Iraqi Islamic Bank for Investment and Development – Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of the Iraqi Islamic Bank for Investment and Development (IIB or the Bank) at ‘B-’ and ‘B’, respectively. CI Ratings has also affirmed IIB’s Bank Standalone Rating (BSR) of ‘b-’, Core Financial Strength (CFS) rating of ‘bb-’ and Extraordinary Support Level (ESL) of Uncertain. The Outlook on the LT FCR and BSR is Stable.

At the same time, CI has affirmed IIB’s Long- and Short-Term Ratings on the Iraq National Scale at ‘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 BSR is derived from a CFS rating of ‘bb-’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’. The latter is at a level indicative of a high degree of risk and is a key rating constraint for IIB, as well as for all other Iraqi banks. The CFS is supported by an established and expanding Islamic corporate banking franchise, strongly improved profitability and a good capital base, including a high Tier 1 component and balance sheet leverage ratio. The high liquidity, underpinned by an expanding customer deposit base, is also a credit strength. The major credit challenges are IIB’s high credit risk profile (in common with other Iraqi banks) due to Iraq’s economic and political vulnerabilities, concentrations in assets and customer deposits, and the small balance sheet. The swift financing growth, relatively high non-performing financing (NPF) ratio, and the weak regulatory and supervisory framework are also credit challenges.

CI considers the likelihood of sufficient and timely official extraordinary support being made available to IIB in the event of financial distress to be uncertain and, consequently, does 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 by our internal assessment of Iraq sovereign risk.

Despite a still relatively small asset base (as is the case with peer banks), IIB has achieved significant progress in expanding the balance sheet and franchise in recent years. The business model has demonstrated a fairly good degree of resilience throughout the economic cycle but remains skewed toward corporate banking. This renders customer concentration risks high and, in turn, elevates the Bank’s risk profile. Looking ahead, management seek to leverage the relationships with government ministries to build ‘sticky’ retail customer deposits by offering payroll-based accounts to their employees. CI considers any meaningful growth in retail deposits and financings to be a credit positive given the diversification benefits. With the recent arrival of the well-regarded Safwa Islamic Bank (Jordan) (SIB) as a shareholder (ca. 10%), IIB seeks to leverage the combined experience to deliver a broad range of banking services and financing solutions to the expanding Iraqi market.

In common with other Iraqi banks, IIB’s exposure to credit risk is considered to be high given our internal assessment of Iraq’s sovereign creditworthiness, coupled with the difficult operating environment. The Bank has significant Iraq sovereign risk exposure stemming from non-remunerative balances with the Central Bank of Iraq (CBI). This asset allocation partially underscores the very limited avenues in which to profitably deploy surplus liquidity in the Iraqi market. Under CI’s rating criteria, central bank balances come firmly under the sovereign risk category. This raises concentration risk issues, particularly given Iraq’s high sovereign credit risk. In our view, a significant sovereign credit event could potentially transmit stress to the Bank’s balance sheet including capital, as well as earnings. This is an important risk factor for the ratings.

Notwithstanding the ongoing challenging lending conditions in Iraq, IIB’s overall financing asset quality was generally stable in 9M 24. Previous remedial efforts and collections had contributed to the significant decline in NPFs seen a few years earlier in the aftermath of the Covid-19 pandemic. Having fallen in 9M 24, NPFs resumed moderate growth in the final quarter of last year. While the brisk credit expansion seen in recent periods could potentially translate into renewed NPF accretion in the short to medium term, this risk factor is partially mitigated by the mostly short tenor (up to one year) of financings. CI also considers financing asset quality vulnerable to downside risks in view of IIB’s high borrower concentrations alongside the elevated credit risk in the banking sector. The previously full financing-loss reserve cover for NPFs declined but remained satisfactory at 90% in 9M 24. That said, the Bank’s capacity to build provisions for credit losses has strengthened significantly, as evidenced by very good operating profitability. The extended NPF coverage ratio rose to 672%, with unprovided NPFs equivalent to a negligible percentage of total capital.

IIB’s good capitalisation and leverage are an important risk mitigant in view of the high probability of event risk in Iraq. The planned IQD150bn increase in paid-up capital to comply with the revised regulatory IQD400bn requirement was partially achieved from capitalisation of reserves in 2024. The CBI granted IIB an extension for full adherence until May 2025, in view of the arrival of the capital injection from new shareholder SIB. The latter has already paid in the IQD40bn for the purchase of new shares, but the money cannot be formally added to capital until the necessary central bank approvals are in place. The Bank’s improved bottom line profitability in recent periods, coupled with full retention of earnings, has served to improve capital flexibility. This will enable the fulfilment of potential future increases in regulatory paid-up capital. Although capital quality is good, the high total CAR is in large part a function of the zero risk-weighting of CBI balances and, therefore, a relatively low risk-weighted assets density.

Notwithstanding the prevailing high systemic liquidity risk, IIB has maintained good liquidity, reflecting the significant funds deployed into CBI balances and bank placements and, conversely, the limited share of net financings in total assets. This is in large part a corollary of the limited lending opportunities in the banking system. The importance given to safeguarding liquidity is crucial in a system where the central bank is understood to perform a lender-of-last-resort function only in exceptional cases, and where depositor confidence is low. That said, aided by its good reputation, IIB has doubled customer deposits (including margin accounts) since 2022. Although depositor concentrations persist, the attendant liquidity and funding risk is partially mitigated by a good stock of liquid assets.

IIB’s earnings strength supports the ratings. In contrast to almost all other Iraqi private sector banks, IIB has been consistently profitable since 2015 despite difficult operating conditions in the country. Although the business model remains concentrated, with limited sources of financing income, IIB’s operating income improved significantly in recent periods, driven by increased business volumes and a favourable net financing margin. In turn, the Bank’s capacity to generate net financing income and non-financing income (non-FI) has improved. Earnings quality is considered to be satisfactory. Operating income, however, remains skewed towards non-FI, reflecting the scarce profitable avenues to deploy surplus liquidity in the system. Although the earnings outlook faces some downside risks given Iraq’s challenging operating environment, we anticipate revenue diversification to improve in the longer term as new products are launched.

The OPERA takes into account economic volatility 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 in 2024, buoyed by favourable oil prices, credit risk remains elevated. The OPERA also reflects 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.

Rating Outlook

The Outlook for IIB’s ratings is Stable, indicating that they are unlikely to change over the next 12 months. This reflects our view that the Bank will maintain its current risk profile.

Rating Dynamics: Upside Scenario

We do not expect an upward change in the ratings and/or outlook, unless the OPERA and our internal assessment of Iraq’s sovereign credit risk improves. These are currently seen as being unlikely to change within a 12-month timeframe.

Rating Dynamics: Downside Scenario

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

Contact

Primary Analyst: Morris Helal, Senior Credit Analyst; E-mail: ...
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 FY2020-23 and Q3 24. 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. The ratings were first released in April 2020 and last updated in April 2024. 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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