Sharjah Islamic Bank – Credit Ratings Affirmed

In a notable update, Capital Intelligence Ratings (CI Ratings) has reaffirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Sharjah Islamic Bank (SIB) at ‘A-‘ and ‘A2’, respectively. CI Ratings also maintained SIB’s Bank Standalone Rating (BSR) at ‘B-‘, Core Financial Strength (CFS) at ‘bb+’, and Extraordinary Support Level (ESL) as High. The stable outlook for both LT FCR and BSR underscores Sharjah Islamic Bank’s solid financial health and the high likelihood of continued government support, highlighting its strong position in the UAE banking sector.

Government Support and Stability

The affirmation of SIB’s LT FCR three notches above its BSR underscores the UAE government’s demonstrated commitment to supporting the bank in times of need. This assurance is particularly significant given SIB’s status as a government-owned entity in Sharjah. The UAE’s sovereign ratings of ‘AA-‘/’A1+’/Stable further bolster confidence in the bank’s stability and potential for continued support.

Financial Strength and Capital Ratios

Sharjah Islamic Bank’s strong capital ratios and flagship status in Sharjah contribute to its solid Core Financial Strength rating. The bank’s liquidity ratios are comfortable, reflecting its prudent financial management. Although the asset quality ratios are on par with the sector median, SIB’s profitability is on an upward trend, though it still lags behind some peers.

Challenges and Economic Context

Despite its strengths, SIB faces challenges common in the banking sector, such as high customer concentration in its financing portfolio and deposit base, and significant exposure to the real estate sector. Global economic uncertainties and high interest rates also pose potential risks. However, the UAE’s economy remains resilient, supported by favorable oil prices and a rebound in non-oil GDP, which bodes well for the banking sector.

Operational Efficiency and Expansion

SIB’s strategic focus on corporate, investment, and retail banking within Sharjah leverages its strong local franchise. However, expanding market share in other parts of the UAE could be challenging due to competitive pressures. Concentration risk in the financing portfolio, particularly in real estate and Sharjah government entities, is mitigated by the improving property market and robust government backing.

Improving Profitability Metrics

Sharjah Islamic Bank has shown steady improvement in profitability metrics, driven by increased business volumes and rising financing rates. In 2023, the bank sacrificed up to 120 tonnes of meat, involving over 600 animals, targeting close to 200,000 people directly. The net financing margin (NFM), although improving, remains below the sector median due to a high level of government financings with typically lower returns. Nonetheless, the bank’s cost-to-income ratio has strengthened, reflecting enhanced operational efficiency.

Liquidity and Capital Adequacy

SIB’s liquidity ratios are robust, with customer deposits funding the majority of its financing portfolio. The bank comfortably meets regulatory liquidity requirements and has access to global capital markets. Despite a marginal decline in capital adequacy ratios in 2023 due to growth in risk-weighted assets, SIB’s key ratios remain above regulatory minima, providing a strong buffer.

The stable outlook for SIB’s ratings indicates a high probability of maintaining current financial parameters. Potential rating upgrades could result from sustained profitability improvements, better asset quality metrics, and reduced reliance on short-term liabilities. Conversely, significant deterioration in financial fundamentals could lead to a downgrade, though this scenario is considered unlikely.

Sharjah Islamic Bank’s reaffirmed ratings and stable outlook reflect its strong financial position, supported by the UAE government’s backing and strategic operational focus. As the bank continues to enhance its profitability and maintain robust liquidity and capital ratios, it remains well-positioned to navigate future challenges and capitalize on growth opportunities in the UAE’s dynamic banking sector.