October 6, 2017 / 9:50 AM / in a year

Fitch Affirms ICD's IDR and Hilal's MTN at 'AA'; Outlook Negative

(The following statement was released by the rating agency) LONDON, October 06 (Fitch) Fitch Ratings has affirmed Islamic Corporation for the Development of the Private Sector's (ICD) Long Term Issuer Default Rating at 'AA' with Negative Outlook and Short-Term IDR at 'F1+'. Fitch has also affirmed Hilal Services Ltd's medium-term note (MTN) programme at 'AA'. It should be noted that ICD has changed its financial year end from Lunar Hijri to Solar Hijri (equivalent to Gregorian calendar) and so the end-2016 financial statements used in our analysis and referenced in this commentary are based on a 15-month financial year. KEY RATING DRIVERS ICD is a member of the Islamic Development Bank Group. Members share services including IT infrastructure and premises, and the Islamic Development Bank (IsDB) has three representatives on ICD's board of directors. ICD's ratings are driven by support from key shareholders, IsDB (AAA/Stable) and Saudi Arabia (A+/Stable), which currently own 45.5% and 18.2% of capital, respectively. However, as a result of an ongoing capital increase, IsDB's share-ownership will decline to 34.9% by 2020. ICD's ratings are specifically driven by the average rating of the bank's key shareholders (defined by Fitch as those collectively owning over 50% of the share capital). Saudi Arabia and IsDB will remain the two key shareholders, with a combined 53.6% of share capital but, following the downgrade of Saudi Arabia earlier this year by Fitch, to 'A+' from 'AA-', ICD's ratings are now sensitive to a single-notch downgrade of Saudi Arabia over the medium term. Any further downgrade of Saudi's Long Term Foreign Currency IDR would trigger a downgrade of ICD's rating. Unlike most multilateral development banks (MDB), ICD has not issued callable capital. Notwithstanding a proven track record of liquidity support by IsDB, no legally binding support mechanism is in place to address capital shortages. Fitch, therefore, considers propensity to support as weak and factors this into the ratings. The overall support rating is 'aa'. ICD's overall solvency assessment remains at 'a+'. The bank continues to have 'excellent' capitalisation, with an equity-to-assets ratio of 39.8% at end-2016, which is one of the highest in the universe of Fitch-rated regional MDBs. This ratio fell from last year, however, as ICD's operations are in a development stage and the bank's asset portfolio is growing rapidly, which is a trend that Fitch expects to continue over the medium term. Further developments over the course of the past year include the improvement in the bank's average rating of loans to 'B+' from 'B'; the fall in the impairment ratio to 14.5% from 22%; improvement in the risk concentration metrics, with the five-largest exposures now accounting for 16.3% of the total banking portfolio (down from 28.7%); and the amount of equity participations, as a percentage of total portfolio, fell to 45.3% from 63.1%. These improvements reflect partly continued strong growth, particularly in ICD's loan portfolio, through the bank's strategic decision to focus more heavily on lending to financial institutions, but also the benefits of the enhanced credit approval process the bank has developed in recent years. Fitch's assessment of ICD's liquidity position improved to 'aa-' from 'a+' since the last rating review, owing, firstly, to an improved coverage of short-term debt by liquid assets (165.5% at end-2016 vs. 53.2% at Oct-2015). This ratio is projected to rise over the medium term because the bank expects to eliminate short-term funding by 2018. Secondly, ICD's liquidity position has benefitted from improved access to capital markets, reflecting the bank's substantial Sukuk issuance programme undertaken in the past year. Nevertheless, the bank's liquidity assessment is constrained by the weak quality of treasury assets, with just 5% rated 'AA' to 'AAA'. ICD's operating environment remains 'high-risk', reflecting the overall low credit quality, high political risk and weak public governance of many of the bank's countries of operations. The business profile assessment remains 'medium risk'. This assessment mainly reflects the small size of the bank (total banking exposure of USD1.7 billion) and its focus on the non-sovereign sector. Consequently, a downward adjustment of one notch is applied to the intrinsic rating assessment to reflect the weakness in the ICD's overall business environment, in line with Fitch's criteria. The combination of the 'a+' solvency assessment and the one notch downward adjustment for the business environment results in an overall intrinsic rating of 'a', which is unchanged from last year's assessment. The 'aa' support rating results in a three-notch uplift above the intrinsic rating, which is the maximum permissible as outlined in Fitch's criteria. If, therefore, the intrinsic assessment declines by a single notch, this would lead to a downgrade of ICD's Long-Term IDR. Hilal Services Ltd. The rating for Hilal's MTN programme is driven solely by ICD's IDR. ICD has undertaken and shall be unconditionally and irrevocably obliged to purchase the outstanding portfolio on the maturity date and/or following the occurrence of a dissolution event pursuant to the purchase undertaking deed and the relevant ICD purchase agreement. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to a rating downgrade are: - A weakening of capacity to support evidenced by a downgrade of either IsDB's ratings or a downgrade of Saudi Arabia's IDR; - A marked deterioration in ICD's capitalisation metrics, primarily the equity-to-assets ratio; and - A weakening in the bank's overall solvency risk assessment, caused potentially by deterioration in either the bank's loan impairment ratio or equity risk profile. Conversely, the main factors that could, individually or collectively, lead to the Outlook being revised to Stable are: - Material improvement in the sovereign rating of Saudi Arabia; and - Continued, material improvement in the bank's solvency assessment metrics. KEY ASSUMPTIONS Fitch assumes that the combined share-ownership of IsDB and Saudi Arabia in ICD will remain above 50% until at least 2020. Capitalisation will continue to decline modestly but the equity-to-adjusted assets ratio should remain above 35% over the medium term. The rating of Hilal's MTN programme will be influenced by changes in ICD's Long-Term IDR. A downgrade of ICD's IDR would result in a downgrade of Hilal's ratings. Contact: Primary Analyst Nicholas Perry Analyst +44 203 530 1795 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Vincent Martin Director +44 20 3 30 1828 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Sources of information ICD's financial statements and other information provided by ICD. Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Supranationals Rating Criteria (pub. 18 May 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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