(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 Al Janoob Islamic Bank (JIB or the Bank) at ‘B-’ and ‘B’, respectively. At the same time, CI Ratings has affirmed JIB’s Bank Standalone Rating (BSR) of ‘b-’, Core Financial Strength (CFS) rating of ‘b+’ and Extraordinary Support Level (ESL) of Uncertain. The Outlook for both the LT FCR and BSR is Stable.

CI has also affirmed JIB’s Long- and Short-Term Ratings on the Iraq National Scale at ‘iqBBB’ and ‘iqA3’, respectively, with a Stable Outlook. These ratings 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 ‘b+’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’. The CFS is supported by the Bank’s good balance sheet leverage ratio and capitalisation (after a sizable rights issue in 2023), high liquidity, and adequate profitability at both operating and net levels. The capable management is also a credit strength. The main constraints on the CFS are the Bank’s high credit risk profile (due to an ongoing difficult operating environment), concentrations in assets and customer deposits, and a relatively small balance sheet and market share. Though improving, Iraq’s weak regulatory and supervisory framework also remains a credit challenge. JIB (along with many other Iraqi banks) is currently banned by the Central Bank of Iraq (CBI) from transacting in USD due to alleged irregularities. In partial mitigation, the Bank is able to access other hard currencies in order to fulfil financial commitments. The OPERA is at a level indicative of a high degree of risk and is a key rating constraint on the ratings for JIB (as well as for all other Iraqi banks).

We consider the likelihood of sufficient and timely official extraordinary support being made available to JIB (or any other private sector bank) 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.

Despite the challenges that persist in the Iraqi operating environment (including the impact of the USD ban on business volumes and earnings), JIB’s business model has demonstrated a fair degree of resilience. This reflects an effective management team implementing a strategy appropriate for tough business conditions. With trade finance activities largely suspended (due to the USD ban), management is focused on building corporate and retail financing in part to diversify assets and revenues and, in turn, reduce concentration risks. Governance standards are being strengthened, supported by a newly constituted and well qualified board. That said, significant market and regulatory challenges prevail in Iraq’s still underdeveloped banking system.

JIB is among a handful of Iraqi private-sector banks that have fully complied with the CBI’s revised paid-up capital requirement via a sizeable rights issue (in 2023). The timely injection of fresh equity denotes good capital flexibility and firmly underscores the shareholders’ capacity and willingness to support the Bank throughout the ordinary course of business. We expect this factor − alongside a good capital buffer – to remain a credit strength going forward. Although total CAR declined due to growth in total risk-weighted assets (RWAs), it remained high and provides ample scope for sustained business expansion over the short to medium term. We note that RWA-based capital ratios are flattered by large holdings of zero-weighted CBI balances. The balance sheet leverage ratio remained conservative at 58%, with capital consisting of high-quality loss-absorbing common equity. This is important given the concentration risk and balance-sheet sensitivity to potential shocks inherent in Iraq. ’s operating environment.

Although the composition of assets shifted moderately towards financings, CBI balances continue to dominate the asset base. The resultant concentration risk is a salient feature of all Iraqi banks. Under CI’s rating criteria, central bank balances come firmly under the sovereign risk category. Although JIB’s exposure to the CBI declined further, it was equivalent to a still significant 81% of total equity in H1 25. 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.
The Bank has maintained financing asset quality metrics at a satisfactory level despite the growth in non-performing financings (NPFs) (Stage 3) in recent periods. While the recent rapid financing expansion would normally be a cause for concern, CI notes that this was off a low base – the financing portfolio was equivalent to just 9% of total assets in 2024 and cover is more than full. Stage 2 financings, a forward-looking indicator of future asset quality risks, grew noticeably to 16.6% of gross financings in H1 25, reflecting the cyclicality of some corporate borrowers’ cash flows. In mitigation management has a tested lending policy and effective collection processes. Stage 2 financings have subsequently declined to 3.2%. Given the limited size of the financing portfolio, we project the magnitude of any new NPFs to be manageable. The portfolio however remains concentrated in terms of borrowers and economic sector.

Notwithstanding the ongoing high systemic liquidity risk in Iraq, JIB’s liquidity position remains good, reflecting a still modest financing portfolio. However, liquidity is subject to considerable concentration risk, as the bulk of funds is deployed into CBI balances. Liquidity is thus vulnerable to sovereign risk. Iraqi banks as a group typically channel much of their liquidity into non-remunerative CBI balances, as there are scarce avenues in which to profitably invest surplus liquidity in the banking system. The CBI (in collaboration with the Ministry of Finance) has recently launched new profit-earning treasury instruments for banks to deploy their idle liquidity. This is expected to lift financing income levels and at the same time activate the secondary market. Following the retirement of expensive time deposits and withdrawals from current accounts, management has launched a new deposit scheme aimed at rebuilding customer deposits. In this regard, JIB has considerable scope to leverage the equity base. However, future deposit growth is vulnerable to confidence shocks that can periodically impact the banking system. There persists an overall general lack of customer confidence and public trust in private-sector banks given Iraq’s recent history.

While profitability metrics are currently adequate and expected to remain as such relative to the ratings, earnings strength has declined from the good levels seen in 2022-23, in large part due to the impact of the USD ban. The latter has translated into lower business volumes and, in turn, reduced operating income. In common with almost all other Iraqi banks, JIB’s operating income remains heavily skewed toward non-financing income (non-FI). This is in large part due to the dearth of profitable avenues in which to invest surplus liquidity in the Iraqi banking system. This, in turn, has the effect of compressing the net financing margin (NFM), although we expect NFM to improve as the share of financings in total assets grows. The underlying stability and quality of non-FI streams is adequate, with the bulk derived from fees and commissions. Although customer concentrations introduce some degree of income volatility, the expansion into retail banking is likely to make a positive contribution to operating income.

The OPERA reflects very high political and geopolitical risk factors, and continued reliance on hydrocarbons coupled with the lack of a comprehensive reform agenda that would diversify the economy and shield it from exogenous shocks. Economic risk is further exacerbated by low institutional strength and the government’s limited and reduced access to its USD reserves held at the US Fed. On the other hand, the Iraqi economy is supported by the country’s large hydrocarbon reserves (second-largest OPEC producer), as well as adequate foreign exchange reserves and improving data disclosure. Structural weaknesses in the banking sector continue to prevail, giving rise to high systemic risk.

Rating Outlook

The Outlook for JIB’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, including the concentrations in the balance sheet.

Rating Dynamics: Upside Scenario

We do not expect an upward change in the ratings and/or outlook unless the OPERA improves. This is currently seen as being unlikely to change within a 12-month timeframe. Positive pressure could however be exerted on the CFS were the Bank to increase market share significantly, reduce concentration risks and improve the ROAA.

Rating Dynamics: Downside Scenario

While not our current expectation, JIB’s ratings could be reduced by one notch over the next 12 months should key credit metrics worsen significantly and/or should the OPERA be revised downwards.

Note: 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 and 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 FY2021-24 and H1 25. 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) and the National Scale Ratings Criteria for Iraq, (dated 15 March 2020). For the methodology and our definition of default see Information on rating scales and definitions and the time horizon of rating outlooks 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. International and National ratings on the entity were first released in December 2019 and suspended in April 2024 due to a lack of sufficient information. The ratings have now been reinstated due to the receipt of more up-to-date financial data. The ratings were first released in August 2020 and last updated in April 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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