Moody's Investors Service has today assigned A3 long-term and Prime-2 short-term local and foreign currency issuer ratings as well as a D+ bank financial strength rating (BFSR) to Masraf Al Rayan ("MAR"). The rating outlook is stable. This is Moody's first public rating assigned
to an Islamic bank in Qatar.
With USD4.6 billion of assets at 31 December 2008, MAR is a small financial institution by domestic and regional standards and holds a market share of around 5% in domestic banking assets. However, it is one of Qatar's most successful Islamic banks and commands around 25% of the country's Shari'ah-compliant banking assets. MAR's immediate domestic Islamic banking competitors, International Islamic Bank and Qatar Islamic Bank (both not rated), are older and more entrenched players.
Despite having been established as recently as January 2006, MAR began operations with authorized capital as large as USD2.1 billion, of which USD1.1 billion was issued and paid up at year-end 2008. MAR already boasts one of the most significant market capitalizations in Qatar, standing at USD6.2 billion at 30 June 2009. However, MAR still has a short track record and small customer base, serving around 8,000 retail and around 400 corporate customers through a network of only five branches. Despite its small size, MAR enjoys a solid brand name and a strong reputation as one of the most dynamic Shari'ah-compliant financial institutions in the country.
The D+ BFSR -- which maps to a baseline credit assessment (BCA) of Ba1-- reflects MAR's growing franchise as one of Qatar's few Islamic banks, its close ties with the government of Qatar, strong financial performance and asset quality, as well as ample capitalisation and satisfactory liquidity. However, the rating is constrained by a short track record and limited absolute size, high degree of concentration risks, rapid balance sheet growth, as well as a still imbalanced funding continuum that is heavily reliant on short-term customer deposits, generating both maturity mismatches and displaced commercial risks.
Moody's believes the D+ BFSR and Ba1 BCA capture the bank's standalone risk profile, which balances very strong financial metrics with lower qualitative scores, which themselves factor in the recurring weaknesses of Islamic banks in the Middle East: namely, high concentration risks, constrained liquidity management, still developing risk management architectures, challenging balance sheet management on both the asset and liability sides, and -- in the case of MAR -- small size, a limited track record and an unseasoned/untested business model.
Moody's assesses the probability of systemic support in the event of a stress situation to be very high, based on (i) Moody's assessment of Qatar (rated Aa2) as a high-support environment, especially for domestic, retail deposit-taking institutions like MAR; (ii) evidence of systemic support that was provided to troubled domestic retail banks in the past; and (iii) the bank's status as one of Qatar's most successful Shari'ah-compliant financial institutions, and its 33% ownership by Qatari public sector entities. However, Moody's does not consider MAR to be a Government-Related Issuer (GRI) and as such, does not apply its GRI methodology to assess MAR's credit profile. Given the support assessment, MAR's long-term global local currency (GLC) issuer rating is set at A3, underpinned by its BCA of Ba1 and the Qatari government's systemic support capability -- resulting in a four-notch uplift from the bank's BCA.
The outlook on the ratings is stable. Moody's considers both an upgrade and a downgrade of the bank's current BFSR and issuer ratings to be unlikely over the medium term. The rating agency says that an upgrade of the bank's BFSR and/or issuer rating could be triggered by significant asset as well as business expansion, which would in turn lead to further diversification, both by name and sector, especially in the retail segment. The BFSR and/or issuer rating could also be upgraded if the mix of funding sources were to incorporate more term financing as an alternative to the bank's binary approach between capital and customer deposits, and if buffers against displaced commercial risks are gradually built up.
Conversely, the BFSR and/or issuer rating could be downgraded in the event of deteriorating profitability, a steep decline in asset quality, or a sudden and sharp tightening of the bank's liquidity profile or capitalisation that would be triggered by a pace of growth that far exceeds expectations and plans. Downward rating pressure would also arise if reputation or displaced commercial risks materialize, or if the current links with Qatar's government and public sector at large weaken.
The principal methodologies used in rating MAR were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.
Masraf Al Rayan is headquartered in Doha, Qatar, and reported total assets of QAR22,613 million (USD6.2 billion) at 30 June 2009.Global Arab Network