1 component is capable of withstanding unforeseen losses, and provides ample scope for further business expansion. Although capital ratios are likely to continue trending downward in the medium term as the Bank leverages its equity, we expect capitalisation to remain sound relative to the current rating level. Capital flexibility is deemed satisfactory underpinned by a policy of full earnings retention. In turn, this has aided the rate of internal capital generation, underscoring a supportive shareholder base.

IDB’s consistently good liquidity is a rating supporting factor. CI expects the Bank to maintain high liquidity going forward, underpinned by sustained customer deposit expansion. The importance given to safeguarding liquidity is vital 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). There is also no real domestic interbank market to support banks’ potential short-term funding requirements. The bulk of IDB’s liquidity remains deployed in non-remunerative CBI balances and cash. Indeed, there are very few avenues in which to profitably deploy excess liquidity in the Iraqi banking system. In the context of Iraq’s high sovereign credit risk, CBI balances produce concentration risk issues and may render IDB’s balance sheet and earnings vulnerable to a sovereign event. This risk factor is a credit challenge.

Aided by IDB’s extensive branch network, customer deposits grew further in both money and proportionate terms, driven by retail and, to a lesser extent, wholesale deposits. This, in turn, is helping diversify the funding profile and reduce depositor concentrations. Concurrently, the Bank continues to build CASA and has launched 3- and 5-year time deposits to fund retail loans against salary assignment. The stability of customer deposits in Iraq, however, remains vulnerable to confidence shocks. Mitigating potential liquidity and funding risk is the Bank’s large stock of liquid assets, underpinned by a significant pool of granular retail customer deposits. CI considers this a key supporting factor for the ratings.

The improvement seen in loan asset quality is a credit strength. IDB’s net loans as a share of total assets remain relatively low despite strong credit growth over the last five years. Although CI normally considers rapid loan expansion a cause for some concern (particularly as and when economic growth falters), the credit risk is mitigated by the fact that retail loans are granted against salary assignment, including to public sector employees. Following a significant increase in 2021 due to classified corporate credits (Covid-related), the NPL ratio improved to 2.6% in H1 22 as a result of settlements. Although stage 2 loans (mostly retail up to 60 days past due) had increased significantly, management inform these have since declined at year end-2022. Restructured credits remained negligible. While new NPLs could emerge throughout the remainder of the current year given the prevailing credit risk in the banking sector, we expect loan asset quality to remain broadly stable in the short term. IDB’s capacity to absorb potential new credit losses is currently good. Cover for NPLs strengthened significantly to 139% at end-2022.

IDB’s satisfactory performance reflects its longer track record − in comparison with most other Iraqi private sector banks − and expanding business franchise. Notwithstanding the volatility seen over the last four years, IDB has been profitable, reflecting satisfactory operating income generation driven by both net interest income and non-interest income. We expect earnings volatility to decline over time as the Bank continues to build its retail banking business and concentrations reduce. CI considers earnings quality and stability in general to be better than that of most other Iraqi banks in large part due to IDB’s rather sizeable lending and trade finance operation. Operating profitability recovered in H1 22, although higher provisions curtailed net profit growth. IDB’s capacity to absorb credit losses through P&L is currently satisfactory. Operating efficiency measured by the cost-to-income ratio also improved.

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 IDB’s credit risk profile will more than likely be maintained at the current level, despite economic headwinds and ongoing geopolitical tensions.

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 sustained improvement in profitability at all levels is likely to exert upward pressure on the Bank’s CFS, provided other key metrics are sustained at a sound level.

Rating Dynamics: Downside Scenario

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

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 H1 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

This rating action follows a scheduled periodic (annual) review of the rated entity. National and International ratings on the entity were first released in May 2020 and last updated in May 2022. 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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