Qatar is one of the world's richest countries, and its banks are enjoying profitable returns across the board. However, there are concerns that the tiny country's banking sector is overcrowded and has too many regulators, leading for calls for consolidation in both areas.
In recent years, Qatar has emerged on the world stage as an economic powerhouse. Sitting atop the globe’s third largest natural gas reserves, the country’s enormous liquefied natural gas (LNG) expansion programme conducted over the past few years has fuelled its meteoric growth.
Ranked as the world’s fastest-growing economy in 2010, Qatar achieved a gross domestic product (GDP) growth rate of 18.5%. Its GDP is forecast to grow by a further 19% this year, driven by further expansion in LNG production, which is expected to peak at 77 million tonnes per year, compared to 30 million tonnes per year in 2008. The hydrocarbon sector accounted for 56% of nominal GDP in 2010, with this figure set to rise to 64% this year.
Over the next few years, hydrocarbons are set to account for a decreasing proportion of Qatar’s GDP; falling to just over half (51%) by 2016. But while growth tapers off in the hydrocarbon sector, Qatar’s non-hydrocarbon GDP is projected to grow in between 8% and 9% on the back of continued high government spending on infrastructure.
In June 2010, the Qatari government and state-owned firms embarked on a $100bn five-year government expenditure plan devoted to infrastructure projects such as roads, ports, airports, and sewage and water treatment. The announcement in December 2010 that Qatar had been chosen to host the 2022 football World Cup served as a further catalyst for increased infrastructure expenditure in the country – estimated at $65bn by the Washington, DC-headquartered Institute of International Finance.
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Jewel in the crown
It is not hard, therefore, to understand why Qatari banks are performing well, with all key financial indicators reporting strong growth in the first half of 2011. Total assets across the banking sector grew by an annualised 29.6% to stand at QR542.9bn ($149bn) at the end of June 2011, while net profit increased by 24.8% to QR7.4bn over the same period.
Meanwhile, total customer deposits grew by 30.6% year on year to QR364.8bn and loans rose by 15.8% to QR300.7bn. The sector is healthy – its capital ratios are well above the 8% stipulated by Basel II and the 10% required by Qatar's central bank.
“Qatar is the jewel in the Gulf’s crown,” says Dr Regharan Seetharaman, chief executive of Doha Bank. “The economic stability of the country is reflected in the banking sector, which reported double-digit growth in the first six months of 2011.”
Interest in infrastructure
While most Western banks are tightening their belts amid fears of contagion from heavily indebted countries, Qatari banks are eyeing up financing opportunities for the planned infrastructure projects. Excluding the completion of the new $10bn Doha International Airport by the end of 2012, the government is expected to build nine new stadiums (at a cost of $4bn), and invest an additional $51bn in infrastructure, including metro and light-rail systems, and more than 65,000 new hotel rooms.
“Qatar already had an ambitious expansion plan,” says George Nasra, managing director of the International Bank of Qatar (IBQ). “The airport and port developments were already under way, as was the railway project. But it has definitely accelerated certain projects. Infrastructure will be the focus for the next seven years and then [the country] will start building the stadiums. We are issuing lots of bid bonds for the first project – a $1bn road that leads to Lusail, where the opening game [of the World Cup] will take place.”
Mohamad Moabi, assistant general manager for economics, financial analysis and research at Qatar National Bank (QNB) – the country’s largest bank by asset size with a market share approaching 40% – adds: “Bids are really going to start opening up in the next six months. The metro project alone is valued at close to $30bn.”
Safe bet
Aside from its own sound economic fundamentals, Qatar has also benefited from being perceived as a safe haven during the ongoing financial and political turmoil taking place across much of the rest of the Middle East and north Africa.
The country’s credit default swap spreads – the cost of protecting against losses on debt sold by Qatari companies – are currently trading at 95 basis points (bps) to 104bps, the lowest in the Gulf. Abu Dhabi’s spreads are about 105bps, Saudi Arabia’s are 110bps, Bahrain’s are 270bps to 275bps and Dubai are between 376bps to 400bps.
Meanwhile, yields on Qatari bonds are at historic lows. Qatari bonds that mature in 2019 are yielding 3%, less than half of their 6.5% yield when they were first sold in 2009. Yields are being pushed down as investors worldwide abandon stocks in favour of gold and government bonds that are perceived as being more secure. Stock markets across Europe have shed more than 20% of their value since the end of July amid renewed concern about the eurozone debt crisis and signs that a recession will recur.
There has been a flight of capital as we have seen liquidity come into Doha and Dubai from Libya, Egypt and Tunisia
The wave of demonstrations and protests calling for democracy across the Middle East since the start of the year – known as the Arab Spring – have further flagged up Doha’s relative stability.
“There has been a flight of capital as we have seen liquidity come into Doha and Dubai from Libya, Egypt and Tunisia,” says Shahzad Shahbaz, chief executive of QInvest, Qatar’s largest investment bank. “We are very busy across all business lines and we have a lot of mandates. We have a number of Qatari clients looking at mergers and acquisitions, divestitures and financing opportunities on the equity or debt market – we are currently working on three initial public offerings transactions.”
Trump card
Aside from the growth that banks are enjoying on the back of Qatar’s solid macro-fundamentals, the country’s financial sector is making efforts to diversify into new business lines.
Set up in March 2005, the Qatar Financial Centre Authority (QFCA) is spearheading Doha’s efforts to become a regional hub for financial institutions from across the world. To date, it has attracted 145 institutions, with clients including Switzerland’s Credit Suisse; US banks Goldman Sachs, Citibank and Morgan Stanley; India’s ICICI Bank; UK-based firms KPMG and PricewaterhouseCoopers; the French global insurance group AXA; Germany’s Deutsche Bank; and Japan’s Sumitomo Mitsui Banking Corporation.
However, it has faced stiff competition from the region’s other financial centres; Bahrain and Dubai. And at the start of 2010, the QFCA changed its strategy to focus on asset management, reinsurance and captive insurance. “There is a lot of work going on at the QFCA to make this happen,” says Phillip Thorpe, chairman and chief executive of Qatar Financial Centre Regulatory Authority (QFCRA). “We know that people are not just going to come knocking on our door. But it is a very young industry here and our trump card is the huge economic activity taking place, which is generating large pools of liquidity. The opportunities for existing players to act as distributors is very obvious.”
Wealthy nation
Qatar now ranks as the world’s richest country, with the highest per capita GDP estimated at about $72,000 in 2010, and has about $183bn in assets under management. It also boasts the third highest density of millionaires in the world, after Singapore and Switzerland, with 8.9% of households having $1m or more in assets to manage, according to a study published by Boston Consulting Group (BCG) in June 2011.
“There is a large opportunity for local banks to seize. But so far in Qatar, there has not been a bank that has got the business model right,” says Douglas Beal, managing director at BCG’s Dubai office. “It is not that they have not succeeded, it is that they have not really tried. Most of the wealthy keep about one-third of their wealth onshore, and they are looking for someone locally to manage that money. There is a lot of profit to be made from that.”
Aware of this untapped lucrative market, banks are starting to move into this space. QInvest's Mr Shahbaz says: 'We launched our wealth management business at the beginning of 2011 and we are hoping to launch our products at the end of this year. Doha will generate significant surplus capital in the coming years so we think it is a sound strategy. Unlike investment banking, which is very deal-oriented, asset management is a business that gives you ongoing revenues."
IBQ's Mr Nasra adds: 'We are already very strong on private banking, but we are now moving to the second stage of wealth management, which we are looking to introduce in early 2012. Ultra-high-net-worth individuals are covered by international banks but I think there’s a gap in the market for offering this to middle-income families.”
New directions
Qatar National Bank (QNB) opened its asset management division in 2005 and has subsequently grown its asset pool from QR300m to more than QR10bn in six years to become the largest asset manager in the country. QNB is also looking to increase revenues by moving back into brokerage activities after regulators reversed a 2006 ban on banks operating as brokers on the local bourse, the Qatar Exchange, in March 2010.
In May 2011, the bank launched its subsidiary QNB Financial Services – making it the first bank with an independently regulated licensed brokerage unit in Qatar. Its electronic trading platform provides clients access to stocks listed on the Qatar, United Arab Emirates and Omani securities markets. The Middle East and north African markets and other major international markets are expected to be available to investors in the near future.
There is a large opportunity for local banks to seize. But so far in Qatar, there has not been a bank that has got the business model right
The exchange has now also opened up the market to foreign institutional investors by enabling them to invest up to 25% in all stocks. Investors are showing a lot of interest, and as a result, brokerage activity is expected to become a key area for banks in the coming years.
The QFCA is also targeting the insurance market as a major growth area through a focus on reinsurance, which helps companies offset risk, and captive insurance, whereby a company sets up an insurance arm to underwrite its own risks to save costs. Currently, between 60% to 70% of insurance premiums are reinsured outside the country and insurance for large corporates is almost entirely exported.
“Qatar has a very low penetration rate of insurance but there is some sizeable commercial risk here – whether its LNG trains, shipping fleets or buildings – and there will be a growing number of big projects in need of risk management,” says QFCRA's Mr Thorpe. “There is a strong retail banking market in Doha so we hope this will offer a good marriage.”
Overcrowded market
It is hoped that the QFCA’s new strategy will provide a welcome boost to Qatar’s overcrowded retail banking sector. Today, the 500,000-strong bankable population (out of a total population of 1.7 million), is served by 18 banks that include seven international lenders, which include European behemoths HSBC and BNP Paribas, as well as four standalone Islamic banks.
Competition was compounded further by the Qatar Central Bank directive issued in February this year that ordered all conventional banks to close down their Islamic windows by the end of 2011, amid worries over the co-mingling of funds. Islamic finance had been the fastest-growing segment of conventional banks’ balance sheets but the directive will result in a field of 12 competing institutions being pared back to just four.
To date however, only one bank has acted on the directive. In August this year, IBQ sold off its Islamic unit, Al Yusr, including two retail branches, to Barwa Bank, a local sharia-compliant entity. “We only started our Islamic finance business in May 2009 and [Barwa is] a new bank that is looking to expand into retail,” says Mr Nasra. “We thought it was a good fit as it offers a personal approach to banking.”
Nearly all conventional banks, including heavyweight QNB, have Islamic operations with huge assets and liabilities, but it is as yet unclear whether they will meet the deadline. What is clear is that the regulatory changes will force them to diversify into untapped income streams: asset management, insurance and brokerage activity.
Consolidate not compete
The influx of expatriates associated with the 2022 Football World Cup should help generate significant new demand for retail products such as mortgages, credit cards and car loans. Even so, the lack of consolidation in the market is an issue that will be brought to the fore by the size of the impending contracts associated with the World Cup. “I think the sector needs to consolidate,” says Mr Nasra. “Given the size of transactions planned for the coming years, there needs to be consolidation.”
A unified regulatory regime would help to address the black spots in the market and create a level playing field in the industry, which in turn would help attract foreign players to set up shop in Qatar
In fact, one of the big anticipated events for the Qatari banking market in 2011 was the proposed merger between IBQ and Al-Khaleeji Commercial Bank. However, in June this year, it was called off at the 11th hour due to a disagreement over share price.
In the meantime, IBQ has successfully applied to the Qatar Central Bank to increase its capital by QR2bn, with the first QR1bn tranche set for September 29 and a second tranche on March 1, 2012.
Unified step forward
The introduction of a single regulator will also be central to the future development of the country’s finance industry. The unification of the various regulatory bodies – the central bank, the QFCRA and the Qatar Financial Markets Authority, which regulates the Qatar Exchange – was first mooted in 2007, but has been repeatedly delayed.
“Progress has not been as rapid on this as we would have liked so we are still some way off from seeing it being implemented. But we have received strong re-affirmation from ministers that it is going ahead. People are nervous about the implications but everyone is on the same page about the necessity of it. A unified regulatory regime would help to address the black spots in the market and create a level playing field in the industry, which in turn would help attract foreign players to set up shop in Qatar," says the QFCRA's Mr Thorpe.
“If we are serious about seeing finance services advance here in Qatar then we need a single regulator. It would be a major step forward in the country’s aspiration to become a serious centre for regional activity.”
