MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB). Concurrently, the rating agency affirmed its rating of AAAIS on the Sukuk Wakalah programme of up to RM400 million issued by Tadamun Services Berhad, a trust established by IsDB. The outlook on the ratings is stable.
The affirmed FI ratings reflect IsDB’s strong capitalisation, healthy liquidity position, low leverage ratio as well as its preferred creditor status as a multilateral development bank (MDB) that was established by the Organisation of Islamic Cooperation (OIC) in 1975 to provide financial support for development projects of OIC member countries and Islamic communities in non-member countries.
The stable rating outlook incorporates MARC’s expectation that IsDB will maintain its strong capitalisation and liquidity profile over the medium term, and that the bank’s member countries will continue to extend strong support. This support remains evident since its inception; in 2018, capital contribution from member countries rose by ID216.9 million to increase its paid-up capital to ID5,595.4 million (Islamic Dinar (ID)1.00 = US$1.39).
IsDB’s capital metrics have remained strong. As at end-2018, the bank’s members’ equity-to-assets ratio stood at 39.6%, providing strong coverage of assets. This ratio remains higher than many of its peer MDBs. MARC also views IsDB’s policy of restricting earnings distribution until general reserves attain 25% of subscribed capital as prudent; as at end-2018 this stood at 5.7%. The subscribed capital comprises members’ equity of ID8.7 billion, called-up but not due capital of ID3.6 billion (to be paid over the next 17 years) and callable capital of ID40.9 billion. As about 46.9% of callable capital is pledged by member countries with sovereign ratings of A- and above on the global rating scale, the quality of sizeable callable capital in relation to its total debt is considered strong.
IsDB’s debt-to-equity (DE) ratio rose to 142.7% as at end-2018 (2017: 122.8%), following sukuk issuances totalling ID2.8 billion, which were undertaken in part to support the growth of Islamic financial markets globally. IsDB’s leverage policy, despite an increase in its DE ratio limit to 175% from 125%, is considered moderate compared to its peers.
The bank also has a sound liquidity position as reflected by its liquid assets-to-total borrowings ratio of 53.7%, higher than many of its peers. Its liquid assets, which stood at ID6.7 billion as at end-2018, comprised deposits with banks, cash balances and sukuk investment. MARC observes that the bank also has an off-balance sheet liquidity buffer in the form of the Waqf Fund, a trust fund with ID719.2 million in total assets. MARC notes that the bank has sourced deposits of ID388.7 million from related parties in 2018, which provides some diversification to its funding base that has previously comprised solely of borrowings.
IsDB has steadily grown its financing portfolio in recent years, registering a 9.1% y-o-y growth in gross financing to ID14.3 billion in 2018. After accounting for provisions, net financing exposure stood at ID13.9 billion, of which 68.2% came from the infrastructure sector, 14.1% from social services and 9.9% from the agriculture sector. As with other MDBs, IsDB remains exposed to the credit risk of sovereigns with weak credit profiles.
As at end-2018, 84.8% of the bank’s top 20 sovereign exposures were unrated and non-investment grade countries; the three largest exposures were to Turkey (10.5%), Pakistan (7.3%) and Iran (6.6%), which are facing significant economic challenges, although there were no overdue instalments from these sovereigns. Overdue instalments rose to 1.1% of total financing at end-2018 (2017: 0.9%), largely due to an increase of ID23.4 million in overdue instalments from the Sudanese government. The bank maintains a policy of making full provisions against instalments overdue by six months or more. IsDB benefits from its preference creditor status, which places priority of debt payments to MDBs, ahead of other creditors.
Contacts: Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my ; Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my.
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