Fitch Ratings has assigned Trade Bank of Iraq (TBI) a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with Stable Outlook.

According to Saudi Gazette, this makes TBI the first bank in Iraq to get B- from Fitch.

IDRS AND VIABILITY RATING

TBI’s IDRs are driven by the bank’s Viability Rating (VR) and underpinned by potential sovereign support.

TBI’s VR of ‘b-‘ is constrained by the operating environment in Iraq, which can be volatile and challenging, and where TBI generates 85% of its business volume (on- and off-balance sheet exposure). Therefore, the operating environment and broader country risks influence TBI’s standalone risk profile.

TBI’s company profile is a relative strength for the rating. It captures the bank’s important trade finance role, as Iraq’s primary bank for financing imports, leading market share in Iraq (30% of sector assets), and largely government-led business in terms of lending, off-balance sheet transactions and customer deposit funding.

TBI was set up in 2003 by the Coalition Provisional Authority (the transitional government of Iraq at the time) with the support of a consortium of 13 major international banks from 13 countries, which provided technical and operational expertise. TBI is now fully operational and is systemically important to Iraq.

TBI’s key strategic objectives are to build a universal banking franchise in Iraq (with growth in domestic retail banking and project finance) and expand regionally through acquisitions. The latter is partly driven by the government’s efforts to reintegrate Iraq in the international financial markets. This also opens the bank to significant execution risks if the expansion is not managed adequately. The bank currently has a representative office in Abu Dhabi and has recently been granted licence to open a branch Saudi Arabia.

Asset quality is a rating weakness. TBI has a very high impaired loan ratio (41% at end-2017). Most impaired exposures were originated during 2014-2015 in a period of political turmoil and heightened security risks with the rise of ISIS in Iraq. Recent impaired loan generation is attributable to the drop in oil prices given the high oil dependence nature of the Iraqi economy (oil accounts for more than 50% of GDP). TBI’s impaired loans include both cash loans and trade finance facilities that got impaired (moved onto balance sheet). Under new management, TBI has made strong strides in recoveries, which total USD640 million to date in 2018 (2017: USD210 million).

TBI has a satisfactory funding and liquidity position, helped by substantial government deposits. Profitability is also satisfactory, with core net interest income growing in 2017 despite slow business volume growth due to conflict and low oil prices.

Capitalisation is a relative strength, with TBI reporting very strong regulatory Basel I total capital adequacy ratio and Fitch Core Capital ratio of 67% at end-2017. At the same time, these strong metrics should be viewed in the context of 0% risk weightings applied to all of TBI’s sovereign and government exposure. TBI is expected to report regulatory capital ratios under Basel III in 2019.

For now, TBI’s leverage, as defined by the bank’s tangible common equity/tangible assets ratio, which was a satisfactory 16.7% at end-2017, is a more reasonable measure of capitalisation in our view.

TBI has around USD3.7 billion equivalent of Iraqi dinar deposits trapped in the Kurdish region due to a political dispute with the central government, which would eliminate TBI’s equity if deducted. TBI expects to recover this amount due to ongoing discussions between both parties. These deposits are excluded from TBI’s reported liquidity ratios (Basel III liquidity coverage ratio of 186% and net stable funding ratio of 162% at end-9M18), which are very healthy.

SUPPORT RATING AND SUPPORT RATING FLOOR

TBI’s Support Rating of ‘5’ and Support Rating Floor of ‘B-‘ reflect Fitch view that sovereign support, while possible, cannot be relied upon.

Fitch believes that the authorities would have a strong propensity to support TBI in case of need. This considers the role played by TBI on behalf of the government, the bank’s systemic importance, as well as its 100% state-ownership. Nevertheless, Fitch’s view is that sovereign support cannot be relied upon given Iraq’s own creditworthiness (as indicated by the sovereign’s ‘B-‘ IDR) and potential delays in providing timely and sufficient support due to country risks including an uncertain political environment in Iraq.

RATING SENSITIVITIES

IDRS AND VR
TBI’s IDRs and VR are sensitive to a change in the Iraqi sovereign rating. They are also sensitive to further asset quality deterioration or an increase in country risk, leading to more challenging operating conditions. Finally, the VR is also sensitive to TBI making a major acquisition abroad that could materially change its overall risk profile.

SUPPORT RATING AND SUPPORT RATING FLOOR
TBI’s SR and SRF are also sensitive to a change in the Iraqi sovereign rating. They could be downgraded/revised if Fitch views that the state’s willingness to support the bank is diminishing, for example in the event of a change in TBI’s role or a material reduction in government ownership.

The rating actions are as follows:

Trade Bank of Iraq
Long-Term IDR assigned at ‘B-‘: Outlook Stable
Short-Term IDR assigned at ‘B’
Viability Rating assigned at ‘b-‘
Support Rating assigned at ‘5’
Support Rating Floor assigned at ‘B-‘

(Sources: Fitch, Saudi Gazette)

By John Lee.

Iraq opened the books yesterday on its first independent bond sale in a decade.

Investor demand was huge,” writese Marcus Ashworth at Bloomberg. “The deal was seven times oversubscribed.

The $1-billion, dollar-denominated bond, maturing in March 2023, was expected yield 7 percent, but demand enabled that to be cut to 6.75 percent.

In January, Iraq raised $1 billion of five-year bonds, guaranteed by the United States, at a coupon of 2.149 percent, but this latest bond is not guaranteed and depends on Iraq’s own creditworthiness. It is rated B- by both S&P and Fitch.

Iraq appointed Citi, Deutsche Bank and JP Morgan as joint bookrunners for the issue.

Meanwhile, the yield on the Iraqi 10-year bond (2028) has fallen from 9.3 percent in November to 6.7 percent.

(Sources: Bloomberg, Financial Times)

Fitch Ratings has revised the Outlook on Iraq’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘B-‘. The Country Ceiling has been affirmed at ‘B-‘ and the Short-Term Foreign-Currency IDR at ‘B’.

KEY RATING DRIVERS

The revision of the Outlook reflects the following key rating drivers:

Iraq’s fiscal position has improved relative to 2015 and 1H16 because of higher than expected oil prices and reduced government spending. We estimate that the budget deficit narrowed to IQD16.5trn or 8.1% of GDP in 2016, from 12.3% of GDP in 2015. The IMF programme agreed in July 2016 is providing a useful policy framework and has helped Iraq’s financing options. However, progress has been slow in a number of areas including surveying arrears, in part due to capacity constraints.

In 2017 we forecast that the deficit will narrow further, to 5.1% of GDP, with higher average oil prices driving strong revenue growth. We incorporate non-oil revenue of IQD8trn (the IMF assumes IQD10.5trn). On the spending side, we forecast 12.1% growth in expenditure after three years of substantial spending declines.

Financing needs will therefore be lower in 2017 and the authorities expect to rely less on indirect monetary financing by the CBI. External financing will play a more dominant role, with funds from the IMF, World Bank, bilateral project loans, a USD1bn Eurobond (with a 100% US guarantee) issued in January and another planned for later in 2017 (without a guarantee). For 2018, Iraq still needs to identify sources of funding to plug the financing gap calculated by the IMF and will likely again focus on external financing.

Identified arrears totalled IQD12.5trn (USD10.6bn or 6.1% of 2016 GDP) at end-June 2016. In October the IMF expected around IQD6.5trn of these arrears to be repaid in 2016 (including most external arrears) and these are included in 2016 spending estimates. The remaining identified domestic arrears are to be repaid in 2017-19 after they have been audited.

Fitch Ratings has affirmed Iraq’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Negative Outlook. The Country Ceiling is affirmed at ‘B-‘ and the Short-Term IDR at ‘B’.

KEY RATING DRIVERS

Political risk and insecurity in Iraq are among the highest faced by any sovereign rated by Fitch. Progress has been made in pushing back the Islamic State (IS), but the military campaign brings in its wake major reconstruction and humanitarian challenges.

Sectarian and ethnic tensions continue to undermine political stability, relations with the Kurdish Regional Government are volatile and Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator. This reflects not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions.

The bulk of oil production facilities and export infrastructure are located away from areas of insecurity. After expanding strongly in 2015, oil output in the south has stabilised so far in 2016 at 3.5m b/d on average, given lower budgeted government payments to international oil companies, which has constrained investment. Including output from the north, which incorporates Kurdish fields, total oil production totalled 4.6m b/d in July, according to the Ministry of Oil. Given low oil prices we expect the government to budget a similar amount for oil investment in 2017 and we forecast oil production and exports (at 3.3m b/d) to plateau.

Lower oil prices are driving significant deterioration in Iraq’s financial position. Commodity dependence is among the highest of all Fitch-rated sovereigns. Oil accounts for more than 50% of GDP and over 90% of fiscal and current external receipts. The budget deficit in 2015 ballooned to IQD26.4trn (USD22.3bn) or 13.9% of GDP. This was financed by a mixture of T-bill issuance to banks refinanced to a large degree by the CBI (indirect monetary financing), accumulation of domestic and external arrears and multilateral financing.

By John Lee.

Reuters reports that Iraq expects to sell $2 billion in eurobonds in the last quarter of this year, when international aid starts coming in, helping lower its cost of borrowing.

Finance Minister Hoshiyar Zebari (pictured) told the news agency that Iraq expects to receive $600 million in September from the International Monetary Fund (IMF), as the first tranche of a $5.4-billion facility that the organization is expected to provide over three years under a standby agreement announced last month.

Moody’s and Fitch Ratings last month said Iraq’s IMF deal is credit positive. Fitch rated Iraq’s long-term credit at B-, below investment-grade.

(Source: Reuters)

By John Lee.

The CEO of Standard Chartered in Iraq has said that the bank is in talks with Iraq’s Finance Ministry to take part in a $2-billion bond sale this year.

Andreas Meletiou also told Bloomberg that the London-based bank is also holding talks with other government institutions about their financing needs.

A planned sale of government bonds last year was halted because investors demanded yields that the government deemed too high. Citigroup, Deutsche Bank and JPMorgan Chase had been working on that deal.

Fitch Ratings last week revised its outlook on Iraq’s long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable.

(Source: Bloomberg)

(Bonds image via Shutterstock)

Fitch Ratings has revised its outlook on Iraq’s Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B-‘.

The Country Ceiling has been affirmed at ‘B-‘ and the Short-Term foreign currency IDR at ‘B’.

KEY RATING DRIVERS

The revision of the Outlook reflects the following key rating drivers:

Lower oil prices are driving a significant deterioration of Iraq’s financial position. Commodity dependence is among the highest of all rated sovereigns. Oil accounts for more than 50% of GDP and over 90% of fiscal and current external receipts.

The budget deficit widened in 2015 to an estimated 8.2% of GDP, due to sharply lower oil prices. The 2016 budget envisages a larger deficit, but its assumptions of an average oil price of USD45/b and 3.6m b/d of crude exports still look optimistic. Fitch forecasts that Brent crude will average USD35/b in 2016, suggesting an Iraqi price of USD32/b (based on the average discount in 2013-15). Assuming crude exports remain at current levels of around 3.3m b/d and the government enacts modest spending cuts, we project the budget deficit to widen to 15% of GDP in 2016. Fitch expects this to moderate to 7.6% of GDP in 2017 as oil prices rise.

In 2015 the government received USD1.2bn each from the IMF and World Bank and further foreign concessional loans are likely. Iraq and the IMF agreed on a Staff Monitored Program (SMP) in November with the aim of moving to a stand-by arrangement (SBA). Iraq is hoping to revive plans to issue Eurobonds of up to USD2bn this year. Fitch believes this is contingent on securing a SBA with the IMF. Meanwhile, domestic issuance of T-bills has ramped up, with indirect monetary financing by the central bank playing a substantial role. Despite some modest initiatives to introduce new excise and consumption taxes, there is little prospect of substantial revenue diversification in the medium term.