LONDON — The Issuer Default Ratings (IDRs) of Islamic banks in the Gulf Cooperation Council (GCC) region are all investment grade, Fitch Ratings said, with 89% of IDRs driven by potential sovereign support either directly or through a parent. The remaining 11% are driven by banks" standalone creditworthiness, as defined by their Viability Ratings (VRs). The outlooks on most IDRs are stable. Sovereign willingness to provide support has remained extremely strong throughout the GCC and little progress towards resolution has been made. Only 35% of VRs are investment grade (this is lower than at conventional banks), with higher risk appetites and weak asset quality as the main shortfalls. The average VR in Saudi Arabia is a strong "bbb+" (ranging from "bb+" to "a-") but is much weaker in Kuwait (bb+) and the UAE (bb). The average VR is "bbb-" in Qatar. Increased Shariah-focused regulation could potentially have credit implications, which we will assess as implementation progresses. The two largest Islamic banks are in Saudi Arabia, reflecting Saudi Arabia"s larger economy, well-established Islamic banking market and relatively small number of banks. The third-largest bank by assets, Kuwait Finance house (KFH), is well behind (about half the size). However, KFH could fill the gap if the discussed merger with Bahrain"s Ahli United Bank goes ahead. Islamic banks continue to benefit from strong demand for Islamic banking products now that these products are broadly equivalent to those of conventional banks. Some of these banks are in start-up or growth phases and are looking to gain market shares. — SG