Fitch Ratings: Neutral outlook for EMEA Islamic banks

Fitch Ratings’ neutral 2023 sector outlook for EMEA Islamic banks reflects solid economic conditions in the main EMEA Islamic markets, says Fitch Ratings. Credit growth will continue to outstrip that of conventional banks. Fitch expects profitability to improve and liquidity to remain solid, while capital buffers should remain adequate for the risks, and asset quality will remain stable.

Two-thirds of the Issuer Default Ratings (IDRs) assigned by Fitch to EMEA Islamic banks are investment-grade, and 61% are driven by potential sovereign support; that leaves 35% of IDRs driven by the banks’ standalone creditworthiness – as shown by their Viability Ratings – and 4% driven by potential shareholder support. IDRs are widely distributed from ‘A+’ to ‘CCC+’, with Iraq having the lowest-rated banks. The range mostly reflects that of sovereign ratings.

The Positive Outlook on two Saudi Islamic banks reflect that on the sovereign, in turn driven by improvements in its balance sheet given higher oil revenue and fiscal consolidation. The Negative Outlook on all Turkish Islamic banks also mirrors that on the sovereign and the operating environment.

With the exception of Gulf countries, EMEA Islamic banks have an overall low market share of sector assets. Market shares will continue to grow as awareness and confidence in the Islamic finance industry grows. This will happen naturally in some markets as banking penetration grows, and in others will be part of the government’s strategy to promote and grow Islamic banking.