Commercial Islamic Bank of Iraq – Ratings Affirmed

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Commercial Islamic Bank of Iraq’s (CIBIQ) − formerly the Commercial Bank of Iraq − 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. CI Ratings has also affirmed CIBIQ’s Bank Standalone Rating (BSR) of ‘b-’ with a Stable Outlook, the Core Financial Strength (CFS) rating of ‘bb-’, and the Extraordinary Support Level (ESL) of High.

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

CIBIQ’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), whose BSR is ‘bbb’, in Bahrain. CI considers AUB to be able and willing to provide extraordinary support to CIBIQ based on its strong creditworthiness. The support is underpinned by a technical and management services agreement. AUB meanwhile is a consolidated subsidiary of Kuwait Finance House (KFH) in Kuwait. 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.

The Bank’s BSR is derived from a CFS rating of ‘bb-’ and the constraints imposed by Iraq’s Operating Environment Risk Anchor (OPERA) of ‘c+’. The latter is a key rating constraint for all rated Iraqi banks. The CFS rating reflects the Bank’s good track record and management, underpinned by AUB (KFH) ownership and management control, very sound CAR including high CET 1 component, and capital flexibility. The good ROAA and liquidity position also support the rating. The principal credit challenges are the difficult operating environment and Iraq’s sovereign risk (as is the case with peer banks), the small balance sheet and market share, and large concentrations in assets, as well as, to a lesser extent, customer deposits. Iraq’s high systemic liquidity risk and weak regulatory and supervisory framework (though improving) are also credit challenges.

CIBIQ’s strong parentage and management agreement with AUB bestow significant financial and non-financial benefits to the franchise. Risk management practices are in general sound. CIBIQ is a self- funding entity and also has access to financial (liquidity) backing from its parent as and when needed. However, in common with almost all peer banks, the business model is narrow in scope, reflecting in part the small balance sheet, as well as Iraq’s underdeveloped banking sector. These factors are a corollary of a persistently difficult operating environment compounded by elevated credit and liquidity risks in the banking system. We deem these to be a credit challenge.

CI considers the Bank to have a high credit risk profile – as is the case with all other Iraqi private sector banks – due to the difficult operating environment coupled with large exposures to the sovereign (via government bonds and/or 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 132% of total equity in Q3 24. The significant degree of concentration risk is exacerbated by Iraq’s high credit risk profile, meaning that any material sovereign credit event could potentially transmit stress to CIBIQ’s balance sheet, including capital, as well as earnings. This is expected to remain an important risk factor for the ratings in the short to medium term.

The net financing portfolio continued to constitute a fractional 2% of total equity at end-Q3 24. Given its negligible size in both money and proportionate terms, CI’s standard measures for assessing financing asset quality analysis are not very meaningful. That being said, CIBIQ’s financing asset quality has improved in recent periods due to write-offs. As and when lending resumes, we envisage new NPFs to emerge as part of the normal business cycle. However, given our expectation for the financing portfolio to remain relatively small looking ahead (coupled with the Bank’s sound provisioning policy), the formation of new NPFs is not likely to be a cause for concern.

The CBI raised the minimum paid-up capital requirement for Iraqi banks to IQD400bn (from IQD250bn) with effect December 2024, although the date was subsequently extended until March 2025. CIBIQ is currently liaising with the regulator for an extension given its current comfortable capital position. Management will continue to engage with the regulator to fulfil regulatory requirements. Even without a capital injection from the parent, the Bank should be able to meet the revised capital requirement from capitalisation of reserves and retained earnings. CIBIQ’s current capital ratios and leverage are good, although total CAR remains flattered by the zero risk-weighting of Iraqi government securities and CBI balances. While we expect capital ratios to decline over time as and when financings and leverage increase, they are projected to remain sound relative to the rating level. Capital quality is good, given the dominance of CET 1 funds, with capital flexibility being high, given the strong ownership.

In view of the Iraqi banking sector’s high systemic liquidity risk, the Bank has consistently maintained a good stock of liquid assets. We expect this factor to continue to support the ratings in the medium term. The high liquidity reflects the exceptionally low share of net financings in total assets, alongside a large holding of liquid government securities as well as CBI balances. The emphasis on safeguarding liquidity is crucial in a banking system where the CBI is understood to perform lender-of-last-resort functions only in exceptional circumstances. Although the contribution of customer deposits to total funding remained limited (30%) in Q3 24, CI considers customer deposits sensitive to confidence shocks due to the high probability of event risk in Iraq. CIBIQ does not actively seek customer deposits, given the limited avenues in which to profitably deploy surplus liquidity in the banking system. The high depositor concentrations elevate liquidity risk, but this is partially mitigated by significant liquid asset holdings.

The Bank’s continued good profitability at both the operating and net levels (despite some degree of volatility) is a credit strength, in contrast to the earnings performance of most (but not all) peer banks. We expect this to remain the case going forward. CIBIQ has demonstrated good operating income generation over time, although sources remain concentrated and significantly skewed towards net financing income (NFI). The bulk of NFI is derived from Iraqi government securities, and we expect the net financing margin to remain good over the medium term due to the dominance of low-cost funds. However, sources of non-financing income are limited and volatile – as is the case with most peers. CIBIQ’s risk absorption capacity − as measured by operating profitability − is considered sound. Looking ahead, we expect operating income to remain concentrated, with this being a function of a narrow business model and limited customer base.

Iraq’s OPERA is at a level indicative of a high degree of risk. The 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 in 2024 – buoyed by favourable oil prices − credit risk remains elevated. 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 CIBIQ’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 OPERA and our internal assessment of Iraq’s sovereign credit risk improve. 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 key metrics deteriorate considerably. The ratings could also be lowered should OPERA and/or our internal assessment of sovereign risk deteriorate.

*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: ...
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 2024. 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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