Sharjah Islamic Bank

The stable outlook reflects our view that the bank's business and financial profiles will remain broadly unchanged over the next 12-24 months, despite pressure on its operating environment and our expectation that asset-quality indicators will slightly weaken. We could consider a negative rating action if we observe higher-than-expected deterioration in asset quality or weaker-than-expected capitalization, signaled by the RAC ratio dropping below 10%, which may come from faster-than-expected growth. We may also take a negative rating action if the creditworthiness of Sharjah's government, the bank's largest counterparty, comes under further pressure. A positive rating action is remote in the next 12-24 months, since it would require SIB to materially strengthen both its franchise and capitalization, with RAC sustainably exceeding 15%.

...Sharjah Islamic Bank's (SIB's) capitalization will remain strong. We expect that SIB's risk-adjusted capital (RAC) ratio before concentration adjustments will remain at 11.5%-12.0% over the next 12-24 months. We factor an average cost of risk of above 100 basis points (bps) over the next two to three years in our base-case forecast, and we expect the share of stage 3 loans will revert to around 5.5%. We also expect the bank will maintain stage 3 coverage by specific provisions of about 60%--broadly on par with the UAE market average. SIB's credit growth will outpace that of its peers. We expect SIB will continue expanding at a faster pace than its domestic peer group, with financings increasing by 7%-8% per year as it captures market share from other Sharjah-based banks. Like 2020, we believe a significant portion of growth will be linked to government-related entities (GREs) in Sharjah, and to a lesser extent Dubai. Loan deferrals will remain a source of uncertainty. We expect some deterioration...

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