In most countries, a rapid 40% drop in the national stock market would have serious consequences for the economy in general, and banks in particular. Losses from margin trading would mount. Companies would shelve investment plans as the market dried up for raising cash through initial public offerings (IPOs). And a negative wealth effect would spread doom and gloom across the land, from the supermarket checkout to the boardroom.
But Qatar is not like most countries. It is, famously, home to the world’s third largest gas deposits and no small amount of oil. All shared by a population of just a few hundred thousand Qataris. Against that background, the normal rules of financial economics are, if not suspended, then severely moderated.
Ali Shareef Al Emadi, acting CEO of Qatar National Bank (QNB), the country’s largest lender, shrugs off the impact of the stock market slump. “QNB profitability is not dependent on or affected by the DSM [Doha Securities Market] since we do not have a trading position, and thereby do not rely on gain from sale of investments.”
The main DSM index fell from a peak of 12,893 points in late 2005 to 7111 in May 2005, before recovering slightly to just above 8000 points in early July.
Bullish banks
In common with most banks in Qatar, QNB remains extremely bullish about 2006. “From here on, profitability will be driven by a number of initiatives taken, and the main growth areas are project finance, Islamic finance through QNB Al Islami, fund management and mortgage finance among others.”
QNBs’ earnings per share increased sharply in the first half of 2006, to Qr8.5 ($2.3) from Qr5.4 in the same period a year ago. Retail banking, project finance and investment banking activity related to the IPO for Al Rayyan Bank all contributed. QNB is also growing fee income: it is rolling out a new securities trading platform that it is selling to firms active on the DSM.
Smaller rival Doha Bank is similarly bullish. Return on equity was 50% in 2005, up from 40% in 2004. Return on assets was 6%, up from 4.8%, while the cost/income ratio was stable at just 25%.
Qatar is opening up several new frontiers in 2006. It has signed an agreement to finance properties built in the country by Dubai-based developer Damac. The Qatari government has passed a law granting foreign investors the right to acquire properties on 99-year leases, and a construction boom is under way to provide suitable opportunities.
“Mortgage finance is an interesting area,” says Doha Bank deputy chief executive R. Seetharaman. “We have done real estate finance before, but these are small tickets.” Credit cards also offer growth potential – partly because the business is in its infancy in Qatar, and partly because the economic boom is swelling the population with middle class expatriate professionals.
Mr Seetharaman believes this strong performance is sustainable. Indeed, the bank is looking to raise $1bn from the Eurobond market to help fund expansion outside the country.
Domestic growth
QNB is also attacking the small but fast-growing retail home finance market. “QNB has been providing real estate financing for Qatari citizens for a while, but with the recent government regulations allowing expatriates to own 99-year leasehold properties in select projects, mortgage financing has become an important product offering for QNB,” says Mr Emadi.
“With the rapid real estate developments emerging in Qatar and various projects being offered by different developers to both locals and expatriates, mortgage financing will stay as a mainstream for QNB. However, QNB will ensure that the credit limits are in accordance with those set by the board of directors and the Qatar Central Bank.”
Local banks are well positioned to take advantage of the boom, but international players are also active. Standard Chartered, HSBC and Citibank all have established operations in Qatar.
“Set against a backdrop of rising oil prices, which will increase government investments in non-hydrocarbon sectors, the increasing infrastructure projects will certainly deliver on the country agenda to diversify for economic sustainability,” says Kris Babicci, chief executive officer at Standard Chartered Bank, Qatar.
Retail banking is very much on the bank’s radar, particularly wholesale areas such as treasury. “With positive economic development in the country and the region, there is also a rising demand for treasury services. One opportunity is the expansion of the local currency capital market environment to promote greater yield curve development.”
Mr Babicci adds: “This is timely, with high liquidity in the market and the region’s move towards a single Gulf Co-operation Council currency by 2010, coupled with volatilities in interest rates and dollar currency markets. Deepening corporate and institutional local currency debt would not only match businesses’ underlying risks better but would also create a wider variety of products for Gulf-based investors.”
Foreign licences
For bigger ticket items, Qatar Financial Centre will play an increasing role, particularly as Qatar has said it needs to raise some $130bn by 2010. In June, Standard Chartered received a licence to operate within the centre. It joins international firms such as Credit Suisse and Axa Asset Management, as well as local player Ansbacher, a subsidiary of QNB. “For sure, this licence offers Standard Chartered Bank the creative platform to bring significant breadth and depth into the banking and financial sector,” says Mr Babicci.
But Qatar is about more than just project finance. Qatari investment banking group Amwal is targeting advisory fees from mergers and acquisitions (M&A) and capital raising. “The whole concept of corporate finance advisory is fairly new. In the past three years there have been 25-30 M&A transactions. In the coming period, we see a lot more M&A activity,” says Amwal director Khaled Hassan Rashed.
He is also bullish on Qatar shares, following the recent correction (Amwal launched the Qatar Gate Fund in June 2005, to invest up to Qr1bn in Qatari stocks). “Valuations are attractive. Interest rates are still relatively low. Industry still has another five years to grow,” he says.
Despite the growing domestic market, some institutions such as Doha Bank are already looking overseas. “If you look at the way Qatar is globalising, Qatar is focusing on Europe, and Doha Bank wants to be part of that,” says Mr Seetharaman.
“The UK is buying gas from Qatar, as is Spain. Italy gets 10% of its gas from Qatar. There is investment in Belgium and Romania. The long-term vision is to globalise this bank wherever Qatar moves. Qatar is investing $5bn in India, in gas, in real estate, in telecommunications. You need a Qatari bank there.”
