CREDIT ANALYSIS REPORT

ISLAMIC DEVELOPMENT BANK - 2020

Report ID 60545 Popularity 370 views 11 downloads 
Report Date Jun 2020 Product  
Company / Issuer Islamic Development Bank Sector Finance - Financial Institution
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale
MARC has affirmed its financial institution (FI) ratings of AAA/MARC-1 on Islamic Development Bank (IsDB), as well as 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 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. It also considers IsDB’s strong capitalisation, healthy liquidity position and low leverage ratio, which provides some buffer against the weakening global economy amid the COVID-19 pandemic.

IsDB’s healthy capitalisation and provisioning stand the MDB in good stead to weather the economic crisis, notwithstanding the likely increase in overdue instalments. As at end-2019, impairment provisions stood at ID306.4 million against ID121.4 million worth of overdue instalments, translating to overdues provisioning coverage of over 250%. At the same time, the bank’s members’ equity-to-assets ratio stood at 38.5%, higher than many of its peer MDBs. Given that all instalments overdue by six months are fully provided for, MARC’s stress test shows that a severe increase in overdue instalments as of end-2019 can be comfortably absorbed; a tenfold and twentyfold increase in overdue instalments (overdue instalment ratio: 8.7%; 16.6%) result in equity-to-assets ratio of over 33% and 28%, which still remain higher than that of 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-2019 this stood at 5.9%. The subscribed capital comprises callable capital of ID40.9 billion and called-up capital of ID9.4 billion, of which ID5.8 billion has been paid and the remainder expected to be paid over the next 16 years.

The bank also has a sound liquidity position as reflected by its liquid assets-to-total borrowings ratio of 51.2%. Its liquid assets, which stood at ID7.1 billion as at end-2019, comprised deposits with banks, cash balances and sukuk investment.  MARC notes that the bank has also sourced deposits of ID361.8 million from related parties in 2019, 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 7.7% y-o-y growth in gross financing to ID15.3 billion in 2019. After accounting for provisions, net financing exposure stood at ID15.0 billion, of  which  68.5% came from  the infrastructure  sector, 15.0% from social services and 9.3% from the agriculture sector. MARC understands that in view of the COVID-19 pandemic, over ID1 billion worth of financing has been repurposed by the MDB towards supporting affected member countries, by way of strengthening health systems, building pandemic preparedness capacity and SME support, among others.

As with other MDBs, IsDB remains exposed to the credit risk of sovereigns with weak credit profiles. As at end-2019, 85.1% of the bank’s top 20 sovereign exposures were unrated and non-investment grade countries. While overdue instalments improved to 0.8% of total financing in 2019 (2018: 1.1%), the economic impact from the ongoing COVID-19 pandemic on some of IsDB’s debtor nations will be severe, which could lead to an increase in overdue instalments. Nevertheless, IsDB benefits from its preferred creditor status which places priority of debt payments to MDBs ahead of other creditors.

Major Rating Factors

Strengths
Healthy capital and liquidity position; 
Strong shareholders’ commitment to subscribe to callable capital; and
Preferred creditor status.

Challenge/Risk
Significant credit exposure to sovereigns with weak credit profiles.


Related