Operating in one of the world’s fastest growing and wealthiest economies, Qatari banks have been enjoying strong growth for many years on the back of the country’s solid macro-fundamentals. Qatar’s annual real growth of 14.8% between 2007 and 2011 was by far the highest recorded in the world, mainly due to the expansion in production of liquefied natural gas in the country. While growth eased to an estimated 6.1% in 2012, there is no doubting that this pace is still strong by current global standards.
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In the past couple of months, two of the major international ratings agencies have given Qatar's banking sector a clean bill of health. In April 2013, Moody’s published a report on Qatari banks that stated: “Our outlook for Qatar’s banking system is stable, unchanged from 2010. The outlook reflects Qatar’s benign economic environment and our expectations that banks will maintain strong financial metrics, primarily robust earnings, sound capitalisation and low levels of non-performing loans (NPLs).” In May 2013, Fitch affirmed its ratings on seven Qatari banks; four were rated A and three A-, all with a stable outlook.
A key engine of the banks’ growth has been the $185bn five-year (2011 to 2016) National Development Strategy, which has placed infrastructure at the heart of Qatar's plans. Key projects include the new Doha International Airport, due for completion this year, and the new Doha Port, due to be completed in 2016, as well as the upgrading of existing transportation, sewage and water treatment systems.
Public spending boost
Qatar’s successful bid to host football's World Cup tournament in 2022 has served as a further catalyst for the country’s growth plans – prompting a further $65bn of investment in infrastructure development projects. The government will build nine stadia at a cost of $5bn and more than 65,000 hotel rooms valued at $12.4bn, as well as new roads and railways, while also expanding its power plants and refineries.
“We expect this vast government spending to create corporate lending opportunities for the local banks in the private and public sector, with nominal lending growing by 20% to 25% in 2013, compared with inflation of 3%,” noted Moody’s in its April 2013 report.
“All projects under the National Development Strategy are now in the process of being implemented and they are largely on track,” says Ali Shareef Al Emadi, group chief executive of Qatar National Bank (QNB), the country’s largest bank by asset size, which stood at $104.4bn as of March 2013.
“The state remains committed to a public spending programme that is focused on developing infrastructure, education and healthcare. The 2013/14 state budget has allocated $24bn towards development projects. These projects will have a trickle-down effect and increase private sector activity, providing a further boost to efforts to diversify the economy in the years ahead,” he adds.
Indeed, the benefits of increased public spending have already been felt by Qatar's private sector, which expanded by a compound annual growth rate of 9% between 2008 and 2012 and at just over 10% in 2012. Consequently, the non-oil sector is assuming a larger role in driving economic growth, with its contribution towards gross domestic product (GDP) forecast to rise from 42% in 2011 to 46% in 2013.
Bond demand
When bidding for work in Qatar, multinationals need bonding lines to support them to bid and then the performance bonds if they win these contracts. Largely speaking, contractors are required to provide bid bonds with an average value of roughly 5% of the total value of a project.
Local banks saw a marked increase of about 40% in requests for issuing bid bonds in 2011 and this is fast becoming a new line of business for them, with HSBC one of the most active banks in the bonding and multinational contract financing space.
“The bid and performance bonding activity has picked up over the past six months, in particular around a variety of infrastructure projects. We expect this trend to continue as some of the larger projects start to take off, including the $35bn-plus rail project, which is expected to start in the second half of 2013,” says Jody Sanderson, managing director and head of global banking at HSBC Qatar.
“We are also seeing a positive trend in the level of activity on the contract financing space compared with the previous three to four years. However, it is only just beginning. The market remains highly competitive due in part to a delay in many of the projects and the built up capacity many banks, including HSBC, has to support the current contract financing requirements. However, I expect with the quantum of bonding required in the coming three to five years that we will see the contract financing business continue to perform well for HSBC,” he adds.
The lion’s share of the funding for the infrastructure projects being developed will come directly from the Qatari government, which is awash with liquidity owing to its vast hydrocarbon wealth. Most of Qatar’s hydrocarbon reserves are held in the North Field, which contains 60% of the gas reserves of countries in the Gulf Co-operation Council (GCC) and 14% of global gas reserves. It is also home to 26 billion barrels of crude oil and condensates, equivalent to 5% of GCC reserves and 1.9% of global reserves.
Constrained capacity
However, much of the funding will be recycled through the domestic banking sector. But given that banks typically rely on short-term retail deposits, this is leading to maturity mismatches, which are constraining banks’ capacity to fund large project finance deals that have a longer tenor.
This has led a number of Qatari banks to start sourcing a larger share of their funding from international markets. For example, during 2012 QNB tapped international bond investors with two tranches under its Euro Medium-Term Note programme, each at $1bn for five years. QNB tapped the international markets again in early 2013 for a seven-year $1bn bond that was five times oversubscribed and received orders from more than 270 investors globally.
Cognisant of the fact that the deepening eurozone financial crisis and US debt problems have tightened global liquidity and raised banks’ funding costs, in May 2012 the Qatar Central Bank partnered with Bloomberg to launch the first Qatar Interbank Offered Rate to encourage a more active interbank market in the country.
As Moody’s April 2013 report noted: “Over the past few years – as lending growth gained traction and demand for foreign-currency lending has grown – Qatari banks have increased their dependence on foreign borrowing, having attracted funds from international banks, but also from their overseas operations. Gross foreign liabilities constituted 27% of total funding in 2012, up from 16% in 2006. Qatari banks’ increased exposure to foreign funding, part of which comes from Europe, leaves them vulnerable to conditions in the euro area and raises refinancing risks.”
Local debt market
Such concerns add further pressure to Qatar’s need to develop its local debt market and the government is only too aware of this. In April 2013, central bank governor Sheikh Abdullah Saud Al Thani said that the bank would look to ramp up its local currency bond issuances to deepen the local bond market and decrease the country’s reliance on international funding.
This comment followed on from a statement issued by the central bank in March 2013 when it stated that it would issue QR1bn ($274m) of local-currency Islamic bonds (sukuk) and QR3bn of local currency conventional bonds. It has not yet provided a timeframe for these issues, but says that local currency debt will be issued every quarter, half with three-year maturities and half with five-year maturities.
The execution of the first treasury bills (T-bills) trade on the Qatar Exchange in December 2011 marked a positive step in efforts to develop the local debt market and move towards listing bonds on the exchange. Since then, the central bank has been holding monthly auctions of 91-, 182- and 273-day T-bills. The bank has issued up to QR4bn in T-bills for the month of April, with yields ranging from 0.92% to 1.11%, according to central bank data.
“In order to create an active secondary market, there has to be a regular issuance cycle by both the state of Qatar and the Qatar Central Bank in different maturities and in sizeable amounts. Currently the T-bills issued by Qatar Central Bank are rolled over upon maturity and the long-term bond issuances are picking up pace in 2013. Regular issuances to meet the demand of both short- and long-term market players will not only foster active secondary market trading, but will also facilitate liquidity management in tune with overall short- and long-term objectives of the market, as well as the government,” says Mr Sanderson.
Asset management growth
In addition to developing its debt market, Qatar is also continuing to pursue its goal of becoming the leading asset management centre in the Gulf. At the start of 2010, the Qatar Financial Centre, now home to 174 institutions, changed its strategy to focus on asset management, as well as captive insurance and reinsurance.
Given the enormous wealth of the country, asset management is a natural fit as one of the key pillars of Qatar’s growth strategy; its GDP per capita surpassed the $100,000 threshold in 2011, overtaking Luxembourg to become the wealthiest country on earth by this measure. Qatar’s GDP per capita stood at $106,000 in 2012. Qatar is currently managing between $200m and $300m in assets but is looking to scale this up to $150bn to $200bn by 2020.
In April 2012, UK lender Barclays signed a $250m asset management deal with Qatar Asset Management Company – a joint venture between the country’s sovereign wealth fund, the Qatar Investment Authority, and the Qatar Financial Centre Authority – to invest in natural resource projects around the world. As part of the deal, Barclays Natural Resource Investments, a division of Barclays, has located its Middle Eastern office in the Qatar Financial Centre.
The most recent major development was the formation of Aventicum Capital, which is a joint venture between Credit Suisse and Qatar Holding, a subsidiary of the Qatar Investment Authority. Aventicum Capital will use the Qatar Financial Centre as a platform from which to invest in Turkey and fast-growing frontier markets in the Middle East.
Local management
To date, while there have been many asset gatherers in the Middle East region, most assets have been managed outside the region. But industry insiders are hopeful that change is afoot. “We are seeing a definite trend towards more assets being managed in the Gulf region. We have seen increased investment from the region into regional equity funds in the first quarter of 2013,” says Shashank Srivastava, chief executive and board member of the Qatar Financial Centre Authority, the body responsible for leading the expansion of Qatar’s financial services sector.
“Other research also indicates that investors in the region have become less interested in mature markets such as Europe and increasingly recognise the opportunities nearer to home,” he adds.
Indeed, while historically wealth has been invested in Europe and the US, Middle Eastern capital is now looking for better risk-adjusted returns. To date, the region has mainly focused on equity and real estate, but Mr Srivastava believes that new asset classes have started to emerge. “Private equity is already an important asset class in the Gulf and obviously the Qatari authorities are now taking steps to develop a local currency yield curve in order to encourage a local currency fixed-income market. As regional capital markets grow in size and sophistication, we can expect to see products such as exchange-traded funds and derivatives emerging as well,” he says.
Of course, local banks have also seized the opportunity to offer asset management services in light of the large pools of liquidity being produced. QNB opened its asset management division in 2005 and has subsequently grown its asset pool from QR300m to more than QR10bn to become the largest asset manager in the country. Meanwhile, QInvest, Qatar’s largest investment bank, launched its wealth management business at the beginning of 2011, while International Bank of Qatar is already very strong on private banking.
QNB Group estimates that 40,000 Qatari employees earn more than $10,000 per month, while 80,000 earn more than $5,000 per month. The outlook for growth in the high-income segment remains strong as development shifts to increasingly more sophisticated sectors.
Labour market
Qatar's banking sector is also benefiting from the fact that the high levels of project activity are attracting large numbers of skilled and unskilled workers into the market. The country recorded the fastest population growth in the world from 2007 to 2009, with a 16.2% rise from 1.21 million to 1.64 million, largely due to steady inflows of construction workers. Based on a 12-month rolling average, population growth accelerated to 6.4% in January 2012, the highest rate the country has experienced since 2009. Inevitably, this will translate into increased retail business for banks as the new arrivals demand products such as credit cards and car loans.
With this in mind, Mr Sanderson at HSBC says: “I believe HSBC is well positioned to grow the retail business in Qatar across a range of product areas, in part as a result of the influx of people moving to Qatar to support the increased project activity. This will include anything from basic accounts, credit cards, investments and personal loans, as well as the ability to have accounts with one bank in multiple countries on one internet-based platform.”
Such demand will provide a welcome boost to Qatar’s overcrowded retail banking sector. Of Qatar’s population of 1.7 million, the bankable population of 500,000 is served by 18 banks. This has led banks to become overexposed to certain sectors, as noted in Moody’s report published in April. “We consider Qatari banks’ exposure to the construction and real estate sector as a potential source of credit risk, representing around 25% of loans as of the end of 2012,” it said.
“One of the key challenges for all banks [in Qatar] is the increasing level of competition in what is still a relatively small market by global standards. From a retail banking standpoint, the number of banks compared to the bankable population would have Qatar among the most banked places in the world. Meanwhile, from a wholesale banking standpoint, there have been many new foreign banking entrants focusing on Qatar, in particular in the investment banking space,” says Mr Sanderson.
“To justify the investment, these banks need to secure mandates, sometimes at any cost, which we are seeing examples of. This dynamic cannot sustain itself for extended periods and I expect many foreign banks that have made Qatar a priority market will need to revisit their strategy if they cannot generate an appropriate return on the investment. Fortunately, in our case, HSBC has offered a full platform on the ground for 60 years, which makes us less dependent on any particular product area or one-off transaction,” he adds.
In good health
However, as things stand today, Qatari banks have the lowest NPL ratio (1.6%) of all the Gulf’s banking sectors, compared with 2.3% for Saudi Arabia, 6.7% for Kuwait and 8% for the United Arab Emirates. In addition to the benign environment, this reflects the fact that 43% of credit is extended to government-related entities, which carry zero delinquencies.
Coupled with this, Qatari banks report the highest risk-adjusted profitability among banks in the GCC, reflecting their rapid credit expansion and robust operating conditions. Moody’s forecasts Qatar’s real GDP to expand by 5% in 2013 and expects banks’ 2013 profitability to remain strong and at similar levels with 2012, with return-on-average assets ranging between 2.2% and 2.4%.
“The banking sector has experienced tremendous growth in recent years, while maintaining strong capitalisation and high-quality loan portfolios. There is still plenty of growth to come in Qatar, financing the many projects that are planned over the next decade,” says QNB’s Mr Al Emadi.
“However, the challenge will be maintaining quality in the face of this growth, while at the same time adhering to increased standards of capital adequacy under Basel III. Moreover, as Qatari banks are increasingly looking abroad for opportunities, the risk and rewards in operating in other markets become increasingly important. This requires a strong culture and approach towards risk management and compliance,” he adds.
